U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB




x
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
      THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31,
2004
 o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934




Commission
File Number 001-16381





ENDAVO
      MEDIA AND COMMUNICATIONS, INC.
      (Name
      of Small Business Issuer in its Charter)DELAWARE
      (State
      or other jurisdiction of
      incorporation
      or organization)
    87-0642448
      (IRS
      Employer Identification No.)50
      WEST BROADWAY, SUITE 400
      SALT
      LAKE CITY, UTAH
      (Address
      of principal executive offices)
    84101
      (Zip
      Code)


(801)
297-8500


(Issuer’s
telephone number)




Securities
registered under Section 12(b) of the Exchange Act: NONE




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





COMMON
STOCK, $.001 PAR VALUE


(Title of
Class)





CERISTAR,
INC.


(Former
Name)





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





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





Registrant’s
revenues for its most recent fiscal year were approximately
$178,000.





The
aggregate market value of the common stock held by non-affiliates computed based
on the closing price of such stock on the OTC Bulletin Board on March 31, 2005
was approximately $10,600,000.





On April
1, 2005, there were approximately 10,501,000 shares of the issuer’s common stock
outstanding.





Transitional
Small Business Disclosure Format: Yes o No x













**TABLE
OF CONTENTS**





**Item**
    
    
    
    **Page**Part
      I
    
    
    
    1Item
      1.
    
    Business
    
    1Item
      2.
    
    Property
    
    8Item
      3.
    
    Legal
      Proceedings
    
    8Item
      4.
    
    Submission
      of Matters to a Vote of Security Holders
    
    9Part
      II
    
    
    
    10Item
      5.
    
    Market
      for Common Equity, Related Stockholder Matters and Small
      Business
      Issuer
      Purchases of Equity Securities
    
    10Item
      6.
    
    Management’s
      Discussion and Analysis
    
    11Item
      7.
    
    Financial
      Statements and Supplementary Data
    
    32Report
      of Independent Registered Public Accounting Firms
    
    F-1Consolidated
      Financial Statements:Consolidated
      Balance Sheet at December 31, 2004
    
    F-3Consolidated
      Statements of Operations for the Years Ended
      December
      31, 2004 and December 31, 2003
    
    F-4Consolidated
      Statements of Cash Flows for the Years Ended
      December
      31, 2004 and December 31, 2003
    
    F-5Consolidated
      Statements of Stockholder’s Deficit for the Years Ended
      December
      31, 2004 and December 31, 2003
    
    F-6Notes
      to Consolidated Financial Statements
    
    F-7Item
      8.
    
    Changes
      in and Disagreements with Accountants on Accountingand Financial
      Disclosure
    
    33Item
      8A.
    
    Controls
      and Procedures
    
    33Part
      III
    
    
    
    34Item
      9.
    
    Directors
      and Executive Officers of the Registrant
    
    34Item
      10.
    
    Executive
      Compensation
    
    36Item
      11.
    
    Security
      Ownership of Certain Beneficial Owners and
      Management
      and Related Stockholder Matters
    
    38Item
      12.
    
    Certain
      Relationships and Related Transactions
    
    41Item
      13.
    
    Exhibits,
      List and Reports on Form 8-K
    
    42Item
      14.
    
    Principal
      Accountant Fees and Services
    
    43Signatures
    
    
    
    45





This
report contains trademarks and trade names that are the property of Endavo Media
and Communications, Inc. and its subsidiaries, and of other companies, as
indicated.





i







**PART
I**




**Forward-Looking
Statements**




Part I of
this Annual Report on Form 10-KSB, includes statements that constitute
“forward-looking statements.” These forward-looking statements are often
characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
statements contained in Part I of this Annual Report include, but are not
limited to the Company’s expectation that the lawsuit in which it is currently
engaged will be settled without any material adverse effect on the Company.




Forward-looking
statements involve risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking statements. Factors and risks
that could affect our results and achievements and cause them to materially
differ from those contained in the forward-looking statements include those
identified in the section titled “Risk Factors” in Part II, as well as other
factors that we are currently unable to identify or quantify, but may exist in
the future.




In
addition, the foregoing factors may affect generally our business, results of
operations and financial position. Forward-looking statements speak only as of
the date the statement was made. We do not undertake and specifically decline
any obligation to update any forward-looking statements.




**ITEM
1. DESCRIPTION OF BUSINESS**




**Corporate
History**




Endavo
Media and Communications, Inc., a Delaware corporation (“Endavo,” the “Company,”
“we,” “us” or “our”), is headquartered in Salt Lake City, Utah. We p rovide
integrated broadband services, including voice, video and data services to
residential customers through Internet Protocol, or “IP,” based networks. We are
also targeting commercial and municipal concerns. Our
website is www.endavo.com. Any information contained on our website or any other
websites referenced on our website or in this Annual Report are not a part of
this Annual Report.




We were
originally incorporated as Ceristar, Inc. in December 1999. On September 10,
2002, we entered into a merger with a subsidiary of Planet Resources, Inc., a
Delaware corporation, in which Ceristar survived the merger and became a wholly
owned subsidiary of Planet and all of our issued and outstanding common and
preferred stock was exchanged for Planet’s common stock. Accordingly, as a
result of the merger, we succeeded to the ownership of Planet, which was now a
holding company, and continued to operate our business through Ceristar, now a
wholly-owned subsidiary of Planet. Prior to the merger, Planet had no operations
for two years. Subsequent to the merger, we changed our name to Endavo Media and
Communications, Inc. in order to more accurately reflect the new direction of
the Company and our operating subsidiary became Susquina, Inc.




**Business
Description**




Historically,
we have provided bundled broadband services, including high-speed Internet
services, cable television and Voice over Internet Protocol, or “VOIP,” to
residential and commercial customers through fiber-based community networks and
over fiber-to-the-premises, or “FTTP.” We plan to continue delivering Internet
Protocol, or “IP,” voice, video and data services to our current residential
customer base in Utah and also to operate, support and expand our network
facilities in both our local and other potential markets. However, our new
business plan also includes the development of a distribution and transaction
management system over a national IP Multicast network services delivery system
that will enable the distribution of digital entertainment and communications
services to connected customers and communities. We call this distribution and
transaction management system the Endavo EcoSystemTM.




1





Once our
technologies and products are sufficiently developed and tested, we plan to
market our “d-commerce marketplace” of digital services and content, on a
wholesale and retail basis, to defined groups of customers. We define the
d-commerce marketplace as any product or service that can be delivered over an
IP network. This includes individual pieces of media, such as movies, music,
books or images, and complete digital services, such as VoIP and secure instant
messages. We intend to initially target our marketing efforts toward
geographical markets located within close proximity to, or already connected to,
our national fiber network and that have existing local or metropolitan fiber
network infrastructure.




**Market
Opportunity**




The
convergence of voice, video and data in today’s marketplace is being facilitated
by the maturation of certain IP technologies that allow these types of
transmissions to be “digitized” into data packets and transported over common
data networks. Traditionally, voice, video and data services have been provided
via multiple delivery systems or networks, and, until recently, via separate
service providers. For example, traditional telephone vendors formerly provided
(i) call termination over copper wires; (ii) television over broadcast antenna,
encoded cable or satellite receivers; and (iii) data services over the Internet
by Internet Service Providers, or “ISPs.” In today’s marketplace, many incumbent
service providers find themselves competing to offer customers bundled voice,
video, and data services, known as the “triple play.” With the proliferation of
broadband, along with the convergence of voice, video and data to IP, the triple
play has become increasingly popular in the United States.





We
believe that as IP technologies evolve, many of the current differences between
cable television signals, phone transmissions and Internet data will converge
until all broadband communications become IP-based, although there is no
assurance that such results will occur. There are a number of dynamics existing
in today’s environment that we believe are restricting the growth of the U.S.
broadband market. The incumbent telephone and cable providers have found
themselves in a regulatory battle to protect their turf and legacy systems.
Because the natural focal point for competition among large providers is the
larger markets, small-to-mid-sized markets are often left underserved. This
leaves few available alternatives for next-generation technologies and services
for the smaller markets. Conversely, the Internet is a hotbed market for new
services, products and applications. However, the Internet is potentially
overwhelming to the average consumer and does not provide them with a sufficient
level of quality of service or confidence.





**Our
Corporate Vision and Mission**




At this
point in time, the d-commerce space is not well defined. Our strategy is to
define (or redefine) that space and declare ourselves a leader in d-commerce. We
envision a paradigm shift in which communication and entertainment evolve very
rapidly. We intend to facilitate that evolution by bringing together key
enabling technologies and an effective and profitable distribution system that
will provide a marketplace for digital content and services representing clearly
defined value to the consumer marketplace.





Our
mission is to become the leading provider of managed distribution solutions for
digital entertainment, data and voice products that are deliverable to our
customers over broadband networks. We believe that to achieve our vision of
becoming a leader in the d-commerce space, we continually will need to refine
our core management and distribution services and expand our offerings of
content and services in order to differentiate ourselves within the marketplace.
We have identified certain key elements to increase our market presence and
growth strategy:




2





·
    Attract
      buyers and sellers to our marketplace by offering buyers selection,
      choice, control, value, security, convenience and entertainment, and
      offering sellers managed delivery of products, efficient distribution and
      marketing, logistics, operations systems support and opportunity to
      increase sales;




·
    Continually
      refine and develop our message and brand;




·
    Make
      strategic investments; and




·
    Build
      shareholder value through innovation, operational efficiency and financial
      performance.




**Business
Strategy**





We are
uniting forms of entertainment and communications services into a converged, all
IP distribution and management system. We are enabling the delivery of those
services over a national IP Multicast network to local broadband
communities. ****** We have
combined all these components to provide an end-to-end, “trusted” services
system that guarantees delivery, quality of service and accountability
throughout the network from content and applications to end-users.




Our
business model is built around an open but managed network utilizing standard
interfaces, equipment and protocols that facilitates the integration and
efficient distribution of any certified product or service across the entire
network. Through this open platform, a robust and differentiated menu of
integrated IP content and services can be sent to the end user and delivered
over multiple qualified devices that communicate and perform different or
interrelated functions. The non-proprietary nature of our system allows for
scalability, interoperability, mesh redundancy and easy insertion of
next-generation services, applications and technologies.





**Products
and Services**





***The
Endavo EcoSystem***





Our
EcoSystem concept is an open software platform designed to accommodate many
suppliers selling symbiotic voice, video and data products and services. Using
software standards, such as Session Initiated Protocol, different types of
IP-based content can be integrated, distributed and managed together in a
completely automated environment. Our EcoSystem model allows integrated content
to be delivered through a single broadband network to anyone or everyone
connected. Once physically connected to Endavo or through the Internet, service
providers and broadband communities will have access to an entire marketplace of
individual or bundled IP-based products aggregated from multiple independent
providers across the digital content and services spectrum.




The
EcoSystem is comprised of the following basic components:




·
    An
      integration and distribution platform used to translate all content and
      applications into common signals and protocols enabling unified
      transmission over a single IP network;




·
    An
      IP multicast stream delivers the digital signals over a national backbone
      network that can be accessed by broadband communities throughout the
      network and delivered over local fiber or other “last-mile” broadband
      media, including wireless, copper and powerline, all the way to the end
      user;




3




·
    A
      common Operational Support System****framework
      allows us to preside over the entire network, account and bill for the
      services, secure and control access, and provide centralized customer
      service and support, while allowing for decentralized network
      management;




·
    We
      partner with consumer premise equipment and “last-mile” network providers
      to provide the connection and components necessary to make the network
      accessible to consumers. For instance, components might include the
      set-top boxes or media servers that allow subscribers to manage content,
      surf the Internet, send and receive email and manage their accounts;
      and




·
    A
      unique characteristic of Endavo’s network will be the capability to
      multicast and unicast content, creating significant bandwidth efficiencies
      within an on-demand environment.




***Residential
IP Services***





We
currently provide bundled services for residential customers over
fiber-to-the-home. These services include high-speed Internet connectivity, IP
telephone service and cable-style television over fiber. We also engineer,
install and manage the fiber network to and within the communities, which
consist of three main parts:





**·**
    the
      community operations center;




**·**
    the
      point of presence facility in each community; and




**·**
    the
      fiber optic cable network and supporting equipment.




However,
we do not intend to expand operations as a residential service provider or fiber
optic network manager.





***Telephone
Services***





Using the
latest in fiber optic and IP technologies, we currently provide traditional VoIP
to our residential customers, along with typical enhanced services, such as call
return, call forwarding, call waiting, caller ID, conference calling, speed
dial, and last number redial.





***High
Speed Internet Access/Data***





We
currently provide Internet connectivity ranging from 128 kbps to 10 mbps on both
the upstream and downstream and can provide up to 1gbps bandwidth within the
Local Area Network. Internet service includes POP3 e-mail, integrated
calendaring, news and sports feeds.





***Digital
Packet Television***





We
currently offer more than 230 channels of local off-air, basic, premium movie,
audio music channels, video-on-demand, near-video-on-demand, music-on-demand and
pay-per-view events delivered as Digital Packet Television, or “DPTV.” Our
network also supports a migration to the new High Definition Television, or
“HDTV,” standards.




4




***Types
of Content Delivered Through the Endavo EcoSystem***





The
following is a list of the content that we expect to become available to our
distribution partners and subscribers, once appropriate content and application
providers register their products with the EcoSystem.





·
    *Voice
      Service*.
      Basic to enhanced Voice over IP services and
  applications




o
    Residential


o
    Enterprise





*·*
    *Video
      Services*




o
    IP-based
      Television


§
    Expanded
      Channel Line-Ups


§
    Pay-Per-View
      Television


§
    Video-On-Demand
      Services


§
    Pay-Per
      View On-Demand


§
    High
      Definition Television


§
    Digital
      Music Channels


§
    World
      Wide Web at TV


§
    Email-at-TV
      Control


§
    Appliance-at-TV
      Control


o
    Niche
      and specialized video content on-demand


o
    Video
      conferencing




*·*
    *Interactive
      and community gaming*




*·*
    *Music/Audio*




*·*
    *Static
      media*




o
    Image
      libraries


o
    Comic
      books


o
    Books


o
    Electronic
      art




*·*
    *Data
      and information services*




*·*
    *Advertising*




*·*
    *Wireless
      access*




**Distribution
Channels**





We
separate our distribution partners according to the method by which they are
connected to our marketplace of digital content and services:





·
    ***Physical
      Community Owners***.
      This group of distribution partners includes any entity that has a
      captured market based on geography. This may include building owners,
      developers, corporate campuses, office parks, homeowners associations,
      independent telcos or municipalities. This group installs, or arranges to
      have installed, the broadband connectivity (i.e., a fiber connection to
      the home or office) required to deliver content to the subscriber. We
      currently market our products and services primarily to existing service
      providers, local government broadband projects, university campuses and
      real estate developers. Geographically, we are currently focusing on
      smaller to mid-sized cities and communities where the large incumbent
      cable and telephone providers do not compete as
    aggressively;




5




**·**
    ***Virtual
      Community Owners***.
      This group of distribution partners includes any entity that has a
      captured market regardless of geography and without the ability to
      determine the infrastructure on which subscribers will access the
      EcoSystem. This may include university student and/or alumni associations,
      professional associations, trade groups, and ISPs.





**Consumers**





We
separate consumers according to the method by which they are connected to our
marketplace of digital content and services:




·
    ***Endavo
      Enabled Communities***.
      These communities that have our services are enabled upon construction.
      The builder or community management company has installed fiber
      connections to every unit similar to how they would install electricity,
      gas, sewers and other public utilities. Upon occupancy, residents are
      immediately able to choose from an array of entertainment, data and voice
      services from a variety of providers.





·
    ***Broadband
      Enabled Subscribers***.
      Even in the absence of living in an enabled community, much of the content
      in the Endavo Ecosystem will still be available to any Internet user with
      enough bandwidth (and the correct hardware and software) to support the
      data streams.





**Competition**





The
industry for telecommunications and broadband is very large and competitive. We
face significant competition from larger, better-capitalized companies, as well
as emerging companies, that operate and/or own broadband infrastructure in our
target markets. We may compete directly with cable and satellite television
providers, traditional local exchange carriers, VoIP telephony providers and
ISPs. Many of these established companies have resources greater than ours and
are direct competitors. We believe that we initially compete favorably with
these and other entities in the smaller markets on the basis of diversity of
products, distribution technology, systems support and quality assurance. Our
prices are expected to be generally lower and/or will include more features,
thereby offering what we believe to be a better value package. In addition, our
market emphasis permits us to make these advanced services available in
underserved markets. However, we cannot provide any assurance that our efforts
will be successful in overcoming the efforts of our competition.





**Regulatory
Matters**





We do not
hold any domestic license with the Federal Communication Commission, or “FCC.”





Presently,
the FCC does not regulate companies that provide IP telephony services as common
carriers or telecommunications service providers. Despite current laws, the
FCC’s potential jurisdiction over the Internet is broad because the Internet
relies on wire and radio communications facilities and services over which the
FCC has long-standing authority.





Currently,
we do not believe we are subject to any state regulation with respect to our
Internet related services. However, there can be no assurances that VoIP will
not be subject to such regulations in the future. Additionally, we are not aware
of any pending legislation that would have a material adverse affect on our
operations.




6





We are
currently licensed as a Competitive Local Exchange Carrier, or “CLEC,” licensed
with the Utah Public Utility Commission, or “PUC,” under certificate number
2389, but we do not offer traditional CLEC services. A CLEC designation permits
the resale of local telecommunications services.





As a
CLEC, we may be subject to certain FCC rules and regulations for telephony
services. However, we believe that since we provide our service using 100% IP
Protocol, our VoIP services are not covered under current PUC and FCC
regulation. Any proposed or enacted changes should only affect our voice
services, but it is possible that new legislation in the future could also
affect our data and video services.





We have
previously requested CLEC status in other states and territories of the United
States, but do not presently intend to pursue such additional CLEC
licenses.





Many
states also impose various reporting requirements or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the disgorgement of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations.





Most
states have consumer protection laws that further define the framework within
which our marketing activities must be conducted. We intend to comply fully with
all laws and regulations; however, the constraints of federal and state
restrictions could impact the success of direct marketing efforts and otherwise
increase our costs of doing business.





