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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ COMMISSION FILE NUMBER 0-28579 NOVO NETWORKS, INC.  Delaware
(State or Other Jurisdiction of Incorporation)
    
    75-2233445
(I.R.S. Employer Identification No.)
 2311 Cedar Springs Road, Suite 400
Dallas, Texas 75201
(Address of Principal Executive Offices) (214) 777-4100
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: On November 12, 2004, 52,323,701 shares of the registrants common stock,
$.00002 par value per share, were outstanding.




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NOVO NETWORKS, INC. QUARTERLY REPORT FORM 10-Q
INDEX PAGE NO.PART I:
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2004 and June 30, 2004
    
    
    3Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003
    
    

    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23PART II:
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    24Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24SIGNATURES
    
    
    
    
    25Certification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial and Accounting Officer Pursuant to Section 302Certification Pursuant to Section 906
  2




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NOVO NETWORKS, INC. 
 CONSOLIDATED BALANCE SHEETS
 September 30, 2004
    
    June 30, 2004(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,326,780
    
    
    $
    1,764,370Note receivable and other receivables, net of allowance ($4,076,839 at
September 30, 2004 and June 30, 2004)
    
    
    
    
    
    
    Prepaid expenses
    
    
    348,968
    
    
    
    387,4371,675,748
    
    
    
    2,151,807LONG-TERM ASSETSPrepaid expenses
    
    
    241,500
    
    
    
    225,000Deposits
    
    
    5,745
    
    
    
    5,745Property and equipment, net
    
    
    127,373
    
    
    
    254,746Equity investments
    
    
    365,331
    
    
    
    425,000739,949
    
    
    
    910,491$
    2,415,697
    
    
    $
    3,062,298LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    
    
    
    $
    49,207Accrued liabilities
    
    
    335,750
    
    
    
    144,646Customer deposits
    
    
    2,000
    
    
    
    2,000337,750
    
    
    
    195,853COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYPreferred stock, $0.00002 par value, $1,000 liquidation
preference per share, authorized 25,000,000, issued and outstanding
13,787 and 13,605, liquidation value  $13,787,000
and $13,605,000, respectively
    
    
    
    
    
    
    Common stock, $0.00002 par value, authorized 200,000,000, issued and outstanding,
52,323,701
    
    
    1,050
    
    
    
    1,050Additional paid-in capital
    
    
    258,061,311
    
    
    
    257,874,065Accumulated deficit
    
    
    (255,984,414
    )
    
    
    (255,008,670
    )2,077,947
    
    
    
    2,866,445$
    2,415,697
    
    
    $
    3,062,298
 The accompanying notes are an integral part of these financial statements. 3




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NOVO NETWORKS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the three months endedSeptember 30,2004
    
    2003(unaudited)Operating expenses:General and administrative expenses
    
    $
    603,822
    
    
    $
    630,648Depreciation and amortization
    
    
    127,373
    
    
    
    34,946731,195
    
    
    
    665,594Loss from operations, before
other (income) expense
    
    
    (731,195
    )
    
    
    (665,594
    )Other (income) expense:Interest income
    
    
    (4,766
    )
    
    
    (8,312
    )Loss in equity investments
    
    
    59,669
    
    
    
    105,432Other
    
    
    2,400
    
    
    
    (27,842
    )57,303
    
    
    
    69,278Net loss
    
    
    (788,498
    )
    
    
    (734,872
    )Series D preferred dividends
    
    
    (187,246
    )
    
    
    (172,949
    )Net loss allocable to common shareholders
    
    $
    (975,744
    )
    
    $
    (907,821
    )Net loss per share  (basic and diluted)
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted average number of shares
outstanding  (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
 The accompanying notes are an integral part of these financial statements. 4




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NOVO NETWORKS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the three months endedSeptember 30,2004
    
    2003(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (788,498
    )
    
    $
    (734,872
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    127,373
    
    
    
    34,946Other non-cash charges and credits:Loss on equity investments
    
    
    59,669
    
    
    
    105,431Change in operating assets and liabilities:Prepaid expenses
    
    
    21,969
    
    
    
    (458,803
    )Accounts payable
    
    
    (49,207
    )
    
    
    (4,835
    )Accrued liabilities
    
    
    191,104
    
    
    
    873,482Net cash used in operating activities
    
    
    (437,590
    )
    
    
    (184,651
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (437,590
    )
    
    
    (184,651
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    1,764,370
    
    
    
    3,894,081CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,326,780
    
    
    $
    3,709,430
 The accompanying notes are an integral part of these financial statements. 5




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NECESSARY DEFINITIONS Novo Networks, Inc. is a holding company incorporated under the laws of the
State of Delaware that is registered under the Securities Exchange Act of 1934.
Throughout this quarterly report (this Quarterly Report), we refer to Novo
Networks, Inc. as Novo Networks, we, us and our. All of our operating
subsidiaries (except Internet Global Services, Inc.), which previously provided
telecommunications services, have filed voluntary petitions for protection
under Chapter 11 of the United States Bankruptcy Code (as hereinafter defined).
Internet Global Services filed a voluntary petition for protection under
Chapter 7 of the United States Bankruptcy Code (as hereinafter defined). We
refer to these subsidiaries collectively as our debtor subsidiaries
throughout this Quarterly Report. Currently, we own a minority interest in
Paciugo Management, LLC and Ad Astra Holdings, LP and related entities. These
entities own and manage a gelato manufacturing, retailing and catering business
operated under the brand name Paciugo. We refer to this interest as the
Paciugo Interest throughout this Quarterly Report. We have been pursuing a Business Opportunity or Strategic Combination
during fiscal 2004 and the three months ended September 30, 2004, that would
likely be conditioned upon our completion of a Recapitalization Event (these
terms are defined in the section entitled Business  Plan of Operation). NOVO NETWORKS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Business General The company now known as Novo Networks was originally incorporated in Delaware
in 1987 as Adina, Inc. (Adina). Adinas corporate existence was permitted to
lapse in February of 1996 and was subsequently reinstated as eVentures Group,
Inc., (eVentures) in August of 1999. During the Fall of 1999, eVentures
completed a series of transactions whereby it became a holding company with two
wholly-owned operating subsidiaries, e.Volve Technology Group, Inc. (e.Volve)
and AxisTel Communications, Inc. (AxisTel), and made a strategic investment
in Gemini Voice Solutions, Inc. (Gemini Voice), formerly PhoneFree.com, Inc.
During the Spring of 2000, eVentures acquired Internet Global Services, Inc.
(iGlobal) and made additional strategic investments. In December of 2000,
eVentures changed its name to Novo Networks. Currently, we own a minority
interest in Paciugo Management, LLC and Ad Astra Holdings, LP and related
entities. These entities own and manage a gelato manufacturing, retailing and
catering business operated under the brand name Paciugo. Plan of Operation Prior Plan of Operation. We expended considerable time and resources in fiscal
2004 pursuing a plan of operation focused on locating, negotiating and, if
possible, consummating a potential transaction for the redeployment of our
remaining cash assets (a Business Opportunity). Unfortunately, our efforts,
with the exception of Paciugo, did not result in such an outcome, with
negotiations ceasing prior to the actual consummation of any of the various
transactions that we have pursued to date. Revised Plan of Operation. Considering our current cash on hand and the
funding needed to satisfy our obligations for the next three months, it remains
highly unlikely that we will be able to consummate a Business Opportunity with
our remaining free cash assets and current capital structure, particularly when
such a transaction must be capable of producing positive cash flow for us in
the immediate future. We shifted our focus during our third fiscal quarter and
began to pursue a revised plan of operation because of our liquidity position,
our lack of a viable Business Opportunity, and our belief that under any
liquidation scenario our stockholders would not receive any recovery on or
value for their holdings. Given our current situation, we believe that the
most beneficial transaction for our stockholders would involve the exchange of
a certain amount of our common stock for the equity of a privately held company
that values our assets and our status as a reporting company under the
Securities Exchange Act of 1934, as amended (a Strategic Combination). In
pursuing the best Strategic Combination possible, we believe that it will be 6




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necessary to effect a Recapitalization Event (as defined below). It should be
noted, however, that the pursuit of a Strategic Combination is not guaranteed
to benefit us or any specific holder of our equity securities. With our
limited cash, the most likely form of Strategic Combination would involve a
substantial portion of the consideration being paid in the form of common
stock. Furthermore, a Strategic Combination may require the approval of the
holders of our common stock and perhaps our outstanding preferred stock. We
can offer no assurances that we could obtain such stockholder approval even if
we were able to locate a suitable Strategic Combination. During the three months ended March 31, 2004, we contemplated a possible plan
of recapitalization that would have resulted in all of the holders of our
preferred stock electing to convert their shares into common stock, at a
negotiated and substantially reduced conversion price (a Recapitalization
Event). Our belief is that we would be in a better position to consummate a
Business Opportunity or a Strategic Combination if we were able to achieve such
a Recapitalization Event. Despite significant efforts, we cannot report that
we have a reasonable likelihood of completing a Business Opportunity, a
Strategic Combination or a Recapitalization Event as of the date of this
Quarterly Report. Even if we entered into a Strategic Combination, the consummation of such a
transaction would likely cause significant dilution in the holdings of our
existing common and possibly our preferred stockholders. If accomplishing a
Recapitalization Event is a condition to the completion of a Strategic
Combination, then the holders of our existing common stock would likely
experience significant material dilution of their holdings both at the time of
such a Recapitalization Event as well as upon the consummation of the Strategic
Combination. Similarly, our preferred stockholders, if converted as part of a
Recapitalization Event, would also experience significant material dilution of
their holdings as a result of the Strategic Combination. On June 7, 2004, we engaged Oasis Capital Partners, LLC (Oasis) to serve as
our financial consultant and advisor in the identification and implementation
of a comprehensive merger or acquisition based upon the long-term strategic
objectives as outlined above. Oasis is advising and assisting us in (i)
identifying a suitable merger or acquisition candidate, (ii) completing due
diligence, (iii) structuring and negotiating acceptable terms and (iv) closing
the transaction. As previously disclosed, the term of the engagement was for
three months, at a monthly rate of $15,000, with the ability to extend on a
month-to-month basis. In October of 2004, Oasis agreed to continue providing
such services as long as it takes to consummate a merger or acquisition in
exchange for an additional payment of $30,000. While we continue to explore potential Strategic Combinations, including
ongoing discussions with entities that might be likely candidates for such a
transaction, we have not entered into any agreement or letter of intent that
involves a Strategic Combination and a possible Recapitalization Event as of
the date of this Quarterly Report. Unless we can achieve these objectives on
or before December 31, 2004, we will likely be required to cease operations
altogether and pursue other alternatives, such as liquidating or filing a
voluntary petition for relief under the Bankruptcy Code (as defined below). Interest in Paciugo During the quarter ended December 31, 2003, we engaged in discussions with
Paciugo that resulted in us entering into a sales agreement on January 13, 2004
(the Sales Agreement) with Ad Astra, PMLLC, and the Equity Owners, whereby we
agreed, subject to customary closing conditions, to (i) sell and transfer to Ad
Astra all of our right, title and interest in Ad Astra, (ii) sell and transfer
to PMLLC all of our right, title and interest in PMLLC, and (iii) terminate our
right to exercise the option to acquire the Subsequent Interest, all in
exchange for a total proposed Sales Price of $1.25 million (the Sales Price),
to be paid in cash at closing by Ad Astra and PMLLC. The closing of the Sales
Agreement was expected to take place on or about May 12, 2004, unless extended
as provided for in the Sales Agreement. The closing date was extended to July
11, 2004. Ad Astra, PMLLC and the Equity Owners breached the Sales Agreement by
not closing the Sales Agreement on or before this date. Accordingly, we
continue to own our 33% interest in Paciugo. Bankruptcy Proceedings On April 2, 2001, our subsidiary iGlobal filed a voluntary petition under
Chapter 7 of Title 11 of the United States Code (the Bankruptcy Code) in the
United States Bankruptcy Court for the Northern District of Texas (the Texas
Bankruptcy Court) due to iGlobals inability to service its debt obligations,
potential contingent liabilities and the 7




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Companys inability to raise sufficient capital to fund operating losses at
iGlobal. As a result of the filing, we recorded an impairment loss of $62.4
million for the year ended June 30, 2001, primarily relating to non-cash
goodwill recorded in connection with the acquisition of iGlobal in March of
2000. On July 30, 2001, five of our direct and indirect wholly-owned subsidiaries
filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the Delaware Bankruptcy
Court) in order to stabilize their operations and protect their assets while
attempting to reorganize their businesses. The five subsidiaries that filed
for bankruptcy protection were Novo Networks Operating Corp., AxisTel, e.Volve,
Novo Networks International Services, Inc. and Novo Networks Global Services,
Inc. On September 14, 2001, Novo Networks Metro Services, Inc., a subsidiary
of AxisTel, also filed a voluntary petition under Chapter 11 of the Bankruptcy
Code. Set forth below is a table summarizing the current status of our debtor
subsidiaries. DateBankruptcy
    
    Status as of
    
    Subject toProtection
    
    November 11,
    
    Bankruptcy Plan orDebtor Subsidiary(1)
    
    Date Acquired(2)
    
    Sought
    
    2004(3)
    
    Proceedings?Novo Networks Operating Corp.
    
    
    2/8/00
    (3)
    
    
    7/30/01
    
    
    Inactive
    
    Yes, Chapter 11(5)AxisTel Communications, Inc.
    
    
    9/22/99
    
    
    
    7/30/01
    
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks International Services, Inc.
    
    
    9/22/99
    
    
    
    7/30/01
    
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks Global Services, Inc.
    
    
    9/22/99
    
    
    
    7/30/01
    
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks Metro Services, Inc.
    
    
    9/22/99
    
    
    
    7/30/01
    
    
    Inactive
    
    Yes, Chapter 11(5)e.Volve Technology Group, Inc.
    
    
    10/19/99
    
    
    
    9/14/01
    
    
    Inactive
    
    Yes, Chapter 11(5)Internet Global Services, Inc.
    
    
    3/10/00
    
    
    
    4/02/01
    
    
    Inactive
    
    Yes, Chapter 7eVentures Holdings, LLC
    
    
    9/7/99
    (3)
    
    
    N/A
    
    
    Active(4)
    
    No
   (1)
    
    Web2Dial Communications, Inc., Novo Networks Metro Services
Virginia, Inc., Novo Networks Media Services, Inc. and Novo Networks
(UK) Ltd., which are not debtor subsidiaries, have been dissolved.(2)
    
    Indicates date of incorporation, if organized by the Company.(3)
    
    Active status indicates current operations within the
respective entity; Inactive status indicates no current
operations, but may include certain activities associated with the
administration of an estate pursuant to a bankruptcy filing or plan.(4)
    
    This entity has no operations other than to hold certain equity
interests.(5)
    
    Subsequently amended to a liquidating Chapter 11 proceeding. As originally contemplated, the goal of the reorganization effort relating to
our debtor subsidiaries that filed voluntary petitions under Chapter 11 of the
Bankruptcy Code was to preserve the going concern value of the debtor
subsidiaries core assets and to provide distributions to their creditors.
However, based largely on the fact that the debtor subsidiaries ceased
receiving traffic from their sole remaining customer, Qwest Communications
Corporation (Qwest), we determined that the continued viability of the debtor
subsidiaries was not realistic. Accordingly, the bankruptcy plan was amended.
The amended plan and disclosure statement were filed with the Delaware
Bankruptcy Court on December 31, 2001. The amended plan provides for a
liquidation of substantially all of the assets of our debtor subsidiaries,
pursuant to Chapter 11 of the Bankruptcy Code, instead of a reorganization as 8