**Future
Regulation**





Due to
the increasing popularity and use of the Internet, it is possible that
additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, privacy, access to adult content by minors,
pricing, bulk e-mail, encryption standards, consumer protection, electronic
commerce, taxation, copyright infringement, and other intellectual property
issues.





We cannot
predict the impact, if any, that future regulatory changes or developments may
have on our business, financial condition, or results of operation. Changes in
the regulatory environment relating to the Internet access industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could increase our operating costs, limit our ability to
offer services and reduce the demand for our services.





As the
law in this area develops, we could become liable for information carried on,
stored on, or disseminated through our gateways, it may be necessary for us to
take steps to reduce our exposure to this type of liability through alterations
in our equipment, expanded insurance coverage or other methods. This may require
us to spend significant amounts of money for new equipment or premiums and may
also require us to discontinue offering certain of our products or services.




7





In a
report to Congress in 1998, the FCC stated its intention to consider whether to
regulate voice and fax telephony services provided over the Internet as
“telecommunications” even though Internet access itself would not be regulated.
The FCC is also considering whether such Internet-based telephone service should
be subject to universal service support obligations or pay carrier access
charges on the same basis as traditional telecommunications companies.





A
governmental body could impose further sales and other taxes on the provision of
our services, which could increase the costs of doing business. A number of
state and local government officials have asserted the right or indicated a
willingness to impose taxes on Internet-related services and commerce, including
sales, use and access taxes. To date, no such laws have become effective. We
cannot accurately predict whether the imposition of any such taxes would
materially increase our costs of doing business or limit the services that we
provide. It may be possible to pass on some of these costs to the consumer and
continue to remain competitive.





**Employees**





As of
March 31, 2005, we had 14 employees and seven independent contractors. All of
our employees are full-time. Of our 14 employees, 10 are in service operations
and four are in general administration. Of our seven independent contractors,
two provide sales and marketing services on a month-to-month basis and five
provide technical engineering services. None of our employees are represented by
a labor union or subject to a collective bargaining agreement. We have never
experienced a work stoppage and consider our employee relations to be good.




**ITEM
2. DESCRIPTION OF PROPERT** **Y**





Our
corporate headquarters are located in Salt Lake City, Utah. We currently lease
approximately 2,000 square feet of office space on a month-to-month basis for
approximately $2,500 per month. We believe that our facilities are adequate to
meet our requirements through the end of fiscal 2005.





**ITEM
3. LEGAL PROCEEDINGS**





On March
4, 2004, Wired, L.C. filed a lawsuit against us in the Third Judicial District
Court, Salt Lake County, State of Utah. Wired alleges a breach of contract under
an agreement that we entered into with Wired. We believed that the case was
without merit and in our response filed on March 24, 2004, we denied any breach
and asserted various affirmative defenses along with counterclaims against Wired
for declaratory judgment. On July 1, 2004, we settled this lawsuit and agreed to
pay Wired $90,000 and return to Wired certain equipment, of which we had to
replace approximately $54,000 worth. In November 2004, Wired claimed that we
breached the terms of the July agreement and filed a Motion for Entry of Final
Judgment. We opposed Wired’s claim and filed a Motion to Enforce Settlement
Agreement on December 10, 2004. We believed that the continued prosecution and
defense of these Motions would be expensive and that there was uncertainty and
risk in the outcome of any litigation. On April 14, 2005, we agreed to full and
complete settlement of all claims related to this case in exchange for our
payment to Wired of $60,000.





In August
2003, we delivered to Basin Digital Media, LLC certain equipment, which
redelivered the equipment to Summit Development and Management, LLC for
installation in a residential apartment complex in Utah County, Utah known as
Parkway Crossing. This equipment was to be used in connection with a Service
Agreement between us and Basin.





To obtain such equipment, we entered into a loan
transaction with Ridgeline, LLC and executed a secured promissory note due
August 1, 2004 in the principal sum of $182,000. We also entered into a
Collateral Assignment and Security Agreement to secure repayment of the note. In
addition, David Bailey, our former CEO and Chairman of the Board, entered into a
personal guarantee with Ridgeline with respect to our obligations under the
note.




8





On
January 7, 2004, Summit and/or Basin delivered a notice of termination of the
Service Agreement, which we refused to accept as we believe they did not have
any grounds to terminate the agreement and thereafter they defaulted on their
obligations under the Service Agreement, as well as their obligation to pay for
the equipment. As a result, on August 1, 2004 we defaulted on our obligations
under the note to Ridgeline.





On June
18, 2004, we filed a lawsuit in the Third Judicial District Court, Salt Lake
County, State of Utah against Parkway Crossing, Basin and Summit alleging breach
of contract, breach of the covenant of good faith and fair dealing, conversion,
fraudulent inducement and tortious interference with economic relations. Parkway
Crossing and Summit subsequently filed a motion to dismiss the action, which was
denied and the parties are currently in the discovery phase.





As a
result of our default on the promissory note with Ridgeline, Ridgeline made
demand upon us and Mr. Bailey for payment of the entire remaining unpaid portion
of the note. In September 2004, Mr. Bailey paid Ridgeline $200,000 under his
guarantee and took an assignment of all of Ridgeline’s rights and interest in
the note and related Security Agreement. At the same time, Mr. Bailey made a
demand upon us for payment of the note and related obligation.





On
January 26, 2005, Mr. Bailey filed a claim in the Fourth Judicial District
Court, Utah County, State of Utah against us, Basin and Summit alleging breach
of contract and unjust enrichment and seeking judgment against all parties in
the amount of $200,000, plus interest, as well as possession of the equipment
that was collateral for the note and fees and costs. We expect that this lawsuit
will be settled without any material adverse effect on us; however, we cannot
provide assurance that it will be settled on a basis that it acceptable to us if
at all or that such settlement will not have an adverse effect on our business
or operations.





In
addition to the foregoing, we may, from time to time, be party to certain legal
proceedings and other various claims and lawsuits in the normal course of our
business, which, in the opinion of management, are not material to our business
or financial condition.





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





In August
2004, a proposal to amend our charter to affect an increase of our authorized
shares of common stock to 100,000,000 and our preferred stock to 5,000,000 was
submitted to a group of shareholders constituting approximately 78% of our
outstanding capital stock entitled to vote. By written consent in lieu of a
meeting, as provided for under Delaware corporate law and our bylaws, these
shareholders approved the amendment of our charter affecting the increase of
authorized capital stock. In connection with the submission of the proposal to
the shareholders, we filed an Information Statement with the Securities and
Exchange Commission and delivered a copy to all shareholders of the Company in
accordance with the Exchange Act of 1934, as amended and the rules and
regulations promulgated thereunder. No other matters were submitted to the
stockholders.







****


**PART
II** ****




**ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS** **AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES**




**Our
Common Stock**





Our
common stock trades publicly on the OTC Bulletin Board under the symbol “EDVO.”
The OTCBB is a regulated quotation service that displays real-time quotes,
last-sale prices and volume information in over-the-counter equity securities.
The OTCBB securities are traded by a community of market makers that enter
quotes and trade reports. This market is extremely limited and any prices quoted
are not a reliable indication of the value of our common stock.





The
following table sets forth the quarterly high and low bid prices per share of
our common stock by the OTCBB during the last two fiscal years. The quotes
represent inter-dealer quotations, without adjustment for retail mark-up,
markdown or commission and may not represent actual transactions. The trading
volume of our securities fluctuates and may be limited during certain periods.
As a result of these volume fluctuations, the liquidity of an investment in our
securities may be adversely affected.





**Fiscal
      Year**
    
    **Quarter
      Ended**
    
    **High**
    
    **Low**2003
    
    March
      31, 2003
    
    $1.55
    
    $0.30June
      30, 2003
    
    $0.95
    
    $0.45September
      30, 2003
    
    $1.95
    
    $0.43December
      31, 2003
    
    $0.58
    
    $0.262004
    
    March
      31, 2004
    
    $0.46
    
    $0.15June
      30, 2004
    
    $0.28
    
    $0.05September
      30, 2004
    
    $0.80*
    
    $0.02*December
      31, 2004
    
    $2.26
    
    $0.51





* On
September 23, 2004, the Company effected a 1-for-16 reverse stock split. For a
more detailed discussion of this reverse stock split and recent steps taken by
the Company to address certain oversights in connection with that corporate
action *see
Item 6. Management’s Discussion and Analysis - Recent
Developments* .





**Holders
of Record**





On March
31, 2005, there were approximately 1,600 holders of record of our common stock
according to our transfer agent. The Company has no record of the number of
shareholders who hold their stock in “street” name with various
brokers.





**Dividends**





We have
never paid a cash dividend on our common stock nor do we anticipate paying cash
dividends on our common stock in the near future. It is our present policy not
to pay cash dividends on the common stock but to retain earnings, if any, to
fund growth and expansion. Under Delaware law, a company is prohibited from
paying dividends if the company, as a result of paying such dividends, would not
be able to pay its debts as they become due, or if the company’s total
liabilities and preferences to preferred shareholders exceed total assets. Any
payment of cash dividends on our common stock in the future will be dependent on
our financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, as well as other factors our board of
directors deems relevant.




10


****


**Sales
of Unregistered Securities**





There
were no sales of unregistered securities during the period covered by this
Annual Report other than sales previously reported in our public filings with
the Securities and Exchange Commission.




**ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS**





For a
description of our significant accounting policies and an understanding of the
significant factors that influenced our performance during the fiscal year ended
December 31, 2004, this “Management’s Discussion and Analysis” should be read in
conjunction with the Consolidated **** Financial
Statements, including the related notes, appearing in Item 7 of this Annual
Report.





**Forward-Looking
Statements**





This
portion of this Annual Report on Form 10-KSB, includes statements that
constitute “forward-looking statements.” These forward-looking statements are
often characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
statements contained in this portion of the Annual Report include, but are not
limited to the Company’s (i) expectation that certain of its liabilities listed
on the balance sheet under the headings “Accounts Payable,” “Accrued
Liabilities” and “Note Payable” will be retired by issuing stock versus cash
during the next 12 months; (ii) expectation that it will continue to devote
capital resources to fund continued development of voice, video and data
services and IP open standard architecture and maintain and grow existing
marketing capacity; (iii) expectation that it will execute employment agreements
with certain executive officers in the next fiscal quarter; (iv) anticipation
that it will incur significantly less capital expenditures for broadband fiber
infrastructure as a result of its new emphasis as a distributor of IP-based
content and services to existing broadband network and service providers; (v)
anticipation that it will incur significantly more capital expenditures as it
expects to procure new equipment and software systems to be installed into
existing network facilities that will accommodate the delivery of content and
services over its network or the network of its partners; (vi) anticipation of
acquiring credit or leasing facilities by a third party in order to finance new
equipment expenditures; and (vii) anticipation of a significant increase in
operational and SG&A costs as it accelerates the development and launch of
new operations in 2005.





Forward-looking
statements involve risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking statements. Factors and risks
that could affect our results and achievements and cause them to materially
differ from those contained in the forward-looking statements include those
identified in the section titled “Risk Factors,” as well as other factors that
we are currently unable to identify or quantify, but that may exist in the
future.





In
addition, the foregoing factors may affect generally our business, results of
operations and financial position. Forward-looking statements speak only as of
the date the statement was made. We do not undertake and specifically decline
any obligation to update any forward-looking statements.





**Executive
Overview**





As we
embark upon a new year and a new stage in Endavo’s development, we are faced
with a number of challenges. However, we believe we have made significant
progress during the last few months and further believe that we have
repositioned ourselves with a view toward the launch of new strategic plans. We
are confident that we can accomplish our interrelated objectives and believe our
new plans will help us create a robust and differentiated product set and
delivery/management model.




11




During
the fourth quarter of 2004, we focused primarily on consolidating our previous
local operations in Utah and restructuring our balance sheet and capitalization
in order to position ourselves to attract equity capital. We quickly realized
some of the key challenges in executing these activities, primarily, the lack of
capital. We needed to acquire and install new equipment at the new community
data center in Orem, Utah in order to accommodate new switching and connectivity
requirements for our customers. For initial installments, we were able to
acquire a significant amount of equipment through our strategic partnerships,
rather than purchasing it all ourselves in the retail markets. This helped
conserve precious capital.




There
will be other issues that will emerge that will require our attention and
ingenuity if we are to be successful in delivering IP-based content. These
include foreseeable challenges such as digital rights management, or “DRM,”
franchise rights, state and federal regulatory issues and issues related to the
taxation of Internet services. Although we believe that the market will
ultimately be characterized more by the need to spread opportunity and
information than to protect manufacturers of content and established interests,
we do recognize that we may need to become more sensitive to DRM issues at some
point. We can relieve many of these potential pressures by leveraging partners
that are already solving these issues. We also think the “local” delivery nature
of the multicast model, as opposed to broadcast, will help us circumvent some of
these issues, at least at the outset.




We will
confront our challenges as they emerge. However, we believe that we remain ahead
of the market in terms of our vision of “convergence” and that we have a unique
window of opportunity to lead the market in terms of our product set and our
ability to locally deliver integrated digital services to wide array of
broadband customers.





Our key
attributes are our small size and our reference base of existing customers that
have been receiving “triple play” services from us for some time. Being a small
company means that our planned changes in the strategy can quickly make
meaningful impact on results without a major overhaul if we are successful in
implementation.





**Recent
Developments**





***Private
Placement***





On
February 22, 2005, we consummated a private placement of $1,425,000 principal
amount of our 8% Senior Secured Convertible Notes and related securities,
including common stock warrants and additional investment rights. Specifically,
this transaction may ultimately result in gross proceeds to us of $4.275 million
if both the additional investment rights are exercised in full.





We have
agreed to file a registration statement with the Securities and Exchange
Commission prior to April 25,2005, registering the shares of common stock
issuable upon conversion of the 8% Senior Secured Convertible Notes, exercise of
the warrants, and the shares related to the additional investment rights if they
are exercised in the future. If we fail to file the registration statement by
April 25, 2005, or if it is not declared effective by the Securities and
Exchange Commission within 120 days from the filing date, we are required to pay
to the investors liquidated damages equal to 2.0% of the amount invested and
shall pay to the investors liquidated damages equal to 1.0% of the amount
invested for each subsequent 30-day period.




12





We
engaged H. C. Wainwright Co., Inc., as the exclusive placement agent in
connection with the private placement. Under our agreement with Wainwright we
paid them a cash fee of $121,750
(9% of the gross proceeds of the financing plus a non-accountable cash allowance
of 2% of the gross proceeds, less any legal fees payable to counsel to the
investors). We paid the investors $35,000 for the legal fees they incurred in
connection with this transaction which was
included in the H.C. Wainwright fee calculation. In addition, we issued
to Wainwright, warrants to purchase 239,630 shares of common stock at $.89 and
239,630 shares of common stock at $1.27. The warrants have the same terms as the
warrants issued to the investors. In addition, we agreed to pay to Wainwright, a
cash fee of 8% of the aggregate consideration received by us from the exercise
of any warrants.





***Reverse
Stock Split***





We
recently took steps to address an oversight in an earlier attempt to effect a
combination of our common stock through a reverse stock split. We intended to
consummate a 1-for-16 reverse stock split of our common stock in September 2004.
Our books and records and those of our transfer agent have continually reflected
this transaction as contemplated. However, we discovered that an amendment to
our certificate of incorporation was not properly filed at the time.
Accordingly, we have taken the appropriate steps to rectify this oversight. The
certificate of amendment to our certificate of incorporation, which we intend to
file with the Delaware Secretary of State, will only effect those shares that
were outstanding as of September 23, 2004, the original effective date of the
intended reverse stock split. Accordingly, these efforts should not have any
effect on the current holders of our common stock.





***Preferred
Stock Exchange***





In
September 2004, prior to the effectiveness of the 1-for-16 reverse stock split
discussed above, certain shareholders exchanged 36,646,158 shares of common
stock for 3,821,197 shares of our newly created Series A Preferred
Stock.





The
Series A Preferred Stock was not effected by the subsequent reverse stock split
also effected in September 2004 and, therefore, each share of Series A Preferred
Stock is convertible into 9.6 shares of our common stock at any time after
September 2005, which is the one year anniversary of their issuance.





The
shares of Series A Preferred Stock do not have a stated dividend rate and have a
liquidation preference of $.001 per share. Each share is also entitled to vote
with the common shareholders as if such share had converted to
common.





**Critical
Accounting Estimates and Assumptions**





The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make certain 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. As such, in accordance with the use of
accounting principles generally accepted in the United States of America, our
actual realized results may differ from management’s initial estimates as
reported. A summary of our significant accounting policies are detailed in the
notes to the financial statements, which are an integral component of this
filing.





We
identified our most critical accounting policies to be related to revenue
recognition, allowance for doubtful accounts, asset valuation and accounting for
stock options. A complete list of our accounting policies is contained in Note 1
to the notes of the consolidated financial statements. The following summarizes
critical estimates made by management in the preparation of the financial
statements.




13


******


***Revenue
Recognition*** . Revenue
is recognized when a valid contract or purchase order has been executed or
received, services have been performed or product has been delivered, the
selling price is fixed or determinable, and collectability is reasonably
assured. Payments received prior to performance are recorded as deferred
revenue. We enter into long-term service contracts in which we receive payments
for initial equipment installation. These revenues are typically deferred over
the life of the service term. Equipment installations relating to residential
monthly contracts are recognized when installed.





***Allowance
for Doubtful Accounts*** .
Financial instruments that potentially subject us to concentration of credit
risk consist primarily of trade receivables. In the normal course of business,
we provide on-going credit evaluations of our customers and maintain allowances
for possible losses, which, when realized, have been within the range of
management’s expectations. Management assesses its estimates of uncollectible
accounts based on age of receivables and direct negotiations with our customers
if disputes arise.





***Impairment
of Long-lived Assets*** . We
review our long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
We evaluate, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. We use an estimate of future
undiscounted net cash flows of the related asset or group of assets over their
estimated remaining life in measuring whether the assets are recoverable.