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previously planned. Our principal operating subsidiaries, AxisTel and eVolve,
ceased operations in September of 2001 and December of 2001, respectively in
connection with the conversion from a reorganization to a liquidation. On January 14, 2002, the Delaware Bankruptcy Court approved the amended
disclosure statement, with certain minor modifications, and on March 1, 2002,
the Delaware Bankruptcy Court confirmed the amended plan, again with minor
modifications. On April 3, 2002, the amended plan became effective and a
liquidating trust was formed, with funding provided by the Company in the
amount of $200,000. Assets to be liquidated of approximately $700,000 were
transferred to the liquidating trust during the fourth quarter of fiscal 2002.
The purpose of the liquidating trust is to collect, liquidate and distribute
the remaining assets of the debtor subsidiaries and prosecute certain causes of
action against various third parties, including, without limitation, Qwest. No
assurance can be given that the liquidating trust will be successful in
liquidating substantially all of the debtor subsidiaries assets pursuant to
the amended plan. Also, it is not possible to predict the outcome of the
prosecution of causes of action against third parties, including, without
limitation, Qwest, as described in the amended plan and disclosure statement. Prior to the debtor subsidiaries bankruptcy filings, we had guaranteed certain
indebtedness of one or more of the debtor subsidiaries and, depending upon the
treatment of and distributions to holders of such indebtedness under the
amended plans, we may be liable for some or all of this indebtedness. In connection with the bankruptcy proceedings, we provided our debtor
subsidiaries with approximately $1.9 million in secured debtor-in-possession
financing to fund their reorganization efforts. The credit facility made funds
available to permit the debtor subsidiaries to pay employees, vendors,
suppliers, customers and professionals consistent with the requirements of the
Bankruptcy Code. In connection with the amended plan being confirmed by the
Delaware Bankruptcy Court and becoming effective on April 3, 2002, the credit
facility was converted into a new secured note. During fiscal 2003, we provided
additional funding of $514,000 to the liquidating trust. The current balance
on the new secured note is approximately $3.3 million that has been fully
reserved due to the uncertainty surrounding the collection of this note. For
further details regarding the funding provided to the debtor subsidiaries, see
the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources. We originally provided administrative services to its debtor subsidiaries
pursuant to an administrative services agreement approved by the Delaware
Bankruptcy Court. The agreement provided that the debtor subsidiaries pay us
$30,000 per week for legal, accounting, human resources and other services.
The original agreement expired on April 2, 2002, and an interim agreement was
reached, whereby the liquidating trust, as successor-in-interest to the debtor
subsidiaries, paid us $40,000 per month for the same services. The interim
agreement expired on August 15, 2002. During the fourth quarter of fiscal
2003, we negotiated an on-going agreement with the liquidating trust, whereby
we provided administrative services to our debtor subsidiaries on a per hour
basis. Pursuant to the terms of this arrangement, the debtor subsidiaries owed
us $653,000 at June 30, 2004. Due to the uncertainty surrounding the
collection of this receivable, it has not been recorded in our financial
statements. It is not possible to predict the outcome or success of any bankruptcy
proceeding or plan or the effects of such efforts on our business or the
interests of its creditors or stockholders. Qwest Arbitration On June 17, 2002, we, along with the liquidating trust, filed a lawsuit seeking
damages resulting from numerous disputes over business dealings and agreements
with Qwest, a former customer and vendor, and John L. Higgins, a former
employee and consultant. No assurances can be given that any recoveries will
result from the prosecution of such causes of action against Qwest and John L.
Higgins. Furthermore, if there are any recoveries, they may or may not inure
to our benefit. Qwest filed a motion to stay the litigation and compel
arbitration on August 14, 2002. On March 13, 2003, a hearing was held to
determine the proper forum for the various claims. After listening to oral
arguments, the district judge granted Qwests motion. On April 2, 2003, we,
along with the liquidating trust, filed a petition with the Supreme Court of
Nevada, asking it to direct the district judge to reconsider her order. On
August 13, 2003, our petition was denied. Accordingly, an arbitrator was
appointed on December 30, 2003. He presided over a preliminary hearing on
February 4, 2004, and he originally set the matter for a final hearing on July
7, 2004. On April 22, 2004, the arbitrator granted Qwests request to postpone
the final hearing until September 27, 2004. On September 16, 2004, the
arbitrator granted Qwest an additional continuance of the final hearing until
November 9




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1, 2004. In October of 2004, we entered into settlement discussions with
Qwest, and the negotiations are ongoing. The final hearing was continued pending the outcome of the settlement discussions. For further details regarding this
litigation, see Note 9 entitled Legal Proceedings. 2. Liquidity and Capital Resources At September 30, 2004, we had consolidated current assets of $1.7 million,
including, without limitation, cash and cash equivalents of approximately $1.3
million and net working capital of $1.3 million. Historically, we funded our
subsidiaries operations primarily through the proceeds of private placements of
our common and preferred stock and borrowings under loan and capital lease
agreements. We do not currently believe that either of these funding sources
will be available in the near term. Principal uses of cash have been to fund
(i) operating losses, (ii) acquisitions and strategic business opportunities,
(iii) working capital requirements and (iv) expenses related to the bankruptcy
plan administration process. Due to our financial performance, the lack of
stability in the capital markets and the economic downturn, our only current
source of funding is expected to be cash on hand. Again, our ability to satisfy our current obligations is dependent upon our
cash on hand. Our current obligations include funding working capital and the
Qwest arbitration. We estimate that it will take approximately $600,000 of our
remaining cash to satisfy these obligations for the next six months. We also
expect to incur legal and advisory fees in connection with our efforts to
locate and consummate a Strategic Combination. In addition, we may have to
fund certain expenses of the liquidating trust. Accordingly, we will be left
with approximately $700,000 of cash available for use in a Business
Opportunity. In the event we expend all $700,000 on a Business Opportunity or
Strategic Combination and achieve no return or cash flow from that transaction
before December 31, 2004, or if we incur other unanticipated expenses for
operations, we would likely be required to cease operations altogether and
pursue other alternatives, such as liquidating or filing a voluntary petition
for relief under the Bankruptcy Code. We believe that under any such
liquidation scenario, our stockholders would not receive any recovery on or
value for their holdings. We currently anticipate that we will not generate any revenue from operations
in the near term based on (i) the termination of the operations of our debtor
subsidiaries, which historically provided all of our revenues on a consolidated
basis and (ii) the uncertainties surrounding other potential Business
Opportunities or Strategic Combinations that we may consider, if any. As noted above, we do not believe that any of the traditional funding sources
will be available to us in the near future. Consequently, our failure to
identify potential Business Opportunities or Strategic Combinations, if any,
will jeopardize our ability to continue as a going concern. Due to these
factors, we are unable to determine whether current available financing will be
sufficient to meet the funding requirements of our ongoing general and
administrative expenses, the Qwest arbitration and our other obligations. No
assurances can be given that adequate levels of financing will be available to
us on acceptable terms, if at all. 3. General The accompanying consolidated financial statements as of September 30, 2004,
and for the three month periods ended September 30, 2004, and 2003,
respectively, have been prepared by us, without audit, pursuant to the interim
financial statements rules and regulations of the United States Securities and
Exchange Commission (SEC). In our opinion, the accompanying consolidated
financial statements include all adjustments necessary to present fairly the
results of our operations and cash flows at the dates and for the periods
indicated. The results of operations for the interim periods are not
necessarily indicative of the results for the full fiscal year. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements included in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2004. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include our accounts and those of our
wholly owned subsidiaries that are not currently involved in the bankruptcy
plan administration process. 10




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As of June 30, 2002, the assets and liabilities of the debtor subsidiaries were
deconsolidated, as the liquidating trust controls their assets. For further
details regarding the bankruptcy proceedings, see Note 1 entitled Business -
Bankruptcy Proceedings. The estimated realizable values and settlement
amounts may be different from the proceeds ultimately received or payments
ultimately made. Certain fiscal 2003 balances have been reclassified for comparative purposes to
be consistent with the fiscal 2004 presentation. Such reclassifications have
no impact on the reported net loss. All significant intercompany accounts have
been eliminated. 4. Basis of Presentation The accompanying consolidated financial statements for the three months ended
September 30, 2004, include our accounts and the accounts of our wholly owned
subsidiaries that are not involved in the bankruptcy plan administration
process. Revenues.We do not expect to generate any revenues from operations until such
time, if any, we successfully redeploy some or all of our remaining cash assets
in a Business Opportunity or Strategic Combination, if at all. General and Administrative Expenses. These expenses include general corporate
expenses, management salaries, professional fees, travel expenses, benefits,
rent and administrative expenses. Currently, we maintain our corporate
headquarters in Dallas, Texas. We provided administrative services to our
debtor subsidiaries on an hourly basis pursuant to an administrative services
agreement with the liquidating trust approved by the Delaware Bankruptcy Court.
As of September 30, 2004, we had an outstanding receivable from the debtor
subsidiaries relating to the provision of such administrative services of
approximately $653,000 that is fully reserved in our financial statements due
to the uncertainty surrounding the collection of the receivable. Under the
terms of the administrative services agreement, any payments to us are deferred
until such time that the trustee receives any funds from the positive outcome
of the Qwest arbitration. Depreciation and Amortization. Depreciation and amortization represents the
depreciation of property and equipment and amortization of leasehold
improvements. We expect our depreciation expense for the second quarter of
fiscal 2005 to remain relatively consistent with the three months ended
September 30, 2004, since we have reduced the useful lives of our assets in
fiscal 2005 due to going concern considerations. Loss in equity investments. Loss in equity investments results from our
minority ownership interests in various subsidiaries that are accounted for
under the equity method of accounting. Under the equity method, our
proportionate share of each subsidiarys operating loss is included in equity
in loss of investments. In December of 2002, we purchased the Initial Interest
in Paciugo. For further details regarding Paciugo, see Note 1 entitled
Business  Interest in Paciugo. The values of our outstanding equity
interests, other than Paciugo, have been reduced to zero either by recording
our proportionate share of prior period losses incurred by each subsidiary to
the cost of that interest or from impairment losses. On February 14, 2003, ORB
Communications & Marketing, Inc. filed for protection under Chapter 7 of the
Bankruptcy Code, and in August of 2003, Gemini Voice Solutions, Inc. obtained
the approval of its stockholders to begin the process of winding up its
affairs. We do not expect to record future charges related to those losses, as
the interests have no carrying value. We expect Paciugo to continue in the
near future to incur operating losses and we will continue to record our
proportionate share of those operating losses. Other Income. Other income results from the Support Services we provided to
Paciugo, pursuant to the Purchase Agreement. There can be no assurances as to
the continuation of these payments, as Paciugo has not made the payment due
since September of 2003 due to disagreements between us and Paciugo regarding
the Support Services. For further details regarding the payments, see Item 2
entitled Acquisition of the Initial Interest in Paciugo. 5. Long-lived Assets Our long-lived assets consist of property and equipment. The Company evaluates
impairment of its long-lived assets in accordance with the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 11




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establishes one accounting model to be used for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued operations to
include more disposal transactions. We assess the recoverability of long-lived assets by determining whether the
net book value of the assets can be recovered through projected undiscounted
future cash flows. The amount of impairment, if any, is measured based on fair
value and is charged to operations in the period in which the impairment
occurs. 6. Loss Per Share We calculate earnings (loss) per share in accordance with SFAS No. 128,
Earnings Per Share (EPS). SFAS No. 128 requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities with
complex capital structures. Basic EPS is computed as net income (loss) less
preferred dividends divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
convertible debentures. Diluted EPS has not been presented, as the effect
would be antidilutive. Accordingly, basic and diluted EPS did not differ for
any period presented. Had the effect not been antidilutive due to losses for
per share computation, 67,111,838 and 68,476,686 shares would have been
included in the diluted earnings per share calculation for the three months
ended September 30, 2004, and 2003, respectively. 7. Equity Investments Subsidiaries whose results are not consolidated, but over whom we exercise
significant influence, are generally accounted for under the equity method of
accounting. Whether we exercise significant influence with respect to a
subsidiary depends on an evaluation of several factors, including, without
limitation, representation on the subsidiarys governing board and ownership
level, which is generally a 20% to 50% interest in the voting securities of the
subsidiary, including voting rights associated with our holdings in common
stock, preferred stock and other convertible instruments in the subsidiary.
Under the equity method of accounting, the subsidiarys accounts are not
reflected in our consolidated financial statements. Our proportionate share of
a subsidiarys operating earnings and losses are included in the caption Loss
in equity of investments in our consolidated statements of operations. Currently, we have minority equity interests in Paciugo and certain development
stage Internet and communications companies. The values of those equity
interests other than Paciugo, have been reduced to zero either by recording our
proportionate share of prior period losses incurred by each subsidiary to the
cost of that interest or from impairment losses. During the second quarter of
fiscal 2003, we purchased the Paciugo Interest. For further details regarding
this transaction, see Note 1 entitled Business  Interest in Paciugo. The
Paciugo Interest is accounted for under the equity method. During the three months ended September 30, 2004, and 2003, we recorded equity
losses totaling $59,700 and $105,900. As previously mentioned, the value of
our outstanding equity interests, other than Paciugo, have been reduced to zero
either by recording our proportionate share of losses incurred by the
subsidiary up to the cost of that interest or from impairment losses. As of
June 30, 2004, we impaired our interest in Paciugo to equal our interest in the
net book value of Paciugo when we determined that the Sales Price in the Sales
Agreement would not be received. For the equity interests that were previously
impaired completely, we ceased recording our share of losses incurred by the
subsidiary. Equity investments consists of the following at September 30, 2004: 12




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% Ownership *
    
    Accounting
    
    CarryingCompany Name
    
    Common
    
    Preferred
    
    Method
    
    ValuePaciugo Mangement LLC
    
    
    33.3
    %
    
    
    0.0
    %
    
    Equity
    
    $
    365,331Gemini Voice Solutions, Inc. (f/k/a PhoneFree.com)**
    
    
    17.2
    %
    
    
    31.7
    %
    
    Equity
    
    
    ORB Communications & Marketing, Inc.***
    
    
    19.0
    %
    
    
    100.0
    %
    
    Equity
    
    
    FonBox, Inc.
    
    
    14.0
    %
    
    
    50.0
    %
    
    Equity
    
    
    Launch Center 39
    
    
    0.0
    %
    
    
    2.1
    %
    
    Cost
    
    
    Spydre Labs
    
    
    5.0
    %
    
    
    0.0
    %
    
    Cost
    
    
    $
    365,331
  *
    
    Reflects our ownership percentage at September 30, 2003.**
    
    Gemini Voice began the process of winding up its affairs in August of 2003.***
    
    ORB filed a voluntary petition under Chapter 7 of the bankruptcy code in February of 2003. For the three months ended September 30, 2004, and 2003, Paciugo met the
criteria for a significant subsidiary as set forth in Rule 1.02(w) of
Regulation S-X. Summarized financial information for Paciugo as of and for the
three months ended September 30, 2004 and 2003 is as follows: September 30,2004
    
    2003Financial position information:Current assets
    
    $
    661,712
    
    
    $
    476,283Non-current assets
    
    
    1,203,235
    
    
    
    1,800,828Current liabilities
    
    
    254,050
    
    
    
    360,566Non-current liabilities
    
    
    479,970
    
    
    
    484,081Net assets
    
    
    1,130,927
    
    
    
    1,793,031Income statement information:Revenues
    
    
    614,236
    
    
    
    607,104Gross profit
    
    
    497,966
    
    
    
    509,630Net loss
    
    
    (179,025
    )
    
    
    (319,487
    )Our equity in Paciugos net loss
    
    $
    59,669
    
    
    $
    105,432
 8. Stock Options At September 30, 2004, we sponsored two stock option plans, the 1999 Omnibus
Securities Plan (the 1999 Plan) and the 2001 Equity Incentive Plan (the 2001
Plan). We have elected to account for those plans under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The FASB issued SFAS No. 123, Accounting for Stock Based Compensation, which
defines a fair value based method of accounting for stock-based compensation.
However, SFAS No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by APB No. 25, Accounting for Stock Issued to
Employees. Entities electing to follow APB No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting defined in SFAS No. 123 had been applied. We have elected to
account for our stock-based compensation to employees under APB No. 25. We have adopted the disclosure-only provision of SFAS 123, Accounting for
Stock Based Compensation. SFAS 123 requires pro forma information to be
presented as if we had accounted for the stock options granted during the
fiscal periods presented using the fair value method. We did not grant any
stock options during fiscal 2002. The fair value for options granted during
the fiscal years ended 2004 and 2003 were estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: 13




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For the three months endedSeptember 30, 20042004
    
    2003Expected
volatility
    
    
    2667.4
    %
    
    
    2667.4
    %Risk-free interest
rate
    
    
    0.9
    %
    
    
    0.9
    %Dividend
yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life
(years)
    