***Accounting
for Stock-based Compensation*** . We
account for stock-based compensation issued to employees and directors under
Accounting Principles Board Opinion, or “APB,” No. 25, “Accounting for Stock
Issued to Employees,” and related interpretations. Under APB No. 25,
compensation related to stock options, if any, is recorded if an option’s
exercise price on the measurement date is below the fair value of the Company’s
common stock and amortized to expense over the vesting period. Compensation
expense for stock awards or purchases, if any, is recognized if the award or
purchase price on the measurement date is below the fair value of the common
stock and is recognized on the date of award or purchase. Statement of Financial
Accounting Standards, or “SFAS,” No. 123, “Accounting for Stock Based
Compensation,” requires pro forma information regarding net loss and net loss
per common share as if the Company had accounted for its stock options granted
under the fair value method.





We
account for stock-based compensation issued to persons other than employees
using the fair value method in accordance with SFAS No. 123 and related
interpretations. Under SFAS No. 123, stock-based compensation is determined as
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
measurement date for these issuances is the earlier of either the date at which
a commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient’s performance is
complete.





**Results
of Operations**





Our
operating results showed a significant decrease in revenues and other areas of
financial performance for the
year ended 2004.




**Summary
      of Operations**2004
    
    2003Revenues
    
    $
    178,000
    
    $
    431,000Cost
      of Revenue
    
    
    419,000
    
    
    511,000Gross
      (Loss)
    
    
    (241,000
    )
    
    (80,000
    )Selling,
      General and Administrative Costs
    
    
    (3,283,000
    )
    
    (3,868,000
    )Operating
      (Loss)
    
    
    (4,154,000
    )
    
    (3,948,000
    )Other
      Income (Expense)
    
    
    (1,149,000
    )
    
    (348,000
    )Loss
      From Litigation Settlements
    
    
    (213,000
    )
    
    —Loss
      From Impairment of Assets
    
    
    (417,000
    )
    
    —Net
      (Loss)
    
    $
    (5,303,000
    )
    $
    (4,296,000
    )





14





Our
revenues decreased 58.7% in 2004 compared to 2003. At the same time, our cost of
revenues also declined; however, it increased dramatically as a percentage of
revenue from 235% in 2004 compared to 119% in 2003. Selling, general and
administrative costs declined slightly in 2004 as compared to 2003 but increased
sharply as a percentage of revenues.




***Revenues***




Our
revenues decreased to $178,000 in 2004 from $431,000 in 2003. This was due in
large part to a decline in service revenue, which comprises the majority of our
revenue, to $174,000 in 2004 from $370,000 in 2003. This decrease in service
revenue is the result of a lack
of new service agreements during 2004 and the termination of service agreements
with certain commercial and residential customers during the same period. In the
third and fourth quarters of 2004, we received minimal revenues from residential
service agreements that we maintained as we focused on our corporate restructure
and redirection of our business plans .





***Cost
of Revenues and Gross Margins***




Our cost
of revenues decreased slightly to $419,000 in 2004 from $511,000 in 2003, a
decrease of 18%. This was the result of the elimination of expenses associated
with labor and equipment in 2004 compared to a combined expenses for those items
in 2003 of approximately $110,000, offset by an increase in expenses associated
with the provision of services. We also
discontinued our agreements with our telecommunications and network bandwidth
provider, which represented a significant percentage of our cost of revenues, as
we switched to a new lower cost bandwidth provider and began providing VoIP
services to our residential customers directly from our new local facility in
Orem, Utah.





Our
g ross
margin on sales in 2004 was $(241,000) compared to a gross margin of $(80,000)
in 2003. This increased negative margin was primarily due to high bandwidth
costs relating to the addition of new residential and commercial customers in
2003 and maintained during the majority of 2004 and also due to the decline in
high margin equipment sales. We had limited revenues from equipment sales in
2004.





***Selling,
General and Administrative Costs***




Selling,
general and administrative costs decreased to $3, 496,000 in 2004
compared to $3, 868,000 in 2003.
These costs decreased primarily due to a significant reduction in costs
associated with professional services from $2,403,000 in 2003 to $1,517,000 in
2004 and the reduction of bad debt expense, offset by a dramatic increase in
payroll expense from $ 984,000 in 2003
to $1, 351,000 in 2004. The
increase in payroll expense came largely in the form of non-cash compensation
for consulting services rendered in connection with our corporate restructure
and redirection of our business plan in the third and fourth quarters of 2004.





**Selling,
      General and Administrative**2004
    
    2003Payroll
      Expenses
    
    $
    984,000
    
    $
    556,000Contract
      Labor
    
    
    284,000
    
    
    121,000Deferred
      Payroll Expense
    
    
    83,000
    
    
    307,000Office
      Expense
    
    
    43,000
    
    
    53,000Professional
      Services
    
    
    1,517,000
    
    
    2,403,000Travel
    
    
    165,000
    
    
    84,000Bad
      Debt
    
    
    35,000
    
    
    149,000Depreciation
    
    
    158,000
    
    
    77,000Other
    
    
    227,000
    
    
    118,000Total
    
    $
    3,496,000
    
    $
    3,868,000


******


15


**


***Other
Income (Expense)***





2004
    
    2003Interest
      expense
    
    $
    1,159,000
    
    $
    349,000Other
    
    
    10,000
    
    
    1,000Total
    
    $
    1,149,000
    
    $
    348,000





Other
expenses increased significantly in 2004 from 2003 largely due to interest
expenses related to certain loans made to the company made by third
party .





**Liquidity
and Capital Resources**





In 2004,
we consolidated our operations in order to focus on our new business plan. As a
result, we do not currently have substantial revenues to fund ongoing operations
and, therefore, rely upon best-efforts third party funding from individual
accredited and institutional investors. We do not have any significant credit
facilities available with financial institutions or other third parties. During
2004, we financed operations through the sale of equity and debt securities.
Though we have been successful at raising capital on a best efforts basis in the
past, we can provide no assurance that we will be successful in any future
funding efforts. If we are unable to either obtain financing from external
sources or generate internal liquidity from operations in the future, we may
need to curtail operations.





Current
assets for 2004 totaled approximately $53,000 as compared to $245,000 reported
for 2003. During 2004, we received net proceeds of $1,773,000 through the
issuance of convertible promissory notes, through the exercise of common stock
warrants and the sale of common stock.





We expect
that certain of our liabilities listed on the balance sheet under the headings
“Accounts Payable,” “Accrued Liabilities” and “Note Payable” will be retired by
issuing stock versus cash during the next 12 months. We may also retire certain
liabilities.





We
anticipate that we will incur significantly less capital expenditures for
broadband fiber infrastructure as a result of our new emphasis as a distributor
of IP-based content and services to existing broadband network and service
providers. Historically, we built out fiber-to-the-premise networks, thereby
incurring significant capital resources. Until we achieve substantial revenues
or profitability over several quarters, we must be considered as a start-up
entity. We have also reduced our operations and SG&A costs as a result of
consolidating our historical operations. Going forward, however, we anticipate
that we will incur significantly more capital expenditures as we expect to
procure new equipment and software systems to be installed into existing network
facilities that will accommodate the delivery of content and services over our
network or the network of our partners. We anticipate acquiring credit or
leasing facilities by a third party in order to finance new equipment
expenditures but can provide no assurance that we will be successful. We also
anticipate a significant increase in operational and SG&A costs, as we
accelerate the development and launch of new operations in 2005.






16


****


**Going
Concern**





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States applicable to a going concern that
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. Our general business strategy is
unproven, and we have only recently begun to record revenues. To date, we have
relied primarily on the sale of our equity and debt securities to fund our
operations. We have incurred losses since our inception and we continue to incur
legal, accounting, and other business and administrative expenses. Our auditor
has therefore recognized that there is substantial doubt about our ability to
continue as a going concern.





**Risk
Factors**





An
investment in our common stock is highly speculative, involves a high degree of
risk, and should be made only by investors who can afford a complete loss. You
should carefully consider the following risk factors, together with the other
information in this prospectus, including our financial statements and the
related notes, before you decide to buy our common stock. Our most significant
risks and uncertainties are described below; however, they are not the only
risks we face. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also impair our business operations. If any of
the following risks actually occur, our business, financial condition, or
results of operations could be materially adversely affected, the trading of our
common stock could decline, and you may lose all or part of your
investment.





RISKS
RELATED TO OUR BUSINESS





**We
have a history of losses, anticipate future losses and our previous independent
auditors have expressed doubt about our ability to continue as a going concern,
any of which may hinder our ability to obtain future
financing.**





In their
report for our most recent fiscal year, our independent auditors stated that our
financial statements for the year ended December 31, 2004 were prepared assuming
that we would continue as a going concern. Our ability to continue as a going
concern is an issue raised as a result of a loss for the year ended December 31,
2004 in the amount of approximately $5,300,000 and a loss for the year ended
December 31, 2003 in the amount of approximately $4,300,000. We continue to
experience net operating losses. Our ability to continue as a going concern is
subject to our ability to generate a profit and/or obtain necessary funding from
outside sources, including obtaining additional funding from the sale of our
securities, increasing sales or obtaining loans and grants from various
financial institutions where possible. The going concern qualification in the
auditor’s report increases the difficulty in meeting such goals and there can be
no assurances that such methods will prove successful. If we do not continue as
a going concern, stockholders may lose their entire investment.





**We
may have difficulty raising additional capital, which could deprive us of
necessary resources to grow our business and achieve our business
objectives.**





We expect
to continue to devote capital resources to fund continued development of our
voice, video and data services and Internet Protocol, or “IP,” open standard
architecture and maintain and grow existing marketing capacity. In order to
support the initiatives envisioned in our business plan, we intend to raise
additional funds through the sale of equity, debt or a combination of the two.
Our ability to raise additional financing depends on many factors beyond our
control, including the state of capital markets, the market price of our common
stock and the development, or prospects for development, of competitive
technology by others.




17





Because
our common stock is listed on the over-the-counter bulletin board, many
investors may not be willing or allowed to purchase it or may demand steep
discounts. Sufficient additional financing may not be available to us or may be
available only on terms that would result in further dilution to the current
owners of our common stock. If we are unable to raise additional funds when we
need them, we may have to severely curtail our operations.





**We
may not successfully enhance existing or develop new products and services in a
cost-effective manner to meet customer demand in the rapidly evolving market for
voice, video and data services.**





The
opportunity for voice, video and data services in residential, commercial,
governmental and educational markets is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. We are currently focused on developing
and evaluating technologies and applications associated with voice, video and
data services over a fiber network; developing applications to enhance
customers’ experiences; and researching and testing technologies used to deliver
broadband services, among others. Our future success will depend, in part, on
our ability to use leading technologies effectively, to continue to develop our
technical expertise, to enhance our existing services and to develop new
services that meet changing customer needs on a timely and cost-effective basis.
We may not be able to adapt quickly enough to changing technology, customer
requirements and industry standards. If we fail to use new technologies
effectively, to develop our technical expertise and new services or to enhance
existing services on a timely basis, either internally or through arrangements
with third parties, our product and service offerings may fail to meet customer
needs, which would adversely affect our revenues.





**We
may not be able to successfully implement our broadband strategy, which could
adversely affect our ability to grow or sustain revenues and our
profitability.**





Our
broadband, or high-speed, services comprised a substantial portion of our total
customer base, and our broadband services have favorably contributed to our
overall revenue per subscriber. One component of our strategy for increasing our
broadband customer base and revenues is to ensure we can cost-effectively
purchase wholesale broadband access. We continue to experience resistance from
the regional bell operating companies, “RBOCs,” and cable providers in gaining
cost-effective, wholesale access to their networks over which we could provide
our high-speed access services. We continue to observe competitive retail
pricing by the RBOCs for high-speed access without corresponding declines in the
prices for wholesale access, which inhibits our ability to compete on a
cost-effective basis. Cable providers have generally resisted granting us
wholesale access to their networks to provide high-speed access services and
have generally not been required by law to make access available. Our results of
operations could be adversely affected if we are unable to maintain or expand
our broadband footprint or are unable to obtain wholesale prices that allow us
to cost effectively sell our high-speed services. A significant component of our
voice, video and data strategy is managing and reducing the costs associated
with delivering services, including recurring service costs such as
telecommunications and customer support costs as well as costs incurred to add
new customers such as sales and marketing. While we believe cost reductions
associated with the delivery of our services will contribute positively to
overall operating profit margins, our profitability would be adversely affected
if we are unable to continue to manage and reduce recurring service costs
associated with the delivery of our services and costs incurred to add new
broadband customers.




18


****


**Competitive
product, price or marketing pressures could cause us to lose existing customers,
or may cause us to reduce our prices for our services, which could adversely
impact our revenues.**





The
voice, video and data services industry is intensely competitive. Some of our
competitors have significantly greater financial, technical, manufacturing,
marketing and distribution resources, as well as greater experience in the
industry than we have. The particular solutions our product lines address can
also be addressed by other voice, video and data services by our competitors.
Many of these alternatives are widely accepted by potential customers and have a
long history of use. Competitors have used and may continue to use aggressive
marketing efforts, including significantly discounting the retail price of their
services to attract new subscribers. There can be no assurance that in response
to these marketing efforts we will not experience increased churn with respect
to these services. Increased churn rates indicate customers are discontinuing
services, which result in a decrease in our customer base and adversely impacts
our revenue. If any of these possibilities occur, it may adversely impact our
revenue and subscribers we are able to add. Competition may additionally result
in price reductions, reduced gross margins and loss of market share.





**Our
service offerings may fail to be competitive with existing and new
competitors.**





Current
and prospective competitors include many large companies that have substantially
greater market presence, financial, technical, marketing and other resources
than we have. We compete directly or indirectly with the following categories of
companies:





·
    CLECs,
      such as Qwest;




·
    Local,
      regional, free or value-priced ISPs, such as United Online, Mindspring,
      Earthlink;




·
    National
      telecommunications companies, such as AT&T and
MCI;




·
    RBOCs,
      such as SBC, Verizon, BellSouth and Qwest;




·
    Content
      companies, such as Yahoo! and Vonage, who have expanded their service
      offerings; and




·
    Cable
      television companies providing broadband access or video on demand,
      including Comcast, Charter and Cox
    Communications, Inc.




Competition
is likely to continue increasing, particularly as large diversified
telecommunications and media companies continue to provide voice, video and data
services. Diversified competitors may continue to bundle other content, services
and products with Internet access services, potentially placing us at a
significant competitive disadvantage.





As
competition in the telecommunication market continues to intensify, competitors
may merge or form strategic alliances that would increase their ability to
compete with us for subscribers. These relationships may negatively impact our
ability to form or maintain our own strategic relationships and could adversely
affect our ability to expand our customer base.





**Service
interruptions or impediments could harm our business.**





***Harmful
software programs*** . Our
network infrastructure and the networks of our third-party providers are
vulnerable to damaging software programs, such as computer viruses and worms.
Certain of these programs have disabled the ability of computers to access the
Internet or other services we provide, requiring users to obtain technical
support. Other programs have had the potential to damage or delete computer
programs. The development and widespread dissemination of harmful programs has
the potential to seriously disrupt usage. If usage is significantly disrupted
for an extended period of time, or if the prevalence of these programs results
in decreased usage of our voice, video or data services, our business could be
materially and adversely impacted.




19


******


***Security
breaches*** . ** We depend
on the security of our network and, in part, on the security of the network
infrastructures of our third-party service providers and our outsourced customer
support service providers. Unauthorized or inappropriate access to, or use of,
our network, computer systems and services could potentially jeopardize the
security of confidential information, including credit card information, of our
subscribers and of third parties. Consumers or businesses may use our services
to perpetuate crimes in the future. Subscribers or third parties may assert
claims of liability against us as a result of any failure by us to prevent these
activities. Although we use security measures, there can be no assurance that
the measures we take will be successfully implemented or will be effective in
preventing these activities. Further, the security measures of our third-party
providers may be inadequate. These activities may subject us to legal claims,
may adversely impact our reputation, and may interfere with our ability to
provide our services, all of which could have a material adverse effect on our
business, financial position and results of operations.





***Natural
disaster or other catastrophic event*** . ** Our
operations and services depend on the extent to which our computer equipment and
the computer equipment of our third-party providers are protected against damage
from fire, flood, earthquakes, power loss, telecommunications failures,
break-ins, acts of war or terrorism and similar events. We have technology
centers in the U.S. that contain a significant portion of our computer and
electronic equipment. These technology centers host and manage our voice, video
and data services. Despite precautions taken by us, a natural disaster or other
unanticipated problem that impacts our locations could cause interruptions in
the services that we provide. Such interruptions in our services could have a
material adverse effect on our ability to provide services to our subscribers
and, in turn, on our business, financial condition and results of
operations.





***Network
infrastructure*** .  The
success of our business depends on the capacity, reliability and security of our
network infrastructure. We may be required to expand and improve our
infrastructure and/or purchase additional capacity from third-party providers to
meet the needs of an increasing number of subscribers and to accommodate the
expanding amount and type of information our customers communicate. Such
expansion and improvement may require substantial financial, operational and
managerial resources. We may not be able to expand or improve our network
infrastructure to meet additional demand or changing subscriber requirements on
a timely basis and at a commercially reasonable cost, or at all. As a result,
users may be unable to use our services. Inaccessibility, interruptions or other
limitations on the ability of customers to access our services due to excessive
user demand, or any failure of our network to handle user traffic, could have a
material adverse effect on our reputation, which could cause an increase in
churn and would adversely impact our revenues.





**We
and our technology partners may not be able to develop or protect our respective
proprietary technologies and may be required to enter licensing arrangements on
unfavorable terms.**





We regard
our trademarks, service marks, copyrights, patents, trade secrets, proprietary
technologies and similar intellectual property and those of our technology
partners as critical to our success. We rely on trademark, copyright and patent
law, trade secret protection, and confidentiality agreements with our employees,
customers, partners and others to protect our proprietary rights and our
technology partners employ similar practices. The efforts that both we and our
technology partners have taken to protect our proprietary rights may not be
sufficient or effective. Third parties may infringe or misappropriate either of
our copyrights, trademarks, patents and similar proprietary rights. If either we
or our technology partners are unable to protect our respective proprietary
rights from unauthorized use, our respective brand images may be harmed and our
business may suffer.