    
    10.0
    
    
    
    10.0
 For purposes of pro forma disclosure, the estimated fair values of the options
are amortized to expense over the options vesting periods of one to three
years. For the three months endedSeptember 30,2004
    
    2003(unaudited)
    
    (unaudited)Pro Forma Net LossNet loss allocable to common shareholders as reported
    
    $
    (975,744
    )
    
    $
    (907,821
    )Add: stock based compensation expense determined
under intrinsic value method
    
    
    
    
    
    
    Less: stock-based compensation expense determined
under fair value-based method
    
    
    (3,500
    )
    
    
    (2,500
    )Pro forma net loss
    
    $
    (979,244
    )
    
    $
    (910,321
    )Net loss per share, pro forma
    
    $
    (0.02
    )
    
    $
    (0.02
    )Net loss per share, basic and diluted, as reported
    
    $
    (0.02
    )
    
    $
    (0.02
    )
 9. Legal Proceedings Eos Partners, LP, Eos Partners SBIC, LP, Eos Partners (Offshore), LP, Kuwait
Fund for Arab Economic Development and TBV Holdings Ltd. (collectively, the
Plaintiffs) filed a lawsuit against us, Fred Vierra, Barrett N. Wissman,
Clark K. Hunt, Mark R. Graham, Olaf Guerrand-Hermes, Stuart Subotnick, Jan
Robert Horsfall, Stuart Chasanoff, John Stevens Robling, Jr., Samuel Litwin,
Mitchell Arthur, BDO Seidman, LLP, Hunt Asset Management, LLC, HW Partners, LP,
HW Finance, LLC, HW Capital, LP and HW Group, LLC (collectively, the
Defendants) in the 190th Judicial District Court of Harris County, Texas, on
December 19, 2002. The lawsuit alleged breach of contract, fraud and
conspiracy in connection with the Plaintiffs purchase of certain of our Series
C Convertible Preferred Stock in December of 1999 and January of 2000. The
Defendants denied the allegations and vigorously defended against the
Plaintiffs claims and sought all other appropriate relief. The Plaintiffs
claimed actual damages of approximately $17.4 million and requested additional
exemplary damages, costs of court and attorneys fees. The Defendants
submitted the claims to their insurance carriers. The district judge denied
the Plaintiffs motion to transfer the case to Dallas County and ruled that it
should instead proceed in Harris County. However, it was reassigned to the
280th Judicial District Court. The Plaintiffs and the Defendants mediated the
case on February 9, 2004, and the claims were settled at that time on terms in
which we did not expend any cash or assets. As part of the settlement, we
received all of the outstanding Series C Convertible Preferred Stock from the
holders thereof, including the Plaintiffs, without any additional
consideration, and the shares were subsequently retired. We, along with the liquidating trust, filed a lawsuit on June 17, 2002, against
Qwest, a former customer and vendor, and John L. Higgins, a former employee and
consultant, in the Eighth Judicial District Court of Clark County, Nevada. The
amended plan called for certain causes of action to be pursued by the
liquidating trust against various third parties, including Qwest, in an attempt
to marshal sufficient assets to make distributions to creditors. We were a
co-proponent of the amended plan and suffered independent damages as a result
of Qwests actions. Accordingly, we and the liquidating trust asserted, among
other things, the following claims against Qwest: (i) breach of contract, (ii)
conversion, (iii) misappropriation of trade secrets, (iv) breach of a
confidential relationship, (v) fraud, (vi) breach 14




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of the covenant of good faith
and fair dealing, (vii) tortious interference with existing and prospective
business relations, (viii) aiding and abetting Mr. Higginss misconduct, (ix)
civil conspiracy and (x) unjust enrichment. The following claims also have
been asserted against Mr. Higgins: (i) breach of contract, (ii) breach of
fiduciary duties, (iii) breach of a confidential relationship, (iv) fraud, (v)
aiding and abetting Qwests misconduct, (vi) civil conspiracy and (vii) unjust
enrichment. In addition to an award of attorneys fees, we and the liquidating
trust are seeking such
actual, consequential and punitive damages as may be awarded by a jury or other
trier of fact. Qwest filed a motion to stay the litigation and compel
arbitration on August 14, 2002. On March 13, 2003, a hearing was held to
determine the proper forum for the various claims. After listening to oral
arguments, the district judge granted Qwests motion. On April 2, 2003, we,
along with the liquidating trust, filed a petition with the Supreme Court of
Nevada, asking it to direct the district judge to reconsider her order. On
August 13, 2003, our petition was denied. Accordingly, an arbitrator was
appointed on December 30, 2003. He presided over a preliminary hearing on
February 4, 2004, and he originally set the matter for a final hearing on July
7, 2004. On April 22, 2004, the arbitrator granted Qwests request to postpone
the final hearing until September 27, 2004. On September 16, 2004, the
arbitrator granted Qwest an additional continuance of the final hearing until
November 1, 2004. In October of 2004, we entered into settlement discussions
with Qwest, and the negotiations are ongoing. The final hearing was continued pending the outcome of the settlement discussions. We have previously disclosed in other reports filed with the United States
Security and Exchange Commission (the SEC) certain other legal proceedings
pending against us and our subsidiaries. Consistent with the rules promulgated
by the SEC, descriptions of these matters have not been included in this
Quarterly Report because they have neither been terminated nor has there been
any material developments during the fiscal year ended June 30, 2004. Readers
are encouraged to refer to our prior reports for further information concerning
other legal proceedings affecting us and our subsidiaries. We and our subsidiaries are involved in other legal proceedings from time to
time, none of which we believe, if decided adversely to us or our subsidiaries,
would have a material adverse effect on our business, financial condition or
results of operations. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Forward-Looking Statements Forward-looking statements appear throughout this Quarterly Report. We have
based these forward-looking statements on our current expectations and
projections about future events. The important factors listed in our Annual
Report on Form 10-K for our fiscal year ended June 30, 2004 (the Annual
Report), under the heading entitled Business Considerations, as well as all
other cautionary language in this Quarterly Report, provide examples of risks,
uncertainties and events that may cause actual results to differ materially
from the expectations described in these forward-looking statements. Readers
should be aware that the occurrence of the events described in these
considerations and elsewhere in this Quarterly Report and in our Annual Report
could have an adverse effect on the business, results of operations or
financial condition of the entity affected. Forward-looking statements in this Quarterly Report include, without limitation, the following: Statements concerning our financial condition and strategic direction:  
    
    statements regarding our ability to continue as a going concern;
    
    statements regarding our future capital requirements and our ability to satisfy our capital needs;
    
    statements regarding our ability to successfully
negotiate and conclude a settlement with Qwest Communications
Corporation (Qwest);
    
    statements regarding the ability of our debtor
subsidiaries to successfully liquidate and distribute
substantially all of their assets, pursuant to the amended plan,
without causing a material adverse impact on us;
    
    statements regarding our ability to monetize our
interest in Paciugo; 15




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##### Table of Contents




    
    statements regarding the potential generation of
revenue resulting from the redeployment of our cash assets;
    
    statements regarding the redeployment of our remaining
cash assets, if any, in furtherance of a potential Business
Opportunity;
    
    statements regarding the possibility of accomplishing a
Recapitalization Event or a Strategic Combination and the
potential effects on us and on our stockholders, including,
without limitation, the possibility of significant stockholder
dilution; and
    
    statements regarding the potential liquidation of our
assets, whether in a voluntary wind down or a bankruptcy
proceeding. Statements concerning our debtor subsidiaries:  
    
    statements regarding the estimated liquidation value of
assets and settlement amounts of liabilities; and
    
    statements regarding the impact of the bankruptcy proceedings on our financial condition. Statements concerning our interest in Paciugo:  
    
    statements regarding our ability to realize any benefit from our Paciugo Interest;
    
    statements regarding Paciugo operations; and
    
    statements regarding our relationship with the Equity
Owners of Paciugo (as hereinafter defined). Other statements:  
    
    statements that contain words like believe,
anticipate, expect and similar expressions are also used to
identify forward-looking statements. Readers should be aware that all of our forward-looking statements are subject
to a number of risks, assumptions and uncertainties, such as (and in no
particular order):  
    
    risks inherent in our ability to continue as a going
concern;
    
    risks inherent in our ability to redeploy our remaining
assets, including, without limitation, our remaining cash assets;
    
    risks associated with competition in the sector or industry that we may enter;
    
    risks associated with our ability to successfully negotiate and conclude a settlement with Qwest;
    
    risks associated with our ability to monetize our interest in Paciugo;
    
    risks associated with Paciugos market position, the
industry in which Paciugo competes, Paciugos prospects for
meaningful success, Paciugos operations and our relationship
with the Equity Owners;
    
    risks associated with having no current operations or
revenue;
    
    risks that we will be unable to redeploy our remaining
cash assets, or if so deployed, risks that we will not be able to
generate positive cash flow or revenue after consummating such a
transaction sufficient to satisfy our current obligations;
    
    risks that we will be unable to obtain any necessary
approvals of our stockholders if we were to propose a
Recapitalization Event or a Strategic Combination;
    
    risks that we might not be able to locate a suitable
entity with which to engage in a Strategic Combination; 16