20





The
protection of trademarks, service marks, copyrights, patents, trade secrets,
proprietary technologies and intellectual property may require the expenditure
of significant financial and managerial resources. Moreover, we cannot be
certain that the steps we or our technology partners take to protect these
assets will adequately protect our respective rights or that others will not
independently develop or otherwise acquire equivalent or superior technology or
other intellectual property rights. Such events could substantially diminish the
value of our respective technology and property, which could adversely affect
our business.





**We
may be accused of infringing upon the intellectual property rights of third
parties, which is costly to defend and could limit our ability to use certain
technologies in the future.**





We may be
subject to claims and legal proceedings regarding alleged infringement by us of
the patents, trademarks, licenses and other intellectual property rights of
third parties. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources, injunctions
against us or the imposition of damages that we must pay. We may need to obtain
licenses from third parties who allege that we have infringed their rights, but
such licenses may not be available on terms acceptable to us or at all. Any of
these could result in increases in our operating expenses or could limit or
reduce the number of our service offerings.





We may
decide to initiate litigation in order to enforce our intellectual property
rights, to protect our trade secrets, or to determine the validity and scope of
our proprietary rights. Any such litigation could result in substantial expense,
may reduce our profits, and may not adequately protect our intellectual property
rights. In addition, we may be exposed to future litigation by third parties
based on claims that our products or services infringe their intellectual
property rights. Any such claim or litigation against us, whether or not
successful, could result in substantial costs and harm our reputation. In
addition, such claims or litigation could force us to do one or more of the
following:





·
    cease
      selling or using any of our products that incorporate the challenged
      intellectual property, which would adversely affect our revenue;




·
    obtain
      a license from and/or make royalty payments to the holder of the
      intellectual property right alleged to have been infringed, which license
      may not be available on reasonable terms, if at
all;




·
    divert
      management’s attention from our business;




·
    redesign
      or, in the case of trademark claims, rename our products or services to
      avoid infringing the intellectual property rights of third parties, which
      may not be possible and in any event could be costly and
      time-consuming.




·
    Even
      if we were to prevail, such claims or litigation could be time-consuming
      and expensive to prosecute or defend, and could result in the diversion of
      our management’s time and attention. These expenses and diversion of
      managerial resources could have a material adverse effect on our business,
      prospects, financial condition, and results of operations.




21




**We
may be unable to hire and retain sufficient qualified personnel, and the loss of
any of our key executive officers could adversely affect
us.**




We
believe that our success will depend in large part on our ability to attract and
retain highly skilled, knowledgeable, sophisticated and qualified managerial,
professional and technical personnel. We have experienced significant
competition in attracting and retaining personnel who possess the skills that we
are seeking. As a result of this competition, we may experience a shortage of
qualified personnel. In addition, the loss of any of our key executives could
have a material adverse effect on us. Much of our success depends upon the
ability of our President and Chief Executive Officer, Paul D. Hamm, to identify,
hire and retain senior management, sales, marketing and personnel. The loss of
Mr. Hamm or the failure to attract, integrate, motivate and retain additional
key employees could adversely impact our business. We do not have key person
insurance on the life of Mr. Hamm or any other executive officer or key
employee.





**Government
regulations could force us to change our business
practices.**





Federal,
state and local governments extensively regulate the cable industry and the
circuit-switched phone services industry and may begin regulating the Internet
services industry. We expect that legislative enactments, court actions and
regulatory proceedings will continue to clarify and in some cases change the
rights and obligations of cable companies and other entities under the
Communications Act and other laws, possibly in ways that we have not foreseen.
The results of these legislative, judicial and administrative actions may
materially affect our business operations.





Changes
in the regulatory environment regarding the Internet and the voice, video and
data services that we provide could cause our revenues to decrease and/or our
costs to increase. Currently, we are classified as a “telecommunications”
provider, and therefore directly regulated by the state and the FCC. We operate
our services throughout the U.S. Regulatory authorities at the state level may
seek to regulate aspects of our activities as telecommunications services,
including Internet access and voice services, such as VoIP. We are also subject
to other regulations that govern businesses generally, such as regulations
related to consumer protection.





The tax
treatment of activities on or relating to the Internet is currently unsettled. A
number of proposals have been made at the federal, state and local levels and by
foreign governments that could impose taxes on the online sale of goods and
services and other Internet activities. Future federal and state laws imposing
taxes on the provision of goods and services over the Internet could make it
substantially more expensive to operate our business.





**Declining
levels of economic activity or fluctuations in the use of our services could
negatively impact our subscriber growth rates and incremental revenue
levels.**





Changes
in general economic conditions that affect demand for the our voice, video and
data services could adversely affect our revenues. While the number of
subscribers has been rising, the infrastructure may not expand fast enough to
meet the increased levels of demand. If use of the voice, video and data
services as a medium for commerce declines or grows at a slower rate than we
anticipate, our revenues could be lower than expected and our business could be
harmed.





**We
may face risks as we expand our business into international markets.**





We
currently may explore opportunities to offer our products in foreign markets. If
so, we have limited experience in developing and marketing our services
internationally, and we may not be able to successfully execute our business
model in markets outside the United States. We may face a number of risks
inherent in doing business in international markets, including the
following:




22




·
    changing
      regulatory requirements;




·
    fluctuations
      in the exchange rate for the United States dollar;




·
    the
      availability of export licenses;




·
    potentially
      adverse tax consequences;




·
    political
      and economic instability;




·
    changes
      in diplomatic and trade relationships;




·
    difficulties
      in staffing and managing foreign operations, tariffs and other trade
      barriers;




·
    complex
      foreign laws and treaties;




·
    changing
      economic conditions;




·
    difficulty
      of collecting foreign account receivables;




·
    exposure
      to different legal standards, particularly with respect to intellectual
      property and distribution of products;




In
addition, we would be subject to the Foreign Corrupt Practices Act, which
prohibits us from making payments to government officials and others in order to
influence the granting of contracts we may be seeking. Our non-U.S. competitors
are not subject to this law and this may give them a competitive advantage over
us.





To the
extent that international operations represent a significant portion of our
business in the future, our business could suffer if any of these risks
occur.





**Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and stock price.**





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
Report on Form 10-KSB for the fiscal year ending December 31, 2006, we will be
required to furnish a report by our management on our internal control over
financial reporting. The internal control report must contain (i) a statement of
management’s responsibility for establishing and maintaining adequate internal
control over financial reporting, (ii) a statement identifying the framework
used by management to conduct the required evaluation of the effectiveness of
our internal control over financial reporting, (iii) management’s assessment of
the effectiveness of our internal control over financial reporting as of the end
of our most recent fiscal year, including a statement as to whether or not
internal control over financial reporting is effective, and (iv) a statement
that the Company’s independent auditors have issued an attestation report on
management’s assessment of internal control over financial reporting.





In order
to achieve compliance with Section 404 of the Act within the prescribed period,
we will need to engage in a process to document and evaluate our internal
control over financial reporting, which will be both costly and challenging. In
this regard, management will need to dedicate internal resources, engage outside
consultants and adopt a detailed work plan to (i) assess and document the
adequacy of internal control over financial reporting, (ii) take steps to
improve control processes where appropriate, (iii) validate through testing that
controls are functioning as documented and (iv) implement a continuous reporting
and improvement process for internal control over financial reporting. We can
provide no assurance as to our, or our independent auditors’, conclusions at
December 31, 2006 with respect to the effectiveness of our internal control over
financial reporting under Section 404 of the Act. There is a risk that neither
we nor our independent auditors will be able to conclude at December 31, 2006
that our internal controls over financial reporting are effective as required by
Section 404 of the Act.




23





During
the course of our testing we may identify deficiencies which we may not be able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404. In addition, if we fail to
achieve and maintain the adequacy of our internal controls, as such standards
are modified, supplemented or amended from time to time, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
related to revenue recognition, are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.





RISKS
RELATED TO OUR OUTSTANDING SECURITIES





**The
sale of the shares of our common stock acquired in private placements could
cause the price of our common stock to decline.**





On
February 22, 2005, we completed a financing in which we issued a total of $1.425
million principal amount of 8% senior secured convertible notes due February 22,
2007. The financing further included warrants to purchase an aggregate of
1,597,529 shares of our common stock and two additional investment rights
entitling the holders to purchase from us up to an additional $2.85 million of
8% senior secured convertible notes and warrants to purchase an aggregate of
3,195,058 shares of our common stock. As required under the terms of those
transactions, we are required to file a registration statement with the United
States Securities and Exchange Commission under which the investors may resell
to the public common stock acquired upon the conversion of the Notes, as well as
common stock acquired upon the exercise of the warrants and other investment
rights held by them.





The
selling stockholders under the registration statement may sell none, some or all
of the shares of common stock acquired from us, as well as common stock acquired
upon the exercise of the warrants and investment rights held by them. We have no
way of knowing whether the selling stockholders will sell the shares covered by
the registration statement. Depending upon market liquidity at the time, a sale
of shares covered by the registration statement at any given time could cause
the trading price of our common stock to decline. The sale of a substantial
number of shares of our common stock under this prospectus, or anticipation of
such sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales.





**The
large number of shares underlying the derivative securities we issued in our
recent private placement may be available for future sale and the sale of these
shares may depress the market price of our common stock.**





The
issuance of common stock to the investors in our recent private placement upon
the conversion or exercise of the derivative securities that they hold may cause
downward pricing pressure and will dilute our stockholders’ percentage of
ownership. The convertible promissory notes sold in the offering are convertible
at any time at the option of the holder into shares of our common stock at a
conversion price of $0.892 per share, which was 70% of the average closing
market price of the common stock on the over-the-counter bulletin board for the
20 trading days prior to the closing of the transaction. In addition, the sale
of the common stock issued upon the exercise of the related warrants and
additional investment rights issued to the investors will also place downward
pricing pressure on our common stock.




24





We also
expect to pay 8% annual interest on the convertible promissory notes, payable
semi-annually in cash or at our option (subject to the satisfaction of certain
conditions) in shares of our common stock valued at 85% of the volume weighted
average price of a common stock for the 20 trading days prior to the payment
date. This will further dilute our stockholders ownership and put additional
downward pricing pressure on the common stock.





**We
have increased the amount of our secured indebtedness as a result of our recent
private placement of convertible secured promissory notes.**





All of
our material assets have been pledged as collateral for the $1,425,000 in
principal amount of the convertible promissory notes that we sold in our recent
private placement. In addition to the security interest in our assets, the
promissory notes carry substantial covenants that impose significant
requirements on us, including, among others, requirements that:





·
    we
      pay principal and other charges on the promissory notes when due and we
      pay interest semi-annually in arrears beginning June 30,
    2005;




·
    we
      use the proceeds from the sale of the promissory notes only for permitted
      purposes;




·
    while
      the promissory notes are outstanding, if we issue equity or equity linked
      securities at a price lower than the conversion price then the conversion
      price of the promissory notes will be reduced to the same price. If we
      issue any variable priced equity securities or variable price equity
      linked securities, then the conversion price of the promissory notes will
      be reduced to the lowest issue price applied to those
      securities;




·
    we
      keep reserved out of our authorized shares of common stock sufficient
      shares to satisfy our obligation to issue shares on conversion of the
      promissory notes and the exercise of the related warrants and other
      investment rights issued in connection with the sale of the promissory
      notes;




·
    if
      we do not achieve revenues of at least $4,000,000 for calendar year 2005,
      the conversion price of the promissory notes will be adjusted to 85% of
      the volume weighted average closing market price of the common stock on
      the over-the-counter bulletin board for the 20 trading days prior to the
      release of the calendar 2005 financial statements, but in no event higher
      than the initial conversion price of $.892. The conversion price is also
      subject to adjustment upon the occurrence of certain specified events,
      including stock dividends and stock splits, pro rata distributions of
      equity securities, evidences of indebtedness, rights or warrants to
      purchase common stock or cash or any other asset, mergers or
      consolidations, or certain issuances of common stock at a price below the
      initial conversion price of $.892 per share, subject to adjustment as set
      forth above;




·
    we
      file a registration statement with the SEC by April 25, 2005, registering
      the shares of common stock issuable upon the conversion of the promissory
      notes and the exercise of the related warrants. If we fail to file the
      registration statement on a timely basis, or if it is not declared
      effective by the SEC within a maximum of 120 days from the filing date, we
      are required to pay to the investors liquidated damages equal to 2.0% of
      the amount invested and shall pay to the investors liquidated damages
      equal to 1.0% of the amount invested for each subsequent 30-day period;
      and




25




·
    we
      shall not, directly or indirectly, (i) redeem, purchase or otherwise
      acquire any capital stock or set aside any monies for such a redemption,
      purchase or other acquisition or (ii) issue any floating price security
      with a floor price below the conversion
price.




Our
ability to comply with these provisions may be affected by changes in our
business condition or results of our operations, or other events beyond our
control. The breach of any of these covenants could result in a default under
the promissory notes, permitting the holders of the promissory notes to
accelerate their maturity and to sell the assets securing them. Such actions by
the holders of the promissory notes could cause us to cease operations or seek
bankruptcy protection.





**If
we are required for any reason to repay the promissory notes, we would be
required to deplete our working capital, if available, or raise additional
funds. Our failure to repay the promissory notes, if required, could result in
legal action against us, which could require the sale of substantial
assets.**





The
promissory notes are due and payable on February 22, 2007 unless sooner
converted into shares of our common stock. In addition, any event of default as
described in the promissory notes could require the early repayment of the notes
including a default interest rate of 18% on the outstanding principal balance of
the promissory notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the promissory notes, together
with accrued interest will be converted into shares of our common stock, in
accordance with the terms of the promissory note. If we are required to repay
the promissory notes, we would be required to use our limited working capital
and raise additional funds. If we were unable to repay the promissory notes when
required, the promissory noteholders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action would
require us to curtail or cease operations.





**There
may be a volatility of our stock price.**





The
trading price of our common stock on the over-the-counter bulletin board has
been and continues to be subject to wide fluctuations. The trading price of our
common stock has closed as low as $0.32 per share and as high as $2.26 per share
in the last twelve months. The market price of the common stock could be subject
to significant fluctuations in response to various factors and events,
including, among other things, the depth and liquidity of the trading market of
the common stock, quarterly variations in actual or anticipated operating
results, growth rates, changes in estimates by analysts, market conditions in
the industry, announcements by competitors, regulatory actions and general
economic conditions. In addition, the stock market from time to time experienced
significant price and volume fluctuations, which may be unrelated to the
operating performance of particular companies. As a result of the foregoing, our
operating results and prospects from time to time may be below the expectations
of public market analysts and investors. Any such event would likely result in a
material adverse effect on the price of the common stock.





**We
do not intend to pay cash dividends on our common stock in the foreseeable
future** .





We
currently anticipate that we will retain all future earnings, if any, to finance
the growth and development of our business and do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any payment of cash
dividends will depend upon our financial condition, capital requirements,
earnings and other factors deemed relevant by our board of
directors.




26





**Our
common stock is subject to the “penny stock” rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock** .





The
Securities and Exchange Commission has adopted Rule 15g-9, which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require a
broker or dealer to approve a person’s account for transactions in penny stocks
and that the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny stock to
be purchased.





In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must obtain financial information and investment experience objectives of
the person and make a reasonable determination that the transactions in penny
stocks are suitable for that person and that the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.





The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form sets forth the basis on which the broker or
dealer made the suitability determination and that the broker or dealer received
a signed, written agreement from the investor prior to the transaction.





Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.





**If
we fail to remain current on our reporting requirements, we could be removed
from the over-the-counter bulletin board, which would limit the ability of
broker-dealers to sell our securities and the ability of stockholders to sell
their securities in the secondary market.**





Companies
trading on the over-the-counter bulletin board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13 in order to maintain price
quotation privileges on the over-the-counter bulletin board.





If we
fail to remain current on our reporting requirements, we could be removed from
the over-the-counter bulletin board. As a result, the market liquidity for our
securities could be severely affected by limiting the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities
in the secondary market





**Stock
prices of technology companies have declined precipitously at times in the past
and the trading price of our common stock is likely to be volatile, which could
result in substantial losses to investors.**





The
trading price of our common stock has fluctuated significantly in the past and
could continue to be volatile in response to factors including the following,
many of which are beyond our control:





·
    variations
      in our operating results;




·
    announcements
      of technological innovations or new services by us or our
      competitors;




27




·
    changes
      in expectations of our future financial performance, including financial
      estimates by securities analysts and
investors;




·
    our
      failure to meet analysts’ expectations;




·
    changes
      in operating and stock price performance of other technology companies
      similar to us;




·
    conditions
      or trends in the technology industry;




·
    additions
      or departures of key personnel; and




·
    future
      sales of our common stock.




Domestic
and international stock markets often experience significant price and volume
fluctuations that are unrelated to the operating performance of companies with
securities trading in those markets. These fluctuations, as well as political
events, terrorist attacks, threatened or actual war, and general economic
conditions unrelated to our performance, may adversely affect the price of our
common stock. In the past, securities holders of other companies often have
initiated securities class action litigation against those companies following
periods of volatility in the market price of those companies’ securities. If the
market price of our stock fluctuates and our stockholders initiate this type of
litigation, we could incur substantial costs and experience a diversion of our
management’s attention and resources, regardless of the outcome. This could
materially and adversely affect our business, prospects, financial condition,
and results of operations.





**Provisions
in our corporate charter and under Delaware law are favorable to our
directors.**





Pursuant
to our certificate of incorporation, members of our management and board of
directors will have no liability for violations of their fiduciary duty of care
as officers and directors, except in limited circumstances. This means that you
may be unable to prevail in a legal action against our officers or directors
even if you believe they have breached their fiduciary duty of care. In
addition, our certificate of incorporation allows us to indemnify our officers
and directors from and against any and all expenses or liabilities arising from
or in connection with their serving in such capacities with us. This means that
if you were able to enforce an action against our directors or officers, in all
likelihood we would be required to pay any expenses they incurred in defending
the lawsuit and any judgment or settlement they otherwise would be required to
pay.





**Certain
provisions of Delaware General Corporation Law and in our charter, as well as
our current stockholder base may prevent or delay a change of control of our
company.**





Under the
Delaware General Corporation Law, which we are subject to, it will be more
difficult for a third party to take control of our company and may limit the
price some investors are willing to pay for shares of our common stock.
Furthermore, our certificate of incorporation authorizes the issuance of
preferred stock without a vote or other stockholder approval. Finally, a
majority of our outstanding common stock is held by insiders. Without a
disparate stockholder base or a fluid aggregation of stockholders, it will be
more difficult for a third-party to acquire our company without the consent of
the insiders.




28





RISKS
RELATED TO THE INTERNET





**We
may not be able to adapt as the Internet market changes.**





Our
failure to respond in a timely manner to changing market conditions or client
requirements could have a material adverse effect on our business, prospects,
financial condition, and results of operations. The Internet is characterized
by:




·
    rapid
      technological change;




·
    changes
      in advertiser and user requirements and
preferences;




·
    frequent
      new product and service introductions embodying new technologies;
      and




·
    the
      emergence of new industry standards and practices that could render our
      existing service offerings, technology, and hardware and software
      infrastructure obsolete.




In order
to compete successfully in the future, we must




·
    enhance
      our existing services and develop new services and technology that address
      the increasingly sophisticated and varied needs of our prospective or
      current customers;




·
    license,
      develop or acquire technologies useful in our business on a timely basis;
      and




·
    respond
      to technological advances and emerging industry standards and practices on
      a cost-effective and timely basis.




**Our
future success may depend on continued growth in the use of the Internet and
Internet -based services.**





Because
the Internet is a rapidly evolving industry, the ultimate demand and market
acceptance for our services will be subject to a high level of uncertainty.
Significant issues concerning the commercial use of the Internet and online
service technologies, including security, reliability, cost, ease of use, and
quality of service, remain unresolved and may inhibit the growth of Internet
business solutions that use these technologies. In addition, the Internet or
other online services could lose their viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Our business, prospects, financial condition, and results of
operations would be materially and adversely affected if the use of the Internet
and other online services does not continue to grow or grows more slowly than we
expect.





**We
may be required to keep pace with rapid technological change in the Internet
industry.**





In order
to remain competitive, we will be required continually to enhance and improve
the functionality and features of our existing services, which could require us
to invest significant capital. If our competitors introduce new products and
services embodying new technologies, or if new industry standards and practices
emerge, our existing services, technologies, and systems may become obsolete. We
may not have the funds or technical know-how to upgrade our services,
technology, and systems. If we face material delays in introducing new services,
products, and enhancements, our customers may forego the use of our services and
select those of our competitors, in which event our business, prospects,
financial condition and results of operations could be materially and adversely
affected.




29





**Regulation
of the Internet and Internet-based services may adversely affect our
business.**





Due to
the increasing popularity and use of the Internet and online services, federal,
state,  local,
and foreign governments may adopt laws and regulations, or amend existing laws
and regulations, with respect to the Internet and other online services. These
laws and regulations may affect issues such as user privacy, pricing, content,
taxation, copyrights, distribution, and quality of products and services. The
laws governing the Internet remain largely unsettled, even in areas where
legislation has been enacted. It may take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel,
and taxation, apply to the Internet. In addition, the growth and development of
the market for electronic commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business via the Internet. Any new
legislation could hinder the growth in use of the Internet generally or in our
industry and could impose additional burdens on companies conducting business
online, which could, in turn, decrease the demand for our services, increase our
cost of doing business, or otherwise have a material adverse effect on our
business, prospects, financial condition, and results of
operations.





**Our
business could be negatively impacted if the security of the Internet becomes
compromised.**





To the
extent that our activities involve the storage and transmission of proprietary
information about our customers, security breaches could damage our reputation
and expose us to a risk of loss or litigation and possible liability. We may be
required to expend significant capital and other resources to protect against
security breaches or to minimize problems caused by security breaches. Our
security measures may not prevent security breaches. Our failure to prevent
these security breaches or a misappropriation of proprietary information may
have a material adverse effect on our business, prospects, financial condition,
and results of operations.





**Our
technical systems could be vulnerable to online security risks, service
interruptions or damage to our systems.**





Our
systems and operations may be vulnerable to damage or interruption from fire,
floods, power loss, telecommunications failures, break-ins, sabotage, computer
viruses, penetration of our network by unauthorized computer users and
“hackers,” natural disaster, and similar events. Preventing, alleviating, or
eliminating computer viruses and other service-related or security problems may
require interruptions, delays or cessation of service. We may need to expend
significant resources protecting against the threat of security breaches or
alleviating potential or actual service interruptions. The occurrence of such
unanticipated problems or security breaches could cause material interruptions
or delays in our business, loss of data, or misappropriation of proprietary or
customer-related information or could render us unable to provide services to
our customers for an indeterminate length of time. The occurrence of any or all
of these events could materially and adversely affect our business, prospects,
financial condition, and results of operations.





**If
we are sued for content distributed through, or linked to by, our website or
those of our customers, we may be required to spend substantial resources to
defend ourselves and could be required to pay monetary damages.**





We
aggregate and distribute third-party data and other content over the Internet.
In addition, third-party websites are accessible through our website or those of
our customers or affiliates. As a result, we could be subject to legal claims
for defamation, negligence, intellectual property infringement, and product or
service liability. Other claims may be based on errors or false or misleading
information provided on or through our website or websites of our customers or
affiliates. Other claims may be based on links to sexually explicit websites and
sexually explicit advertisements. We may need to expend substantial resources to
investigate and defend these claims, regardless of whether we successfully
defend against them. In addition, implementing measures to reduce our exposure
to this liability may require us to spend substantial resources and limit the
attractiveness of our content to users.




30


****


**ITEM
7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**







**TABLE
      OF CONTENTS**
    **Page**REPORTS
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
    F-1CONSOLIDATED
      FINANCIAL STATEMENTS:Consolidated
      Balance Sheets at December 31, 2004
    F-3Consolidated
      Statements of Operations for the years
      ended
      December 31, 2004 and December 31, 2003
    F-4Consolidated
      Statements of Stockholders’ Deficit for
      the
      years ended December 31, 2004 and December
      31,
      2003
    F-5Consolidated
      Statements of Cash Flows for the years
      ended
      December 31, 2004 and December 31, 2003
    F-6NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
    F-7








31










**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board of
Directors


Endavo
Media and Communications, Inc.


Salt Lake
City, Utah





We have
audited the accompanying consolidated balance sheet of Endavo Media and
Communications, Inc. and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, changes in stockholders’ equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement *.* The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over   financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Endavo Media and Communications,
Inc and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for the year then ended in conformity with U.S.
generally accepted accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has limited revenue, has incurred substantial
losses from operations and has working capital and stockholders deficits. These
factors raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans with regard to these matters are described in
Note 3. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





Hein
& Associates LLP


Phoenix,
Arizona


April 9,
2005




F-1







**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








Board of
Directors and Stockholders


Endavo
Media and Communications, Inc.


Salt Lake
City, Utah





We have
audited the accompanying consolidated balance sheet of Endavo Media and
Communications, Inc. and subsidiaries (Formerly known as CeriStar, Inc.) as of
December 31, 2003 and the related consolidated statements of operations,
stockholders’ deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Endavo Media and
Communications, Inc. and subsidiaries as of December 31, 2003, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3, the
Company has a deficit in working capital, negative cash flows from operations,
and recurring net losses. These issues raise substantial doubt about its ability
to continue as a going concern. Management’s plans in regard to these matters
are also described in Note 3. The accompanying financial statements do not
include any adjustment that might result form the outcome of this uncertainty.








Tanner +
Co


Salt Lake
City, Utah


February
13, 2004





F-2







**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**


**Consolidated
Balance Sheets**




**December
      31,****Assets**
    
    2004
    
    2003Current
      assets:Cash
    
    $
    1,000
    
    $
    164,000Accounts
      receivable, net of allowance for doubtful
      accounts
      of $11,000 and $142,000, respectively
    
    
    31,000
    
    
    69,000Prepaid
      expenses
    
    
    3,000
    
    
    4,000Deposits
    
    
    18,000
    
    
    8,000Total
      current assets
    
    
    53,000
    
    
    245,000Property
      and equipment, net
    
    
    153,000
    
    
    549,000Asset
      held for sale
    
    
    45,000
    
    
    —**Total
      Assets**
    
    $
    251,000
    
    $
    794,000
  **Liabilities and Stockholders'
Deficit**Current
      liabilities:Accounts
      payable
    
    $
    651,000
    
    $
    437,000Accrued
      liabilities
    
    
    460,000
    
    
    304,000Deferred
      revenue
    
    
    321,000
    
    
    236,000Notes
      payable including related parties
    
    
    1,078,000
    
    
    934,000Total
      current liabilities
    
    
    2,510,000
    
    
    1,911,000Commitments
      and contingencies (Notes 3,9, and 13)Stockholders'
      deficit:Preferred
      stock, $.001 par value; 5,000,000 shares
      Authorized.
      Of the amount authorized 4,500,000 shares have
      been
      designated as Series A, and 100,000 shares as Series B.
      There
      are 3,821,197 shares of Series A issued and outstanding.
      The
      liquidation preference of the Series A is $4,000.
    
    
    4,000
    
    
    —Common
      stock, $.001 par value, voting, 100,000,000
      shares
      authorized, 9,517,303 and 491,206
      shares
      issued and outstanding, respectively
    
    
    10,000
    
    
    1,000Additional
      paid-in capital
    
    
    15,197,000
    
    
    10,484,000Deferred
      compensation
    
    
    (688,000
    )
    
    (97,000
    )Subscriptions
      receivable
    
    
    (2,000
    )
    
    (28,000
    )Accumulated
      deficit
    
    
    (16,780,000
    )
    
    (11,477,000
    )(2,259,000
    )
    
    (1,117,000
    )**Total
      liabilities and stockholders' deficit**
    
    $
    251,000
    
    $
    794,000See
      accompanying notes to consolidated financial
    statements.









F-3




ENDAVO MEDIA AND COMMUNICATIONS,
INC.


**Consolidated
Statements of Operations**




**Years Ended December
      31,**2004
    
    2003Total
      revenues
    
    $
    178,000
    
    $
    431,000Cost
      of sales
    
    
    (419,000
    )
    
    (511,000
    )Selling,
      general, and administrative expense
    
    
    (3,496,000
    )
    
    (3,868,000
    )Impairment
      of property and equipment
    
    
    (417,000
    )
    
    —Loss
      from operations
    
    
    (4,154,000
    )
    
    (3,948,000
    )Other
      income (expense)
    
    
    10,000
    
    
    1,000Interest
      expense
    
    
    (1,159,000
    )
    
    (349,000
    )Net
      loss
    
    
    (5,303,000
    )
    
    (4,296,000
    )Imputed
      preferred stock dividend
    
    
    (1,891,000
    )
    
    —Net
      loss attributable to common shareholders
    
    $
    (7,194,000
    )
    $
    (4,296,000
    )Net
      loss per common share - basic and diluted
    
    $
    (2.84
    )
    $
    (9.90
    )Weighted
      average shares - basic and diluted
    
    
    2,532,939
    
    
    433,750See accompanying
      notes to consolidated financial statements.








F-4







ENDAVO MEDIA AND COMMUNICATIONS,
INC.


**Consolidated
Statement of Stockholders' Deficit**




**Years Ended December 31, 2004,
      and 2003**Preferred
      Stock
    
    Common
      Stock
    
    Additional
      Paid-in
      Capital
    
    
    Deferred
      Compensation
    
    
    Subscriptions
      Receivable
    
    
    Accumulated
      DeficitShares
    
    Amount
    
    Shares
    
    
    AmountBalance
      January 1, 2003
    
    
    —
    
    $
    —
    
    
    365,762
    
    
    $
    1,000
    
    $
    8,551,000
    
    
    $
    (615,000
    )
    
    $
    (996,000
    )
    
    $
    (7,181,000
    )Issuance
      of common stock for:Cash
    
    
    —
    
    
    —
    
    
    14,006
    
    
    
    —
    
    
    462,000
    
    
    
    —
    
    
    
    —
    
    
    
    —Services
    
    
    —
    
    
    —
    
    
    121,836
    
    
    
    —
    
    
    1,267,000
    
    
    
    —
    
    
    
    (769,000
    )
    
    
    —Employee
      stock subscriptions
      satisfied
      through services
    
    
    —
    
    
    —
    
    
    —
    
    
    
    —
    
    
    —
    
    
    
    —
    
    
    
    70,000
    
    
    
    —Non-vested
      common stock
      canceled
      through employee
      terminations
    
    
    —
    
    
    —
    
    
    (10,398
    )
    
    
    —
    
    
    (223,000
    )
    
    
    211,000
    
    
    
    11,000
    
    
    
    —Amortization
      of deferred
      compensation
      and subscriptions
      receivable
    
    
    —
    
    
    —
    
    
    —
    
    
    
    —
    
    
    —
    
    
    
    307,000
    
    
    
    1,656,000
    
    
    
    —Preferential
      conversion feature and
      issue
      of warrants with long-term
      debt
    
    
    —
    
    
    —
    
    
    —
    
    
    
    —
    
    
    427,000
    
    
    
    —
    
    
    
    —
    
    
    
    —Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    
    —
    
    
    —
    
    
    
    —
    
    
    
    —
    
    
    
    (4,296,000
    )Balance
      December 31, 2003
    
    
    —
    
    
    —
    
    
    491,206
    
    
    
    1,000
    
    
    10,484,000
    
    
    
    (97,000
    )
    
    
    (28,000
    )
    
    
    (11,477,000
    )Conversion
      of notes payable to
      common
      stock
    
    
    
    
    
    
    
    
    3,511,363
    
    
    
    3,000
    
    
    1,691,000Conversion
      of common stock to
      preferred
      stock
    
    
    3,821,197
    
    
    4,000
    
    
    (2,292,718
    )
    
    
    (2,000
    )
    
    (2,000
    )Issuance
      of common stock for:Cash
    
    
    
    
    
    
    
    
    48,000
    
    
    
    —
    
    
    30,000
    
    
    
    
    
    
    
    (8,000
    )Cash-Warrants
      Exercised
    
    
    
    
    
    
    
    
    2,006,892
    
    
    
    2,000
    
    
    352,000Services
    
    
    
    
    
    
    
    
    5,752,560
    
    
    
    6,000
    
    
    1,342,000
    
    
    
    (1,348,000
    )Deferred
      Compensation relating to
      issuance
      of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401,000
    
    
    
    (401,000
    )Consultant
      stock subscriptions
      satisfied
      through services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,000Compensation
      cost related to issuance of options to officers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    458,000Amortization
      of deferred
      compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,158,000Preferential
      conversion feature associated with long-term
      Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441,000Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,303,000
    )Balance
      December 31, 2004
    
    
    3,821,197
    
    $
    4,000
    
    
    9,517,303
    
    
    $
    10,000
    
    $
    15,197,000
    
    
    $
    (688,000
    )
    
    $
    (2,000
    )
    
    $
    (16,780,000
    )See
      accompanying notes to consolidated financial statements.








F-5







**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**


**Consolidated
Statement of Cash Flows**




**Years Ended December
      31,**2004
    
    2003**Cash
      flows from operating activities:**Net
      loss
    
    $
    (5,303,000
    )
    $
    (4,296,000
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    158,000
    
    
    77,000Loss
      on sale of fixed assets
    
    
    12,000
    
    
    —Impairment
      of fixed assets
    
    
    417,000
    
    
    —Stock
      and options issued for services
    
    
    458,000
    
    
    497,000Interest
      expense converted to common stock
    
    
    197,000
    
    
    —Interest
      expense and fees added to note balance
    
    
    29,000
    
    
    —Amortization
      of deferred compensation
    
    
    1,158,000
    
    
    307,000Stock
      subscription satisfied with services
    
    
    34,000
    
    
    1,726,000Amortization
      of discount on long-term debt
    
    
    678,000
    
    
    213,000Bad
      debt expense
    
    
    35,000
    
    
    126,000Decrease
      (increase) in:Accounts
      receivable
    
    
    3,000
    
    
    (90,000
    )Prepaid
      expense
    
    
    1,000
    
    
    (1,000
    )Deposits
    
    
    (10,000
    )
    
    —Increase
      (decrease) in:Accounts
      payable
    
    
    214,000
    
    
    51,000Accrued
      liabilities
    
    
    156,000
    
    
    202,000Deferred
      revenue
    
    
    85,000
    
    
    4,000Net
      cash used in operating activities
    
    
    (1,678,000
    )
    
    (1,184,000
    )**Cash
      flows used in investing activities -**Purchase
      of property and equipment
    
    
    (236,000
    )
    
    (287,000
    )**Cash
      flows from financing activities:**Proceeds
      from issuance of common stock and exercise of warrants
    
    
    376,000
    
    
    462,000Proceeds
      from related party note
    
    
    1,397,000
    
    
    103,000Payments
      on related party convertible notes payable
    
    
    (40,000
    )
    
    (10,000
    )Proceeds
      from note payable
    
    
    18,000
    
    
    210,000Payments
      on note payable
    
    
    —
    
    
    (10,000
    )Proceeds
      from convertible short-term debt
    
    
    —
    
    
    864,000Payments
      on convertible long-term debt
    
    
    —
    
    
    (12,000
    )Net
      cash provided by financing activities
    
    
    1,751,000
    
    
    1,607,000Net
      increase (decrease) in cash and cash equivalents
    
    
    (163,000
    )
    
    136,000Cash
      and cash equivalents at beginning of period
    
    
    164,000
    
    
    28,000Cash
      and cash equivalents at end of period
    
    $
    1,000
    
    $
    164,000See accompanying
      notes to consolidated financial statements.