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##### Table of Contents




    
    risks that we might not be able to effect a
Recapitalization Event or a Strategic Combination on terms that
were acceptable to us or would benefit our stockholders;
    
    risks that a Recapitalization Event may be entered into
upon terms and conditions that would result in a significant and
material dilution of our common and preferred stockholders;
    
    risks that a Strategic Combination may be entered into
upon terms and conditions that would result in a significant and
material dilution of our common and preferred stockholders;
    
    risks that any Strategic Combination would result in us
pursuing a new and unknown business model that may or may not
benefit our stockholders;
    
    risks that any wind down or liquidation would result in
our stockholders receiving no recovery on or value for their
stock holdings;
    
    risks associated with preserving the net operating loss
carryforwards of our debtor subsidiaries;
    
    risks associated with uncertainties in the
implementation and substantial completion of the amended
bankruptcy plan concerning the liquidation of substantially all
of the remaining assets of our debtor subsidiaries and any
resulting impact on us; and
    
    risks associated with changes in the laws and
regulations that govern us. This list is only an example of the risks that may affect the forward-looking
statements. If any of these risks or uncertainties materialize (or if they
fail to materialize), or if the underlying assumptions are incorrect, then
actual results may differ materially from those projected in the
forward-looking statements. Additional factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, without limitation,
those discussed elsewhere in this Quarterly Report, and particularly in our
Annual Report under the heading Business Considerations. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect our analysis, judgment, belief or expectation only as of the date
of this Quarterly Report. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date of this Quarterly Report or the Annual Report, respectively. Acquisition of the Initial Interest in Paciugo On December 19, 2002, we executed a purchase agreement (the Purchase
Agreement) with Ad Astra Holdings LP, a Texas limited partnership (Ad
Astra), Paciugo Management, LLC, a Texas limited liability company and the
sole general partner of Ad Astra (PMLLC), and the collective equity owners of
both Ad Astra and PMLLC, being Ugo Ginatta, Cristiana Acerbi Ginatta and
Vincent Ginatta (collectively, the Equity Owners). Pursuant to the Purchase
Agreement, we acquired a 33% membership interest in PMLLC and a 32.67% limited
partnership interest in Ad Astra, which results in our holding an aggregate
interest, including the PMLLC general partnership interest, in Ad Astra equal
to 33% (the Initial Interest), for a purchase price of $2.5 million. In addition, we hold an option, which expires on December 19, 2004, to purchase
a 17.3% membership interest in PMLLC and a 17.127% limited partnership interest
in Ad Astra (the Subsequent Interest) for $1.5 million. Together, the
Initial Interest and the Subsequent Interest would result in our holding a
50.3% membership interest in PMLLC and a 49.797% limited partnership interest
in Ad Astra, for a total aggregate interest in Ad Astra, including the PMLLC
general partner interest, of 50.3%. Collectively, Ad Astra and PMLLC, through a number of wholly owned
subsidiaries, own and manage a gelato manufacturing, retailing and catering
business operating under the brand name Paciugo. Throughout this Quarterly
Report, we refer collectively to Ad Astra, PMLLC, and their subsidiaries as
Paciugo. Under the terms of the Purchase Agreement, we were to provide
services to support the business operations of Paciugo, including
administrative, accounting, financial, human resources, information technology,
legal, and marketing services (the Support Services). The Support Services
expressly exclude providing certain capital expenditures as well as services
that are customarily performed by third party professionals. In exchange for
our providing the Support Services, we were entitled to receive an annual
amount equal to the greater of $250,000 or 2% of the consolidated gross
revenues of Paciugo (excluding any gross revenues shared with third parties
under existing contractual arrangements). Effective January 1, 2003, we began
receiving monthly payments from Paciugo in the amount of 17




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##### Table of Contents



$20,833, with positive
cumulative differences, if any, between 2% of such gross revenues and $20,833
per month to be paid within ten days of the end of such month. During the
current fiscal year, we recorded other income of $41,666 from the provision of
the Support Services to Paciugo for July and August of 2003 as agreed upon in
the Purchase Agreement. In August of 2003, certain disagreements arose between
us and Paciugo concerning the amount of the monthly payment for July of 2003,
as well as our performance of the Support Services. As a result,
Paciugo has failed to make these payments since August of 2003. Under the terms of the Purchase Agreement, we are entitled to such
representation on the governing board of PMLLC (the Board of Managers) as is
proportionate to our ownership interests therein. Effective as of December 19,
2002, PMLLCs Board of Managers was composed of Ugo Ginatta and Cristiana
Acerbi Ginatta, as the Equity Owners designees, and Barrett N. Wissman, as our
designee. PMLLC, as the sole general partner of Ad Astra, is empowered to make
all decisions associated with Ad Astra, except for those requiring the approval
of the limited partners, as set forth in the limited partnership agreement of
Ad Astra or under applicable law, and those requiring our approval, as set
forth in the Purchase Agreement. We effectively maintain no ability to control the day-to-day affairs of
Paciugo. On August 1, 2003, Susie C. Holliday resigned from her positions as
Senior Vice President and Chief Financial Officer of Paciugo in connection with
her resignation from similar positions with us. On August 15, 2003, Patrick G.
Mackey was named Senior Vice President and Chief Financial Officer of Paciugo.
On August 25, 2003, Barrett N. Wissman resigned from the position of President
of Paciugo. In addition, during 2003, our Board of Directors became
increasingly concerned about Paciugos market position, the industry in which
Paciugo competes and Paciugos prospects for meaningful success therein.
Accordingly, during the fourth quarter of fiscal 2003, we concluded that it was
reasonably unlikely that we would exercise our option to acquire the Subsequent
Interest. Therefore, effective on October 1, 2003, Steven W. Caple and Patrick
G. Mackey resigned from their positions as Senior Vice President and General
Counsel and Senior Vice President and Chief Financial Officer, respectively, of
Paciugo. During the quarter ended December 31, 2003, we engaged in discussions with
Paciugo that resulted in our entering into a sales agreement on January 13,
2004 (the Sales Agreement) with Ad Astra, PMLLC, and the Equity Owners,
whereby we agreed, subject to customary closing conditions, to (i) sell and
transfer to Ad Astra all of our right, title and interest in Ad Astra, (ii)
sell and transfer to PMLLC all of our right, title and interest in PMLLC and
(iii) terminate our right to exercise the option to acquire the Subsequent
Interest, all in exchange for a total proposed Sales Price of $1.25 million
(the Sales Price), to be paid in cash at closing by Ad Astra and PMLLC. The
closing of the Sales Agreement was expected to take place on or about May 12,
2004, unless extended as provided for in the Sales Agreement. The closing date
was extended to July 11, 2004. Ad Astra, PMLLC and the Equity Owners breached
the Sales Agreement by not closing the Sales Agreement on or before this date.
Accordingly, we continue to own our 33% interest in Paciugo. Depending upon a variety of factors, including those outlined above, most of
which are beyond our control, we may determine it necessary to record
additional impairment charges against the Paciugo Interest in our 2005 fiscal
year. The factors that may result in the impairment of our Paciugo Interest
include, without limitation:  
    
    Paciugos ability to locate additional working capital;
    