F-6




****





**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**


**Notes
to Consolidated Financial Statements**




**December 31, 2004, and
      2003**




**1.**  **Organization
and Description of Business**
  Endavo
Media and Communications, Inc. and subsidiaries (collectively referred to as the
“Company”) provide integrated broadband services, including voice, video and
data services to residential customers through IP based networks. The Company is
also targeting commercial and municipal concerns. The Company is located in Salt
Lake City, Utah, and was formed in December 1999. The Company was formerly known
as CeriStar Inc.
  **2.**  **Summary
of Significant Accounting Policies**
  ***Principles
of Consolidation***
 The
financial statement reflect the consolidated results of Endavo Media and
Communications and its wholly owned subsidiaries Susquina, Inc. and New Planet
Resources, Inc. All material intercompany transactions have been eliminated in
the consolidation.
  ***Reverse
Stock Split***
 In the
third quarter of 2004, the Company completed a reverse stock split whereby the
shareholders received 1 share of stock for every 16 that the previously owned.
All share and per share amounts in prior periods have been restated to reflect
the reverse stock split.
  ***Concentration
of Credit Risk***
 Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of trade receivables. In the normal course of business,
the Company provides on-going credit evaluations of its customers and maintains
allowances for possible losses.
  The
Company maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risk on
cash and cash equivalents.
  ***Cash
and Cash Equivalents***
 Cash
includes all cash and highly liquid investments with original maturities of
three months or less.
  ***Property
and Equipment***
 Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
and amortization on property and equipment are determined using the
straight-line method over the three to five year estimated useful lives of the
assets.




F-7






**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*


**2.**  **Summary
of Significant Accounting Policies** ***Continued***
  ***Impairment
of Long-Lived Assets***
 The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable.
The Company evaluates, at each balance sheet date, whether events and
circumstances have occurred which indicate possible impairment. The Company uses
an estimate of future undiscounted net cash flows of the related asset or group
of assets over the estimated remaining life in measuring whether the assets are
recoverable. If it is determined that an impairment loss has occurred based on
expected cash flows, such loss is recognized in the statement of operations. In
the fourth quarter of 2004 the Company analyzed its expected cash flows related
to its installed equipment, and determined that the cash flows will not be
sufficient to recover its investment in those assets, resulting in an impairment
of those assets. The company also impaired an asset that is being held for sale
to its estimated net realizable value. The total amount impaired was $417,000
and is recorded in operating expenses.
  ***Revenue
Recognition***
 Revenue
is recognized when a valid contract or purchase order has been executed or
received, services have been performed or product has been delivered, the
selling price is fixed or determinable, and collectibility is reasonably
assured. Payments received prior to performance are recorded as deferred revenue
and amortized over the estimated service period.
  ***Income
Taxes***
 Deferred
taxes are computed using the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are not recognized
unless it is more likely than not that the asset will be realized in future
years.
  F-8
  **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
 **2.**  **Summary
of Significant Accounting Policies** ***Continued***
 ******
 ***Earnings
Per Common and Common Equivalent Share***
 The
computation of basic earnings per common share is computed using the weighted
average number of common shares outstanding during the year. The
computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus common stock
equivalents which would arise from the exercise of warrants outstanding using
the treasury stock method and the average market price per share during the
year. Options, warrants, convertible debt and convertible preferred stock which
if exercised or converted would require the company to issue 39,798,385 and
80,675 common stock equivalents are not included in the diluted earnings per
share calculation for 2004 and 2003, respectively, since their effect is
anti-dilutive.
  ***Use
of 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 periods. Actual results could differ from those estimates.
Significant estimates include the cash flow projections used for the impairment
tests, the assumption underlying estimate of the period used to amortize
deferred revenue and the assumptions used to value the stock options issued to
non-employees. It is reasonable possible that these estimates may change in the
near term and that such as change may be material.
  ***Stock-Based
Compensation***
 The
Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.”
Accordingly, In accordance with APB Opinion No. 25, no compensation is
recognized for options granted to employees unless those options are subject to
variable accounting or they are issued with an exercise price less than market.
During the year ended December 31, 2004, the Company issued 1,100,000 options to
Officers of the Company to purchase the Company’s common stock at exercise
prices of $.05 to $.60 per share. These options expire in 2014 and were vested
as of December 31, 2004.
  Because
the exercise price of these options would not be decreased proportionately if
the Company has a reverse stock split, they are being accounted for as though
the terms of the options are variable, resulting in a non-cash expense of
$458,000 in 2004.
 **
  F-9




**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
 
 2.  **Summary
of Significant Accounting Policies** ***Continued***
 **
 ***Stock-Based
Compensation - Continued***
 Had
compensation cost for these options been determined based upon the fair value at
the grant date consistent with the methodology prescribed under SFAS No. 123,
the Company's net earnings would have changed as set forth in the table
below:
 **Years Ended December
      31,****2004**
    
    
    **2003**Net
      loss - attributable to common shareholders
      as
      reported
    
    $
    (7,194,000
    )
    $
    (4,296,000
    )Add:
      Stock-based employee compensation
      expense
      included in reported net loss,
      net
      of related tax effects
    
    
    458,000
    
    
    —Deduct:
      Total stock-based employee
      compensation
      expense determined under fair
      value
      based method for all awards, net of relatedtax
      effects
    
    
    (605,000
    )
    
    (340,000
    )Net
      loss - attributable to common shareholders
      pro
      forma
    
    $
    (7,341,000
    )
    $
    (4,636,000
    )Loss
      per share - attributable to common
      shareholders
      as reported
    
    $
    (2.84
    )
    $
    (9.90
    )Loss
      per share - attributable to common shareholders
      pro
      forma
    
    $
    (2.89
    )
    $
    (10.69
    )
 These
options were valued at the date of grant with the total calculated pro forma
expense reflected above, as all options are fully vested.

The fair
value of each warrant grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions at
December 31:


**2004**
    
    
    
    **2003**Expected
      dividend yield
    
    $
    —
    
    
    $
    —Expected
      stock price volatility
    
    
    259
    %
    
    
    100
    %Risk-free
      interest rate
    
    
    4.0
    %
    
    
    4
    %Expected
      life of options
    
    
    10
      years
    
    
    
    10
      years




The
weighted average fair value of each option granted to employees during 2004 and
2003 was $0.58 and $6.56, respectively.




F-10




**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*




**2.**  **Summary
of Significant Accounting Policies** ***Continued***
  ***Reclassifications***
 Certain
amounts in the 2003 financial statements have been reclassified to conform with
classifications adopted in the current year. Such reclassifications had no
effect on the net loss.
  **3.**  **Liquidity
and Going Concern**
  The
Company has a working capital deficit, a stockholders’ deficit, and recurring
net losses. These factors create substantial doubt about the Company’s ability
to continue as a going concern. The financial statements do not include any
adjustment that might be necessary if the Company is unable to continue as a
going concern.
  The
ability of the Company to continue as a going concern is dependent on the
Company generating cash from the sale of its common stock or obtaining debt
financing and attaining future profitable operations. Management’s plans include
selling its equity securities and obtaining debt financing to fund its capital
requirement and ongoing operations, however, there can be no assurance the
Company will be successful in these efforts.
  **4.**  **Property
and Equipment**
  Property
and equipment consists of the following at December 31:
 **2004**
    
    
    **2003**Computer
      equipment and software
    
    $
    239,000
    
    $
    694,000Furniture
      and fixtures
    
    
    14,000
    
    
    14,000253,000
    
    
    708,000Less
      accumulated depreciation, amortization
    
    
    (100,000
    )
    
    (159,000
    )$
    153,000
    
    $
    549,000




The Company also has communication equipment uninstalled and
held for sale totalling $45,000 at December 31, 2004.




F-11






**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*


****
 **5.**  **Accrued
Liabilities**
  Accrued
liabilities consisted of the following at December 31:
 **2004**
    
    
    **2003**Accrued
      payroll
    
    $
    204,000
    
    $
    230,000Other
    
    
    256,000
    
    
    74,000$
    460,000
    
    $
    304,000
 ****
 **6.**  **Deferred
Revenue**
 
 The
Company has entered into long-term service contracts which are accompanied by
payments received from customers for initial equipment installation to service
residential developments and other services. Amounts initially received are
deferred until they are earned based on the terms of the contract. The balance
of the deferred revenue at December 31, 2004 and 2003 was $408,000 and $236,000,
respectively.
  **7.**  **Notes
Payable**
  Notes
payable consisted of the following at December 31:
 **2004**
    
    
    **2003**Discounted
      convertible notes payable due to SovCap. SovCap is affiliated with an
      officer and director of the Company and is a significant stockholder of
      the Company. These notes have a face interest rate of 18%. At December
      2003 there was an unamortized discount of $178,000. This amount, plus an
      additional $263,000 (related to discounts on notes issued in 2004) was
      expensed in 2004. There is no remaining unamortized discount at December
      31. 2004. The notes are unsecured and are due on demand. The notes are
      convertible at a rate of 75% of the average closing bid price of the
      Company’s common stock for the five trading days ending on the trading day
      immediately preceding the conversion date.
    
    $
    763,000
    
    $
    686,000


F-12
 **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
  **7.**  **Notes
Payable** ***Continued***
 Note
      payable originally to a finance company and with an effective interest
      rate of 57% including an original discount of $78,000 from issuance of
      detachable warrants with the note. As of December 31, 2003, the
      unamortized portion of the discount was $46,000, no unamortized discount
      remaining as of December 31, 2004. The note is in default and the finance
      company required repayment by a former officer of the Company who repaid
      the note, accrued interest and fees under a guarantee. The Company's
      obligation is now to the former officer and shareholder. The note was
      collateralized by equipment.
    
    
    200,000
    
    
    137,000Convertible notes due to a former officer and shareholder of the
      Company. These notes bear interest at 12%, are unsecured, and due on
      demand. Subsequent to December 31, 2004 these notes were in default. The
      notes are convertible into approximately 10,251 shares at approximately
      $8.00 per share.
    
    
    82,000
    
    
    93,000Note
      payable to an individual with interest at 10% collateralized by
      receivables and due on demand.
    
    
    18,000
    
    
    18,000Note
      payable to a financial group with interest at 6% and due on
      demand.
    
    
    15,000
    
    
    —Note
      payable to a financial institution. The note is payable in monthly
      installments of $2,000, including interest at 14%, collateralized by
      equipment, and matures on May 30, 2007. At December 31, 2004 and 2003 the
      outstanding balance of the debt was $41,000 and $55,000 less a discount of
      $41,000 and $55,000, respectively.
    
    
    —
    
    
    —$
    1,078,000
    
    $
    934,000
During
2004 $1,638,000 in notes payable and accrued interest was converted to 3,511,363
shares of common stock.





F-13







**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*


****


**7.**  **Notes
Payable** ***Continued***


Future
maturities of notes payable are as follows:
 **Year
      Ending December 31:**
    
    
    **Amount**2005
    
    $
    1,119,000Less
      discount
    
    
    (41,000
    )$
    1,078,000
 
 **8.**  **Income
Taxes**
 
 The
benefit for income taxes is different than amounts which would be provided by
applying the statutory federal income tax rate to loss before benefit for income
taxes for the following reasons:
  **Years
      Ended****December
      31,****2004**
    
    
    **2003**Income
      tax benefit atstatutory
      rate
    
    $
    1,967,000
    
    $
    1,592,000Stock
      valuation for services
    
    
    (649,000
    )
    
    (538,000
    )Change
      in valuation allowance
    
    
    (1,316,000
    )
    
    (1,053,000
    )Other
    
    
    (2,000
    )
    
    (1,000
    )$
    —
    
    $
    —
 
 Deferred
tax assets (liabilities) are comprised of the following as of December
31:
  **2004**
    
    
    **2003**Net
      operating loss carry-forwards
    
    $
    3,691,000
    
    $
    2,401,000Amortization
      of license technology
    
    
    259,000
    
    
    287,000Depreciation
    
    
    (44,000
    )
    
    (114,000
    )Deferred
      revenue
    
    
    119,000
    
    
    88,000Allowance
      for doubtful accounts
    
    
    4,000
    
    
    43,000Other
    
    
    23,000
    
    
    —Valuation
      allowance
    
    
    (4,052,000
    )
    
    (2,705,000
    )$
    —
    
    $
    —
  F-14




**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*


****


**8.**  **Income
Taxes** ***Continued***


At
December 31, 2004, the Company has net operating loss (NOL) carry-forwards
available to offset future taxable income of approximately $9,500,000 which will
begin to expire in 2019. The utilization of the net operating loss
carry-forwards is dependent upon the tax laws in effect at the time the net
operating loss carry-forwards can be utilized. It is also likely that
utilization of the NOL’s are limited based on changes in control of the Company.
A valuation allowance has been recorded against the deferred tax asset due to
the uncertainty surrounding its realization caused by the Company’s recurring
losses.
  **9.**  **Stockholders'
Equity (Deficit)**
 
 ***Conversion
of Debt to Common Stock***
 
 As
discussed in Note 7, pursuant to the original terms of the agreements, certain
creditors converted $1,694,000 of loans and accrued interest into 3,511,363
shares of common stock.
 
 ***Conversion
of Preferred Stock to Common Stock***
 
 In the
third quarter of 2004, certain shareholders converted 2,292,718 shares of common
stock into 3,821,197 shares of Series A Convertible Preferred
Stock.
 
 The
3,821,197 shares of preferred stock are convertible into 36,683,592 shares of
common stock any time after September 30, 2005. This conversion feature is
beneficial as to the preferred stockholders. As a result the Company is
reflecting a preferred stock dividend of $7,566,000 ratably over the term that
the preferred stock first is convertible. As of December 31, 2004, $1,891,000 of
the dividend has been reflected on the statement of operations.
 
 The
Series A has no stated dividend rate and has a liquidation preference of $.001
per share. The Series A Preferred Stock also has voting rights that entitle the
preferred shareholders to vote with the common shareholders as if the preferred
stock had converted to common. The conversion ratio of the preferred into common
is not subject to revision upon reverse stock dividends or splits that reduce
the total shares outstanding.
 
 ***Common
Shares Issued for Service***
 
 The
company has issued 5,752,560 shares, as well as 2,600,000 warrants (with
exercise prices of $0.035 to 0.65) to consultants under consulting agreements
that are generally one year or less. The associated expense are amortized over
the term of the contracts, with the unamortized portion (totaling $688,000 at
December 31, 2004) reflected as a reduction to stockholders equity
(deficit).
 
 F-15
  **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
  ***9.***
    **Stockholders'
      Equity (Deficit)*****Continued***
 ******
 ***Options
and warrants***
  The
Company has issued 0 and 22,547 warrants in conjunction with the issuance of its
securities and convertible debt during the years ended December 31, 2004 and
2003, respectively. Warrants that were issued generally do not have a life that
exceeds five years. Information regarding warrants and options to purchase
common shares is summarized below:
 **Number
      of**
      **Options**
      **and****Warrants**
    
    
    **Exercise****Price
      Per****Share**Outstanding
      at January 1, 2003
    
    $
    20,279
    
    $
    26.72
      - 72.00Granted
    
    
    266,298
    
    
    6.08
      - 72.00Expired
    
    
    —
    
    
    —Outstanding
      at December 31, 2003
    
    
    286,577
    
    
    6.08
      - 72.00Granted
    
    
    1,000,000
    
    
    .035
      - .035Granted
    
    
    50,000
    
    
    .05
      - .05Granted
    
    
    2,600,000
    
    
    .28
      - .60Granted
    
    
    3,900,000
    
    
    .46
      - .46Canceled
    
    
    (250,000
    )
    
    6.08
      - 7.36Canceled
    
    
    (3,900,000
    )
    
    .46
      - .46Exercised
    
    
    (1,000,000
    )
    
    .035
      - .035Exercised
    
    
    (1,005,405
    )
    
    .28
      - .37Outstanding
      at December 31, 2004
    
    $
    1,681,172
    
    $
    .05
      - 72.00
 
 The
following table summarizes information about outstanding warrants and options
for common stock at December 31, 2004:
  **Outstanding**
    
    
    
    
    **Exercisable****Range
      of
      **Exercise**Prices******
    
    
    **Number

      **Out-

      **Standing******
    
    
    **Weighted

      **Average

      **Remaining

      **Contractual

      **Life

      **(Years)************
    
    
    **Weighted

      **Average

      **Exercise

      **Price********
    
    
    **Number

      **Exercisable****
    
    
    **Average

      **Exercise

      **Price******$
    16.00
      - 72.00
    
    
    36,577
    
    
    1.10
    
    
    41.73
    
    
    36,577
    
    
    41.73.37
      - .65
    
    
    594,595
    
    
    .74
    
    
    .50
    
    
    594,595
    
    
    .50.05
      - .05
    
    
    50,000
    
    
    9.58
    
    
    .05
    
    
    50,000
    
    
    .05.60
      - .60
    
    
    1,000,000
    
    
    10.00
    
    
    .60
    
    
    1,000,000
    
    
    .60$
    .05
      - 72.00
    
    
    1,681,172
    
    
    6.52
    
    
    1.44
    
    
    1,681,172
    
    
    1.44
 
  F-16
 
 **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
 **10.**  **Stock
Subscriptions Receivable**
 
 Subscriptions
receivable consist of the obligation of employees to purchase common shares. In
addition the Company may enter into contracts with consultants in which the
Company issues stock at the commencement of the contract period. The value of
the services or common stock given, which ever is more determinable is recorded
as a stock subscription and amortized as expense over the period of the service
contract. At December 31, 2004 and 2003 there were approximately $2,000 and
$28,000 of subscriptions receivable related to these contracts.
  **11.**  **Deferred
Compensations**
 
 Deferred
compensation is comprised of common stock issuances to employees and consultants
which have not yet vested. As of December 31, 2004 and 2003, the company had
common stock for employee services valued at $638,000 and $97,000, respectively.
The measurement date of compensation is the date the shares were
granted.
 
 **12.**  **Supplemental
Cash Flow Information**
 
 During
the year ended December 31, 2004, the Company had significant non - cash
financing and investing activities as follows
 
 ·
    Converted
      $1,691,000 of notes payable and accrued interest into 3,511,363 shares of
      common stock.
 
 ·
    Issued
      common stock and warrants to consultants and amortized the expense over
      the terms of the contract resulting in amortization of deferred
      compensation of $1,158,000.
 
 During
the year ended December 31, 2003, the Company had significant non - cash
financing and investing activities as follows:
 
 **·**
    Issued
      80,125 common shares valued at $769,000 to consultants for short-term
      contract services.
 
 ·
    Cancelled
      10,397 unvested shares of common stock valued at $223,000 recorded as
      deferred compensation of $212,000 and subscriptions receivable of $11,000,
      due to employee terminations.
 
 ·
    Issued
      warrants in connection with debt which resulted in a debt discount of
      $139,000.
 
 ·
    Debt
      issued with beneficial conversion features valued at $288,000 which
      resulted in debt discounts.
   F-17
  **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*
 **12.**  **Supplemental
Cash Flow Information** ***Continued***
 
 ·
    Recorded
      accounts receivable for unearned revenue of
$51,569.
 
 Cash paid
for interest and income taxes are as follows:
 **Years
      Ended**
      **December
      31,****2004**
    
    
    **2003**Interest
    
    $
    156,000
    
    $
    122,000Income
      taxes
    
    $
    —
    
    $
    —
 
 **13.**  **Commitments
and Contingencies**
 
 The
Company may become or is subject to investigations, claims or lawsuits ensuing
out of the conduct of its business. The Company is currently unable to estimate
the loss (if any) related to these matters.
 
 The
Company is currently litigating a claim from a former officer and director on a
note guarantee secured by equipment. The note balance, accrued interest, and
related fees are accrued as a liability at December 31, 2004.
 
 **14.**  **Fair
Value of Financial Instruments**
 
 The
Company’s financial instruments consist of cash, receivables and payables. Due
to the liquidity concerns of the Company, it is currently not able to estimate
the fair value of its financial instruments.
 
 **15.**  **Fourth
Quarter Adjustments**
 
 In the
fourth quarter of 2004, the Company recorded an adjustment to its stockholders
equity to reflect the conversion of 2,292,718 shares of its common stock into
3,821,197 shares of Series A Convertible Preferred Stock. This adjustment should
have been reflected in the Company's September 30, 2004 interim financial
statements.
 
 The
3,821,197 shares of preferred stock are convertible into 36,683,592 shares of
common stock any time after September 30, 2005. This conversion feature is
beneficial as to the preferred stockholders. As a result the Company is
reflecting a preferred stock dividend of 7,566,000 over the term until the
preferred stock first is convertible. As of December 31, 2004, 1,891,000 of the
dividend has been reflected on the statement of operations.
 
 Had the
conversion been reflected in the third quarter, additional preferred stock
dividends reflected in that quarter would have been approximately
$15,000.
  F-18
  **ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*


**16.** **Subsequent
Events**
  On
February 22, 2005, the Company consummated a private placement of $1,425,000
principal amount of 8% Senior Secured Convertible Notes and related securities,
including common stock warrants and additional investment rights. Specifically,
this transaction may ultimately result in gross proceeds to the Company of
$4.275 million if both the additional investment rights are exercised in
full.





The
Company has agreed to file a registration statement with the Securities and
Exchange Commission prior to April 25,2005, registering the shares of common
stock issuable upon conversion of the 8% Senior Secured Convertible Notes,
exercise of the warrants, and the shares related to the additional investment
rights if they are exercised in the future. If the Company fails to file the
registration statement by April 25, 2005, or if it is not declared effective by
the Securities and Exchange Commission within 120 days from the filing date, the
Company will be required to pay to the investors liquidated damages equal to
2.0% of the amount invested and shall pay to the investors liquidated damages
equal to 1.0% of the amount invested for each subsequent 30-day
period.





The
Company engaged H. C. Wainwright Co., Inc., as the exclusive placement agent in
connection with the private placement. Under the agreement with Wainwright the
Company paid them a cash fee of $121,750
(9% of the gross proceeds of the financing plus a non-accountable cash allowance
of 2% of the gross proceeds, less any legal fees payable to counsel to the
investors). The Company paid the investors $35,000 for the legal fees they
incurred in connection with this transaction, which
were included in the H.C. Wainwright fee calculation. In addition, the
Company issued to Wainwright, warrants to purchase 239,630 shares of common
stock at $.89 and 239,630 shares of common stock at $1.27. The warrants have the
same terms as the warrants issued to the investors. In addition, the Company
agreed to pay to Wainwright, a cash fee of 8% of the aggregate consideration
received by us from the exercise of any warrants.




**17.**  **Recent
Accounting Pronouncements**




In
December 2003, the FASB issued Interpretation No. 46 (“FIN 46R”)
(revised December 2003), Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 (“ARB 51”), which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity though means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN
46), which was issued in January 2003. Before concluding that it is appropriate
to apply ARB 51 voting interest consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective date of FIN 46R, an enterprise must evaluate its involvement
with all entities or legal structures created before February 1, 2003, to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no grandfathering of existing entities. Public companies must apply
either FIN 46 or FIN 46R immediately to entities created after January 31, 2003
and no later than the end of the first reporting period that ends after March
15, 2004. The adoption of FIN 46 had no effect on the Company’s consolidated
financial position, results of operations or cash flows.





F-19




**ENDAVO
MEDIA AND COMMUNICATIONS, INC.**
 **Notes
to Consolidated Financial Statements**
 *Continued*




**17.**  **Recent
Accounting Pronouncements** ***Continued***
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
revised Statement of Financial Accounting Standards No. 123 entitled
“Share-Based Payment” (“FAS No. 123R”). This revised statement addresses
accounting for stock-based compensation and results in the fair value of all
stock-based compensation arrangements, including options, being recognized as an
expense in a company’s financial statements. The revised Statement eliminates
the ability to account for stock-based compensation transactions using APB
Opinion No. 25 with supplemental disclosure in the notes to financial
statements as previously allowed under FAS 123. FAS No. 123R is effective for
public entities that file as small business issuers as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently assessing the impact that FAS 123R will have on its
financial statements.




F-20





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





Not
applicable.




**ITEM
8A CONTROLS AND PROCEDURES** ****





Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Annual Report on Form 10-KSB,
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission. Disclosure controls also
are designed with an objective of ensuring that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, in order to allow timely consideration regarding
required disclosures.





The
evaluation of our disclosure controls by our chief executive officer, who is
also our acting chief financial officer, included a review of the controls’
objectives and design, the operation of the controls, and the effect of the
controls on the information presented in this Annual Report. Our management,
including our chief executive officer, does not expect that disclosure controls
can or will prevent or detect all errors and all fraud, if any. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Also,
projections of any evaluation of the disclosure controls and procedures to
future periods are subject to the risk that the disclosure controls and
procedures may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.





Based on
his review and evaluation as of the end of the period covered by this Form
10-KSB, and subject to the inherent limitations all as described above, our
chief executive officer, who is also our acting chief financial officer, has
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) contain
material weaknesses and are not effective.





A
material weakness is a significant deficiency, or a combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.





The
material weaknesses we have identified are the direct result of a lack of
adequate staffing in our accounting department. Currently,
our chief executive officer and a controller have sole responsibility for
receipts and disbursements. We do not employ any other parties to prepare the
periodic financial statements and public filings. Reliance on these limited
resources impairs our ability to provide for a proper segregation of duties and
the ability to ensure consistently complete and accurate financial reporting, as
well as disclosure controls and procedures. As we grow, and as resources permit,
we project that we will hire such additional competent financial personnel to
assist in the segregation of duties with respect to financial reporting, and
Sarbanes-Oxley Section 404 compliance.





We
believe that we will be able to improve our financial reporting and disclosure
controls and procedures and remedy the material weakness identified above.




32





**ITEM
8B CONTROLS AND PROCEDURES**





Not
applicable.




**PART
III** ****




**ITEM
9. DIRECTORS AND EXECUTIVE OFFICERS OF THE** **REGISTRANT**





Our
directors will serve for a term of one year unless they resign or are earlier
removed. Our executive officer and key employees and consultants are appointed
by our board of directors and serve at its discretion.





**Current
Directors and Executive Officers**





Our board
of directors currently consists of three members. There are no arrangements or
understandings between any of the directors or any other persons pursuant to
which any of the directors have been selected as directors, other than as
described below. There are no “family relationships” among the directors, as
that term is defined by the Securities and Exchange Commission. Set forth below
is our current board of directors, including each member’s age and position with
the Company.





**Name**
    
    **Age**
    
    **Position
      with the Company**Paul
      D. Hamm
    
    38
    
    President,
      Chief Executive Officer, and Chairman of the BoardMark
      S. Hewitt
    
    53
    
    Chief
      Technology Officer, Chief Operations Officer and
  DirectorJerry
      Dunlap
    
    52
    
    Director





**PAUL
D. HAMM** . Mr.
Hamm has served as our President, Chief Executive Officer and a member of our
Board of Directors since June 24, 2004. Mr. Hamm is a 14-year financial services
industry veteran, financial entrepreneur, investment banking professional and
private equity fund manager. In 2002, Mr. Hamm founded and is currently the
Managing Partner of AlphaWest Capital Partners, a specialized capital marketing
firm providing extensive market/industry research, financial planning and
modeling, transaction advisory, marketing and investment banking services to
emerging public and “pre-public” U.S. companies. In 1998, Mr. Hamm co-founded
and currently serves as Managing Director of SovCap Investment Management Group,
the investment manager to SovCap Equity Partners, Ltd., an offshore private
investment partnership, and our principal stockholder. As a principal investor,
Mr. Hamm has made numerous private equity investments into publicly traded
companies across technology and communications related industries. He has been
actively involved with portfolio companies in business planning and execution,
often serving as primary financial and strategic advisor to a portfolio
company’s management. Mr. Hamm holds NASD securities licenses, served as a
Transportation/Civil Affairs Commissioned Officer for 8 years with the U.S.
Army/USAR, and has a Bachelor of Science degree in Political Science from
Stetson University.





**MARK
S. HEWITT** . Mr.
Hewitt has served as our Chief Technology Officer and Chief Operations Officer
since June 24, 2004 and a member of our Board of Directors since December 1999.
Since July 2001, Mr. Hewitt has been the Chief Technology Officer of Nextbend,
Inc. a start-up consumer electronics company based in Florida. Previously he was
Chief Technology Officer of Mediacentric Group, a communications solutions
provider from February 2000 until September 2001. From August 1999 until October
2000 he was Senior VP at I-Link, Incorporated, a unified messaging and IP
telephony company. From May 1998 until September 1999 he was the Senior Director
of New Product Development for Frontier Communications, a NASDAQ company which
was acquired by Global Crossing. Mr. Hewitt earned a BS in Electronics
Engineering in 1974 from the University of Alaska.




33




**JERRY
DUNLAP** . Mr.
Dunlap has served as a member of our Board of Directors since July 1, 2004. Mr.
Dunlap is co-founder and currently serves as President and Chief Executive
Officer for ISDN-Net, a internet service provider located in Nashville,
Tennessee. After ten years in existence, ISDN-Net is Tennessee’s oldest and
largest independent Internet Service Provider serving 87 of the state’s 95
counties. Mr. Dunlap oversees many of the day-to-day operations of ISDN-Net and
manages the company’s long-term, strategic direction. Viewed as a pioneer in
telecom networking and communications, Mr. Dunlap was asked by the Tennessee
Public Service Commission in 1992 to direct a pilot project that ultimately
resulted in the introduction of digital connectivity services in Tennessee.
Shortly after that project, in 1994, Mr. Dunlap co-founded ISDN-Net to serve the
data needs of Tennessee businesses. Mr. Dunlap has a Bachelor of Science degree
in pharmacy from the University of Tennessee.





**Section
16(a) Beneficial Ownership Reporting Compliance**





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers, directors, and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the Securities and Exchange Commission (“SEC”). Executive officers, directors,
and greater than 10% stockholders are required by SEC regulation to furnish us
with copies of all Section 16(a) forms they file. Based solely on our review of
the copies of such forms received by it during the year ended December 31, 2004,
we believe that during such year our executive officers, directors and 10%
stockholders complied with all such filing requirements except for the following
late or delinquent filings: (i) Form 3 for Mr. Dunlap reporting his appointment
as a director; (ii) Form 4 for Mr. Dunlap reporting certain transactions in our
common stock by a company of which he is a stockholder, officer and director;
(iii) Form 4 for Mr. Hamm reporting certain transactions in our common stock;
(iv) Form 3 for Mr. Hewitt reporting his appointment as a director; (v) Form 4
for Mr. Hewitt reporting certain transactions in our common stock; and (vi) Form
3 and two Form 4s for SovCap Equity Partners reporting certain transactions in
our common stock.





**Code
of Ethics**





Our board
of directors is currently in the process of adopting a code of ethics that
complies with the rules promulgated under the Sarbanes-Oxley Act of 2002 and
that applies to our principal executive officer and principal financial and
accounting officer and to all of our staff.





**Audit
Committee Financial Expert**





The
Securities and Exchange Commission has adopted rules implementing Section 407 of
the Sarbanes-Oxley Act of 2002 requiring public companies to disclose
information about “audit committee financial experts.” We do not have a standing
Audit Committee **.** The
functions of the Audit Committee have been assumed by our full Board of
Directors. Additionally, we do not have a member of our board of directors that
qualifies as an “audit committee financial expert.” The Securities and Exchange
Commission’s rules do not require us to have an audit committee financial
expert, and our Board of Directors has determined that it possesses sufficient
financial expertise to effectively discharge its obligations.




34




**ITEM
10. EXECUTIVE COMPENSATION** ****




**Summary
compensation table**





The
following table sets forth the total compensation for the fiscal years ended
December 31, 2004, 2003 and 2002 paid to or accrued for our chief executive
officer and our four other executive officers who provided services to us at
December 31, 2004, excluding executive officers paid less than $100,000
annually. Additionally, we have included the compensation for two former
executive officers for whom disclosure would have been required had these two
individuals been serving as executive officers as of December 31, 2004, the end
of our most recently completed fiscal year. Each of the following executive
officers is referred to as a “Named Executive Officer.”




**Annual
      Compensation**
    
    
    **Long
      Term**
      **Compensation****Name and
      Principal Position**
    
    
    **Year**
    
    
    **Salary
      ($)**
    
    
    **Bonus
      ($)**
    
    
    **Securities
      Underlying****Options/SARs
      (#)**Paul
      D. Hamm (1)
    
    
    2004
    
    $
    67,500
    
    
    —
    
    
    525,000Chief
      Executive Officer
    
    
    2003
    
    
    —
    
    
    —
    
    
    —and
      President
    
    
    2002
    
    
    —
    
    
    —
    
    
    —Frederick
      A. Weismiller(2)
    
    
    2004
    
    $
    45,000
    
    
    —
    
    
    1,750,000(3
    )Former
      Chairman of the
    
    
    2003
    
    $
    135,075
    
    $
    7,500
    
    
    —Board,
      Chief Executive Officer and President
    
    
    2002
    
    
    —
    
    
    —
    
    
    —
 ______________





(1)
    Mr.
      Hamm became our Chief Executive Officer and President on June 24, 2004.
      The amounts shown herein as compensation to Mr. Hamm are the total amounts
      paid by the Company to AlphaWest Capital Partners, LLC, or AlphaWest, for
      executive management services provided to us by Mr. Hamm between July 1,
      2004 through December 31, 2004, pursuant to successive consulting
      agreements between Mr. Hamm and the Company. Mr. Hamm is the sole member
      of AlphaWest. These amounts may not reflect Mr. Hamm’s actual compensation
      from AlphaWest, which may be greater or less than the amounts shown. The
      initial consulting agreement, pursuant to which Mr. Hamm provided us with
      executive management services expired on September 30, 2004. On October 1,
      2004, a new consulting agreement was executed between AlphaWest and the
      Company, which expired on December 31, 2004. Currently, Mr. Hamm continues
      to provide us with the executive management services through AlphaWest and
      we have continued to honor the most recent consulting agreement despite
      its expiration. We intend to maintain this arrangement until a formal
      written employment agreement with Mr. Hamm is executed, at which time Mr.
      Hamm will become an employee of the Company. We expect this to occur
      during the second fiscal quarter of 2005. A more detailed description of
      the consulting agreements with AlphaWest and the arrangement under which
      Mr. Hamm continues to provide executive management services is set forth
      under “*Item
      12. Certain Relationships and Related Transactions — Agreements with
      Executive Officers*.”





(2)
    Mr.
      Weismiller resigned as Chief Executive Officer and President on June 24,
      2004 and as a director on September 13, 2004. Mr. Weismiller was employed
      by us pursuant to an employment agreement, dated October 8, 2003. Pursuant
      to Mr. Weismiller’s employment agreement, he was entitled to a monthly
      base salary of $7,500 with annual adjustments approved by our board of
      directors.






35





(3)
    Pursuant
      to Mr. Weismiller’s employment agreement, Mr. Weismiller received options
      to purchase 1,750,000 shares of our common stock at an exercise price of
      $0.46 per share. All of these options terminated upon his departure from
      the Company.





**Stock
Option Grants And Exercises**





The
following is information regarding stock options granted to Messrs. Hamm and
Weismiller during the year ended December 31, 2004.





**OPTION
GRANTS IN LAST FISCAL YEAR**


**Individual
      Grants****Name**
    
    **Number
      of Securities Underlying Options****Granted
      (#)**
    
    **Percent
      of Total Options Granted to Employees in****Fiscal
      Year**
    
    
    **Exercise****Price****($/Share)**
    
    **Expiration**
      **Date**Paul
      D. Hamm
    
    
    25,000(1
      500,000(2
    )
      )
    
    0.4
      8.3
    %
      %
    
    $
      $
    0.05(4
      0.60(4
    )
      )
    
    6/20/14
      12/31/14Frederick
      A. Weismiller
    
    
    1,750,000(3
    )
    
    29.2
    %
    
    $
    0.46(4
    )
    
    1/22/14





(1)
    Options
      granted pursuant to the 2004 Directors, Officers and Consultants Stock
      Option, Stock Warrant and Stock Award Plan, or “2004 Plan,” which vested
      in three equal monthly installments commencing on July 1, 2004. The
      options were not issued in tandem with stock appreciation or similar
      rights and are not transferable other than by will or the laws of descent
      and distribution. The options expire on June 30, 2014.