    Paciugos ability to expand sales while controlling and reducing costs; and
    
    Paciugos ability to compete against more well-known
gelato, frozen dessert, and ice cream stores, many of which
maintain greater management, financial and other resources. Bankruptcy Proceedings During fiscal 2002, our principal telecommunications operating subsidiaries,
including AxisTel Communications, Inc. (AxisTel), e.Volve Technology Group,
Inc. (e.Volve) and Novo Networks Operating Corp. (NNOC) filed voluntary
petitions under Chapter 11 of Title 11 of the United States Code (the
Bankruptcy Code). We will refer to the subsidiaries that have filed for
bankruptcy protection as our debtor subsidiaries throughout this Quarterly
Report. At this same time, we announced that we were exploring the option of
diversifying our business by entering into other lines of business. 18




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On April 2, 2001, our subsidiary iGlobal filed a voluntary petition under
Chapter 7 of Title 11 of the United States Code (the Bankruptcy Code) in the
United States Bankruptcy Court for the Northern District of Texas (the Texas
Bankruptcy Court) due to iGlobals inability to service its debt obligations,
potential contingent liabilities and the Companys inability to raise
sufficient capital to fund operating losses at iGlobal. As a result of the
filing, we
recorded an impairment loss of $62.4 million for the year ended June 30, 2001,
primarily relating to non-cash goodwill recorded in connection with the
acquisition of iGlobal in March of 2000. On July 30, 2001, five of our direct and indirect wholly-owned subsidiaries
filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the Delaware Bankruptcy
Court) in order to stabilize their operations and protect their assets while
attempting to reorganize their businesses. The five subsidiaries that filed
for bankruptcy protection were NNOC, AxisTel, e.Volve, Novo Networks
International Services, Inc. and Novo Networks Global Services, Inc. On
September 14, 2001, Novo Networks Metro Services, Inc., a subsidiary of
AxisTel, also filed a voluntary petition under Chapter 11 of the Bankruptcy
Code. As originally contemplated, the goal of the reorganization effort relating to
our debtor subsidiaries that filed voluntary petitions under Chapter 11 of the
Bankruptcy Code was to preserve the going concern value of the debtor subsidiaries core assets and to provide distributions to their creditors.
However, based largely on the fact that the debtor subsidiaries ceased
receiving traffic from their sole remaining customer, Qwest, we determined that
the continued viability of the debtor subsidiaries was not realistic.
Accordingly, the bankruptcy plan was amended. The amended plan and disclosure
statement were filed with the Delaware Bankruptcy Court on December 31, 2001.
The amended plan provides for a liquidation of substantially all of the assets
of our debtor subsidiaries, pursuant to Chapter 11 of the Bankruptcy Code,
instead of a reorganization as previously planned. Our principal operating
subsidiaries, AxisTel and eVolve, ceased operations in September of 2001 and
December of 2001, respectively in connection with the conversion from a
reorganization to a liquidation. On January 14, 2002, the Delaware Bankruptcy Court approved the amended
disclosure statement, with certain minor modifications, and on March 1, 2002,
the Delaware Bankruptcy Court confirmed the amended plan, again with minor
modifications. On April 3, 2002, the amended plan became effective and a
liquidating trust was formed, with funding provided by the Company in the
amount of $200,000. Assets to be liquidated of approximately $700,000 were
transferred to the liquidating trust during the fourth quarter of fiscal 2002.
The purpose of the liquidating trust is to collect, liquidate and distribute
the remaining assets of the debtor subsidiaries and prosecute certain causes of
action against various third parties, including, without limitation, Qwest. No
assurance can be given that the liquidating trust will be successful in
liquidating substantially all of the debtor subsidiaries assets pursuant to
the amended plan. Also, it is not possible to predict the outcome of the
prosecution of causes of action against third parties, including, without
limitation, Qwest, as described in the amended plan and disclosure statement. Prior to the debtor subsidiaries bankruptcy filings, we had guaranteed certain
indebtedness of one or more of the debtor subsidiaries and, depending upon the
treatment of and distributions to holders of such indebtedness under the
amended plans, we may be liable for some or all of this indebtedness. In connection with the bankruptcy proceedings, we provided our debtor
subsidiaries with approximately $1.9 million in secured debtor-in-possession
financing to fund their reorganization efforts. The credit facility made funds
available to permit the debtor subsidiaries to pay employees, vendors,
suppliers, customers and professionals consistent with the requirements of the
Bankruptcy Code. In connection with the amended plan being confirmed by the
Delaware Bankruptcy Court and becoming effective on April 3, 2002, the credit
facility was converted into a new secured note. During fiscal 2003, we provided
additional funding of $514,000 to the liquidating trust. The current balance
on the new secured note is approximately $3.3 million that has been fully
reserved due to the uncertainty surrounding the collection of this note. For
further details regarding the funding provided to the debtor subsidiaries, see
the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources. We originally provided administrative services to our debtor subsidiaries
pursuant to an administrative services agreement approved by the Delaware
Bankruptcy Court. The agreement provided that the debtor subsidiaries pay us
$30,000 per week for legal, accounting, human resources and other services.
The original agreement expired on April 2, 2002, and an interim agreement was
reached, whereby the liquidating trust, as successor-in-interest to the 19




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debtor
subsidiaries, paid us $40,000 per month for the same services. The interim
agreement expired on August 15, 2002. During the fourth quarter of fiscal
2003, we negotiated an on-going agreement with the liquidating trust, whereby
we provided administrative services to our debtor subsidiaries on a per hour
basis. Pursuant to the terms of
this arrangement, the debtor subsidiaries owed us $653,000 at September 30,
2004. Due to the uncertainty surrounding the collection of this receivable, it
has not been recorded in our financial statements. It is not possible to predict the outcome or success of any bankruptcy
proceeding or plan or the effects of such efforts on our business or the
interests of our creditors or stockholders. Operations Summary For the three months ended September, 2004, we effectively had no operations,
no sources of revenue and no profits, and we do not anticipate being in a
position to resume operations until such time, if any, as we consummate a
Business Opportunity or Strategic Combination. We cannot predict when or if we
will be successful in such a new business venture or other potential Business
Opportunities or Strategic Combinations that we may consider, if any. We currently anticipate that we will not have any revenue from
telecommunications or any other services unless or until we are able to
redeploy our remaining cash assets in a Business Opportunity or Strategic
Combination. Summary of Operating Results The table below summarizes our operating results. For the three months endedSeptember 30,2004
    
    2003(unaudited)Operating expenses:General and administrative
expenses
    
    $
    603,822
    
    
    $
    630,648Depreciation and
amortization
    
    
    127,373
    
    
    
    34,946731,195
    
    
    
    665,594Loss from operations, before
other (income)
expense
    
    
    (731,195
    )
    
    
    (665,594
    )Other (income) expense:Interest income
    
    
    (4,766
    )
    
    
    (8,312
    )Loss in equity
investments
    
    
    59,669
    
    
    
    105,432Other
    
    
    2,400
    
    
    
    (27,842
    )57,303
    
    
    
    69,278Net loss
    
    
    (788,498
    )
    
    
    (734,872
    )Series D preferred dividends
    
    
    (187,246
    )
    
    
    (172,949
    )Net loss allocable to common
shareholders
    
    $
    (975,744
    )
    
    $
    (907,821
    )Net loss per share  (basic and
diluted)
    
    $
    (0.02
    )
    
    $
    (0.02
    )Weighted average number of shares
outstanding  (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
 Three months ended September 30, 2004 Compared to Three months ended September
30, 2003 Revenues. No revenues were generated during the three months ended September
30, 2004 and 2003. 20