(2)
    Options
      granted pursuant to the 2004 Plan, which were completely vested on January
      1, 2005. The options were not issued in tandem with stock appreciation or
      similar rights and are not transferable other than by will or the laws of
      descent and distribution. The options expire on December 31, 2014.
 
 (3)
    Options granted to Mr. Weismiller outside of any formal
      plan. These options expired when Mr. Weismiller resigned without
      disagreement on June 24, 2004.




(4)
    The
      exercise price of these options was equal to the fair market value
      (closing price) of the underlying common stock on the date of grant. These
      options are nonqualified options.





The
following table provides information on the value of each of our Named Executive
Officer’s unexercised options at December 31, 2004. None of our Named Executive
Officers exercised any options during 2004.




36


**Fiscal
Year End Option Values**





**Name**
    
    **Number
      of Securities**
      **Underlying
      Unexercised**
      **Options
      at Fiscal Year—End (#)**
    
    **Value
      of Unexercised In-theMoneyOptions at**
      **Fiscal
      Year-End($)(1)************Exercisable**
    
    
    **Unexercisable**
    
    
    **Exercisable**
    
    
    **Unexercisable**Paul
      D. Hamm
    
    
    525,000
    
    
    —
    
    $
    229,000
    
    
    —





**Compensation
of Directors**





Our
non-employee directors do not receive any additional compensation for serving as
a member of our board of directors or for attending any of our board committees,
but non-employee directors are reimbursed for out-of-pocket expenses incurred in
connection with attending our board and board committee meetings.





For
information concerning agreements involving Named Executive Officers *see
Item 12 Certain Relationships and Related Transactions* .




**ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT** **AND RELATED STOCKHOLDER MATTERS**





The
following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 18, 2005 with respect to (i) each
director of the Company; (ii) each executive officer; (iii) all executive
officers and directors of the Company as a group; and (iv) each party known by
us to be the beneficial owner of more than 5% of our common stock. Unless
otherwise indicated, the mailing address for each party listed below is c/o
Endavo Media & Communications, Inc., 50 West Broadway, Suite 1100, Salt Lake
City, Utah 84119. This table is based upon information supplied by current and
former officers, directors and principal stockholders. Unless otherwise
indicated in the footnotes to this table and subject to community property laws
where applicable, we believe that each of the stockholders named in this table
has sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on approximately 10,501,000
of our common stock outstanding on March 31, 2005 adjusted as required by rules
promulgated by the Securities and Exchange Commission.





The
number and percentage of shares beneficially owned is determined in accordance
with Rule 13d-3 of the Securities Exchange Act and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under that
rule, beneficial ownership includes any shares as to which the individual or
entity has voting power or investment power and any shares that the individual
has the right to acquire within 60 days through the exercise of any stock
option or other right. Unless otherwise indicated in the footnotes or table,
each person or entity has sole voting and investment power, or shares such
powers with his or her spouse, with respect to the shares shown as beneficially
owned.





37




**Name
      and Address of Beneficial Owner**
    
    **Amount
      and Nature of****Beneficial
      Ownership**
    
    **Percent
      of Shares****Outstanding*****Executive
      Officers and Directors***Paul
      D. Hamm (1)
    
    
    3,129,857
    
    
    25.3
    %Mark
      S. Hewitt (2)
    
    
    525,000
    
    
    4.7
    %Jerry
      Dunlap (3)
    
    
    —
    
    
    *Frederick
      A. Weismiller
    
    
    —
    
    
    ****Five
      Percent Shareholders***SovCap
      Equity Partners (4)
      c/o
      Lion Corporate Securities Ltd.
      Cumberland
      House #27
      Cumberland
      Street
      P.O.
      Box N-10818
      Nassau,
      New Providence
    
    
    2,603,733
    
    
    22
    %SovCap
      Investment ManagementGroup
      LLC (5)
      10
      Glenlake Parkway,
      Suite
      130
      Atlanta,
      GA 30328
    
    
    2,603,733
    
    
    22
    %Peter
      D. Martin (6)
    
    
    2,603,733
    
    
    22
    %All
      Directors and Executive
      Officers
      as a Group (four persons) (1)(2)(3)
    
    
    3,654,857
    
    
    28.3
    %


_____________


* Less
than one percent.





(1)
    Consists
      of 1,124 shares of common stock owned directly by Mr. Hamm and 525,000
      shares that Mr. Hamm has the right to acquire upon the exercise of
      currently exercisable stock options. Mr. Hamm may also be deemed to own
      the 44,883 shares of Series A Preferred Stock owned by AlphaWest Capital
      Partners, of which Mr. Hamm is the sole member. However, the Series A
      Preferred Stock is not convertible until September 2005 and then at a
      conversion ratio of 9.6 shares of common stock for each share of Series A
      Preferred Stock. Mr. Hamm, as a managing member of SovCap Investment
      Management Group, also may be deemed to beneficially own any shares of
      common stock beneficially owned by SovCap Investment Management Group. Mr.
      Hamm disclaims beneficial ownership of the securities held by SovCap
      Investment Management Group and SovCap Equity Partners except to the
      extent of his proportionate interest therein. See Note (5)
      below.





(2)
    Consists
      of 525,000 shares that Mr. Hewitt has the right to acquire upon the
      exercise of currently exercisable stock options. Mr. Hewitt also owns
      2,076 shares of Series A Preferred Stock. However, the Series A Preferred
      Stock is not convertible until September 2005 and then at a conversion
      ratio of 9.6 shares of common stock for each share of Series A Preferred
      Stock.





(3)
    ISDN.Net,
      of which Mr. Dunlap is President and an owner, owns 80,000 shares of
      Series A Preferred Stock. However, the Series A Preferred Stock is not
      convertible until September 2005 and then at a conversion ratio of 9.6
      shares of common stock for each share of Series A Preferred Stock. Mr.
      Dunlap disclaims beneficial ownership of the securities owned by ISDN.Net
      except to the extent of his proportionate interest
  therein.






38





(4)
    Includes
      1,192,933 shares issuable to SovCap Equity Partners upon conversion of
      outstanding convertible demand notes issued between August 21, 2003 and
      September 8, 2004. SovCap Equity Partners also holds 3,581,585 shares of
      Series A Preferred Stock. However, the Series A Preferred Stock is not
      convertible until September 2005 and then at a conversion ratio of 9.6
      shares of common stock for each share of Series A Preferred Stock. SovCap
      Equity Partners has sole voting power but shares dispositive power with
      SovCap Investment Management Group, its investment manager, with respect
      to the securities of the Company owned by SovCap Equity
      Partners.





(5)
    Consists
      solely of shares of common stock beneficially owned directly by SovCap
      Equity Partners. SovCap Investment Management Group, as investment manager
      of SovCap Equity Partners, has shared dispositive power (but not voting
      power) with respect to the shares of common stock beneficially owned by
      SovCap Equity Partners. Accordingly, it may be deemed to beneficially own
      any shares of common stock beneficially owned by SovCap Equity Partners.
      SovCap Investment Management Group disclaims beneficial ownership of the
      securities held by SovCap Equity Partners except to the extent of its
      proportionate interest therein.





(6)
    Mr.
      Martin, as a managing member of SovCap Investment Management Group, may be
      deemed to beneficially own any shares of common stock beneficially owned
      by SovCap Investment Management Group. Mr. Martin disclaims beneficial
      ownership of the securities held by SovCap Equity Partners and shares
      beneficially owned by SovCap Investment Management Group except to the
      extent of his beneficial ownership therein. See Note (5)
      above.





**Equity
Compensation Plan Information**





We
maintain the 2004 Directors, Officers and Consultants Stock Option, Stock
Warrant and Stock Award Plan pursuant to which we may grant equity awards to
eligible persons. The following table provides information as of March 31, 2005
about equity awards under this plan.





(a)
    
    (b)
    
    (c)**Plan
      category**
    
    **Number
      of securitiesto be issued uponexercise of outstanding options,**
      **warrants
      and rights**
    
    **Weighted-averageexercise
      price of outstanding options,****warrants
      and rights**
    
    **Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities****reflected
      in column (a))**Equity
      compensation plans approved by security holders (1)
    
    
    1,550,000
      (2
    )
    $
    .558
    
    
    638,000Equity
      compensation plans not approved by security holders
    
    
    —
    
    
    —
    
    
    —Total
    
    
    1,550,000
    
    $
    .558
    
    
    638,000




39





(1) We
previously maintained the New Planet Resources, Inc. Stock Incentive Plan and
the 2002 Directors, Officers and Consultants Stock Option, Stock Warrant and
Stock Award Plan. There are no outstanding options under these plans and we
intend to retire these plans.





(2) This
number does not include 7,812,000 common shares issued pursuant to the 2004
Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award
Plan and for warrants previously exercised that were granted pursuant to the
2004 Plan.




**ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** ****





**Agreements
with Executive Officers**





*Paul
Hamm and Mark Hewitt*





On July
1, 2004, we entered into identical consulting agreements with AlphaWest Capital
Partners, of which our President and CEO, Paul Hamm, is the controlling owner,
and also Mark Hewitt. Under these consulting agreements, Mr. Hamm agreed to act
as our President and Chief Executive Officer, as well as our interim Chief
Financial Officer and Mr. Hewitt agreed to serve as our Chief Technology Officer
and Chief Operating Officer. The consulting agreements were for terms of three
months and both expired on October 31, 2004. As compensation for services under
the consulting agreements, Messrs. Hamm and Hewitt were each entitled to receive
a consulting fee of $7,500 per month, all of which they agreed to defer until
the closing of our recent financing. In connection with their engagement by the
Company, Messrs. Hamm and Hewitt were also both issued options to purchase
25,0000 shares of our common stock. On October 1, 2004, we entered into new
agreements with AlphaWest and Mr. Hewitt, except the consulting fee under each
agreement was $15,000 per month. These agreements were also for terms of three
months and expired on December 31, 2004. In connection with this agreement,
Messrs. Hamm and Hewitt were each issued options to purchase an additional
500,000 shares of our common stock. Currently, Messrs. Hamm and Hewitt continue
to provide us with the executive management services contemplated by the latest
consulting agreements, which we continue to honor despite their expiration. We
intend to maintain this arrangement until a formal written employment agreement
is negotiated and executed with each of them, at which time they will become
employees of the Company. We expect this to occur during the second fiscal
quarter of 2005.





**Other
Relationships and Related Transactions**




Between
August 21, 2003 and September 8, 2004, we borrowed a total of $762,800 from our
largest security holder, SovCap Equity Partners, Ltd. in the form of 13
different convertible promissory notes. Each of theses notes is due within 10
days of demand by SovCap. The notes are not subject to interest; however there
is a repayment fee equal to the product of (i) 1.5% of the outstanding principal
amount under the note and (ii) the number of 30-day periods (rounded up) that
the note has been outstanding. The repayment fee is owed regardless of whether
the note is prepaid in advance or becomes due upon demand or default. If we are
unable to make the payments upon demand or when otherwise due, interest will
also accrue on the amount owed at an annual interest rate of 12%. Each note is
convertible into shares of our common stock at 75% of the average closing bid
price of our common stock over the five trading days preceding the conversion.
We also granted SovCap piggyback registration rights with respect to the shares
of common stock issuable upon conversion of the notes, which SovCap waived in
connection with our recent private placement of convertible promissory notes and
warrants. As of March 31, 2005, the aggregate amount of principal and repayment
premiums due upon demand under the notes was $894,700, or approximately
1,192,933 shares of our common stock had SovCap elected to convert.




40


****


**ITEM
13. EXHIBITS, LIST AND REPORTS ON FORM 8-K** ****







(a) The
following exhibits are either attached hereto or incorporated herein by
reference as indicated.


ExhibitNumber
    
    Description
    
    Previously
      Filed as Exhibit
    
    FileNumber
    
    Date
      Previously
      Filed2.1
    
    Agreement
      and Plan of Merger
    
    Attached
      to the Registrant’s Current Report on Form 8-K
    
    001-16381
    
    9/17/023.1
    
    Certificate
      of Incorporation
    
    Exhibits
      1 and 1.1 to the Registrant’s Registration Statement on Form 8-A
    
    001-16381
    
    3/01/013.2
    
    Amended
      and Restated Bylaws
    
    Exhibit
      2 to the Registrant’s Registration Statement on Form 8-A
    
    001-16381
    
    3/01/014.1
    
    Form
      of 8.0% Senior Secured Convertible Note
    
    Exhibit
      4.1 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/054.2
    
    Form
      of Warrant
    
    Exhibit
      4.2 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/054.3
    
    Form
      of Additional Investment Right “A”
    
    Exhibit
      10.2 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/054.4
    
    Form
      of Additional Investment Right “B”
    
    Exhibit
      10.3 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/0510.1
    
    2004
      Directors, Officers and Consultants Stock Option, Stock Warrant and Stock
      Award Plan
    
    Exhibit
      4.1 to the Registrant’s Registration Statement on Form S-8
    
    333-119586
    
    10/07/0410.2
    
    2002
      Directors, Officers and Consultants Stock Option, Stock Warrant and Stock
      Award Plan
    
    Exhibit
      4.1 to the Registrant’s Registration Statement on Form S-8
    
    333-99371
    
    9/10/0210.3
    
    Consulting
      Agreement, dated October 1, 2004, by and between the Registrant and
      AlphaWest Capital Partners (Paul D. Hamm)
    
    Attached
      hereto10.4
    
    Consulting
      Agreement, dated October 1, 2004, by and between the Registrant and Mark
      S. Hewitt
    
    Attached
      hereto
   41
   10.5
    
    Consulting
      Agreement, dated September 17, 2004, by and between the Registrant and
      Castlegate Group, Ltd.
    
    Attached
      hereto10.6
    
    Consulting
      Agreement, dated September 17, 2004, by and between the Registrant and
      Ronald H. Cole, Jr.
    
    Attached
      hereto10.7
    
    Consulting
      Agreement, dated September 17, 2004, by and between the Registrant and
      International Recruitment Co Ltd.
    
    Attached
      hereto10.8
    
    Consulting
      Agreement, dated September 17, 2004, by and between the Registrant and
      Trufello Associates, Ltd.
    
    Attached
      hereto10.9
    
    Form
      of SovCap Promissory Note (1)
    
    Attached
      hereto10.10
    
    Form
      of Securities Purchase Agreement for 8.0% Senior Secured Convertible
      Notes
    
    Exhibit
      10.1 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/0510.11
    
    Form
      of Security Agreement
    
    Exhibit
      10.4 to Registrant’s Current Report on Form 8-K
    
    001-16381
    
    2/28/0521
    
    Company
      Subsidiaries
    
    Attached
      hereto23.1
    
    Consent
      of Hein & Associates LLP
    
    Attached
      hereto23.2
    
    Consent
      of Tanner & Co.
    
    Attached
      hereto31
    
    Certification
      pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002
    
    Attached
      hereto32
    
    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
    
    Attached
      hereto
 _________________





(1) The
Company made and delivered to SovCap Equity Partners, Ltd. 13 separate demand
promissory notes from August 21, 2003 through September 8, 2004. Each of these
demand notes used the form attached. Only the principal amounts varied. These
demand notes are discussed in greater detail under *Item
12. Certain Relationships and Related Transactions - Other Relationships and
Related Transactions* .





(b) We
did not file any Current Reports on Form 8-K during the period covered by this
Annual Report.




**ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES** ****





Our audit
committee, pursuant to authority granted to it by our board of directors, has
selected Hein & Associates LLP, certified public accountants, as independent
auditors to examine our annual consolidated financial statements for our fiscal
year ending December 31, 2004.




42





We
previously engaged Tanner & Co. to audit our financial statements for the
fiscal year ended December 31, 2003. We have paid or expect to pay the following
fees to Tanner & Co. and Hein & Associates, LLP for work performed in
2003 and 2004 or attributable to the audits of our 2003 and 2004 consolidated
financial statements:





**2003**
    
    **2004**Audit
      Fees
    
    $
    36,515.50
    
    $
    42,415.00Audit-Related
      Fees
    
    $
    1,322.80
    
    $
    0Tax
      Fees
    
    $
    0
    
    $
    3,000.00All
      Other Fees
    
    $
    4,004.14
    
    $
    1,650.00





In
January 2003, the SEC released final rules to implement Title II of the
Sarbanes-Oxley Act of 2003. The rules address auditor independence and have
modified the proxy fee disclosure requirements. Audit fees include fees for
services that normally would be provided by the accountant in connection with
statutory and regulatory filings or engagements and that generally only the
independent accountant can provide. In addition to fees for an audit or review
in accordance with generally accepted auditing standards, this category contains
fees for comfort letters, statutory audits, consents, and assistance with and
review of documents filed with the SEC. Audit-related fees are assurance-related
services that traditionally are performed by the independent accountant, such as
employee benefit plan audits, due diligence related to mergers and acquisitions,
internal control reviews, attest services that are not required by statute or
regulation, and consultation concerning financial accounting and reporting
standards.




We expect
Hein & Associate's fees for the 2004 and it to be approximately
$24,000.


The board
of directors has reviewed the fees paid to Tanner & Co. and Hein &
Associates LLP and has considered whether the fees paid for non-audit services
are compatible with maintaining Hein & Associates’ independence. The board
of directors may additionally ratify certain de minimis services provided by the
independent auditor without prior approval, as permitted by the Sarbanes-Oxley
Act and rules of the SEC promulgated thereunder. We will disclose all such
approvals, as applicable, in upcoming years.




43





SIGNATURES







In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




**COMPANY NAME
      CORPORATION**Date: April 15,
2005
    By:
    /s/ *Paul D.
      Hamm*Paul D. Hamm, Chief Executive OfficerTitle





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







**Signature**
    
    **Title**
    
    **Date***/s/
      Paul D. Hamm*
    
    President,
      Chief Executive Officer and Chairman*(Principal
      Executive*
    
    April
      15, 2005Paul
      D. Hamm
    
    *Officer and acting
      Principal Financial and Accounting Officer)**/s/
      Mark S. Hewitt*
    
    Chief
      Technology Officer, Chief Operations Officer and Director
    
    April
      15, 2005Mark
      S. Hewitt*/s/ Jerry Dunlap*
    
    Director
    
    April
      15, 2005Jerry
      Dunlap