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We do not expect to generate any revenues from operations until such time, if
any, we successfully redeploy some or all of our remaining cash assets in a
Business Opportunity or Strategic Combination, if at all. No assurances can be
given that we will generate revenues from operations in the future. Direct Costs. No direct costs were incurred during the three months ended
September 30, 2004 and 2003, as we currently have no operations. General and Administrative Expenses. General and administrative expenses
decreased approximately 4% or $27,000 during three months ended September 30,
2004 to $604,000 from $631,000 in the three months ended September 30, 2003.
The decrease in selling, general and administrative expenses during the three
months ended September 30, 2004 resulted primarily from the continued
downsizing of our workforce and the reduction in business insurance offset by
an increase in legal and professional fees associated with litigation matters. General and administrative expenses for the three months ended September 30,
2004, consisted primarily of approximately (i) $126,000 of salaries and
benefits, (ii) $275,000 of legal and professional fees, (iii) $125,000 of
business insurance and (iv) $78,000 of other operating expenses. General and
administrative expenses for the three months ended September 30, 2003,
consisted primarily of approximately (i) $144,000 of salaries and benefits,
(ii) $245,000 of legal and professional fees, (iii) $161,000 of business
insurance and (vi) $81,000 of other operating expenses. We anticipate that
general and administrative expenses will remain relatively constant as (i) we
currently have no operations, (ii) we completed personnel reductions and (iii)
we continue to work toward the conclusion of the various bankruptcy
proceedings. We expect our selling, general and administrative expense to
continue to be approximately $125,000 per month until such time, if any, as we
choose to redeploy our remaining cash assets. Depreciation and Amortization. Depreciation recorded on fixed assets during
the three months ended September 30, 2004, totaled approximately $127,000, as
compared to approximately $35,000 for three months ended September 30, 2003.
We expect our depreciation expense for the second quarter of fiscal 2005 to
remain relatively consistent with the three months ended September 30, 2004,
since we have reduced the useful lives of our assets in fiscal 2005 due to
going concern considerations. Interest Income.We recorded interest income from cash investments of $4,800
in the three months ended September 30, 2004, as compared to approximately
$8,300 for the three months ended September 30, 2003. The decrease in interest
income is due to decreased cash balances. Equity in Loss of Investments. Loss in equity investments results from our
minority ownership interests in various subsidiaries that are accounted for
under the equity method of accounting. Under the equity method, our
proportionate share of each subsidiarys operating loss is included in equity
in loss of investments. In December of 2002, we purchased the Initial Interest
in Paciugo. For further details regarding Paciugo, see Item 2 entitled
Acquisition of the Initial Interest in Paciugo. The values of our
outstanding equity interests, other than Paciugo, have been reduced to zero
either by recording our proportionate share of prior period losses incurred by
each subsidiary to the cost of that interest or from impairment losses. We do
not expect to record future charges related to those losses, as the interests
have no carrying value. We expect Paciugo to continue in the near future to
incur operating losses and we will record our proportionate share of those
operating losses. Other (income) expense.During the three months ended September 30, 2004, we
recorded no other income as compared to other income, net of other expense of
approximately $28,000 in the three months ended September 30, 2003. Other
income for the three months ended September 30, 2003 consists of payments of
$20,833 per month for July and August of 2003 from Paciugo less state franchise
tax accruals. However, there can be no assurances as to the continuation of
these payments, as Paciugo has not made the payment due since September of 2003
due to
disagreements between us and Paciugo regarding these monthly payments see Item
2 entitled Acquisition of the Initial Interest in Paciugo. Liquidity and Capital Resources At September 30, 2004, we had consolidated current assets of $1.7 million,
including, without limitation, cash and cash equivalents of approximately $1.3
million and net working capital of $1.3 million. Historically, we funded our
subsidiaries operations primarily through the proceeds of private placements of
our common and preferred stock and 21




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borrowings under loan and capital lease
agreements. We do not currently believe that either of these funding sources
will be available in the near term. Principal uses of cash have been to fund
(i) operating losses, (ii) acquisitions and strategic business opportunities,
(iii) working capital requirements and (iv) expenses related to the bankruptcy
plan administration process. Due to our financial performance, the lack of
stability in the capital markets and the economic downturn, our only current
source of funding is expected to be cash on hand. Again, our ability to satisfy our current obligations is dependent upon our
cash on hand. Our current obligations include funding working capital and the
Qwest arbitration. We estimate that it will take approximately $600,000 of our
remaining cash to satisfy these obligations for the next six months. We also
expect to incur legal and advisory fees in connection with our efforts to
locate and consummate a Strategic Combination. In addition, we may have to
fund certain expenses of the liquidating trust. Accordingly, we will be left
with approximately $700,000 of cash available for use in a Business
Opportunity. In the event we expend all of our $700,000 on a Business
Opportunity or Strategic Combination and achieve no return or cash flow from
that transaction before December 31, 2004, or if we incur other unanticipated
expenses for operations, we would likely be required to cease operations
altogether and pursue other alternatives, such as liquidating or filing a
voluntary petition for relief under the Bankruptcy Code. We believe that under
any such liquidation scenario, our stockholders would not receive any recovery
on or value for their holdings. We currently anticipate that we will not generate any revenue from operations
in the near term based on (i) the termination of the operations of our debtor
subsidiaries, which historically provided all of our revenues on a consolidated
basis and (ii) the uncertainties surrounding other potential Business
Opportunities or Strategic Combination that we may consider, if any. As noted above, we do not believe that any of the traditional funding sources
will be available to us in the near future. Consequently, our failure to
identify potential Business Opportunities or Strategic Combinations, if any,
will jeopardize our ability to continue as a going concern. Due to these
factors, we are unable to determine whether current available financing will be
sufficient to meet the funding requirements of our ongoing general and
administrative expenses, the Qwest arbitration and our other obligations. No
assurances can be given that adequate levels of financing will be available to
us on acceptable terms, if at all. The net cash provided by or used in operating, investing and financing
activities for the three months ended September 30, 2004 and 2003,
respectively, is summarized below: Cash used in operating activities in the three months ended September 30, 2004
totaled approximately $438,000 as compared to approximately $185,000 in the
three months ended September 30, 2003. During the three months ended September
30, 2004, cash flow used by operating activities primarily resulted from
operating losses, net of non-cash charges, totaling approximately $602,000, and
a increase of $191,000 in accrued liabilities. In the three months ended
September 30, 2003, cash flow used by operating activities resulted from
operating losses, net of non-cash charges, totaling $595,000, an increase in
prepaid expenses of $459,000 and the increase in accrued liabilities of
$874,000. Net cash used in investing activities in the three months ended September 30
2004 and 2003 was zero. Cash flows from financing activities in the three months ended September 30,
2004 and 2003 was zero. Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. They do not include any adjustments
that might result should we be unable to continue as a going concern, and no
assurances can be given that we will continue as a going concern. In fact, it
is unlikely that we will be able to continue as a going concern past December
31, 2004, unless we receive the Sales Price from Paciugo or successfully
realize a cash settlement or obtain an award in connection with the Qwest
arbitration or complete a Strategic Combination. 22




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Our independent accountants have included an explanatory paragraph in their
report on our financial statements for the year ended June 30, 2004, which
states that although our financial statements have been prepared assuming that
we will continue as a going concern, substantial doubt exists as to our ability
to do so. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to the impact of interest rate and other risks. We have
investments in money market funds of approximately $1.3 million at September
30, 2004. Due to the short-term nature of our investments, we believe that the
effects of changes in interest rates are limited and would not materially
affect profitability. 
 Item 4. Controls and Procedures We carried out an evaluation, under the supervision and with the participation
of our Principal Executive Officer and Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon that evaluation, the Principal Executive Officer and the Principal
Accounting Officer concluded that our disclosure controls and procedures are
effective, as of the end of the period covered by this report, in timely
alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in this Quarterly Report.
There have been no significant changes in our internal controls over financial
reporting or in other factors, which could significantly affect such internal
controls, subsequent to the date we carried out our evaluation. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings As previously reported, Eos Partners, LP, Eos Partners SBIC, LP, Eos Partners
(Offshore), LP, Kuwait Fund for Arab Economic Development and TBV Holdings Ltd.
(collectively, the Plaintiffs) filed a lawsuit against us, Fred Vierra,
Barrett N. Wissman, Clark K. Hunt, Mark R. Graham, Olaf Guerrand-Hermes, Stuart
Subotnick, Jan Robert Horsfall, Stuart Chasanoff, John Stevens Robling, Jr.,
Samuel Litwin, Mitchell Arthur, BDO Seidman, LLP, Hunt Asset Management, LLC,
HW Partners, LP, HW Finance, LLC, HW Capital, LP and HW Group, LLC
(collectively, the Defendants) in the 190th Judicial District Court of Harris
County, Texas, on December 19, 2002. The lawsuit alleged breach of contract,
fraud and conspiracy in connection with the Plaintiffs purchase of certain of
our Series C Convertible Preferred Stock in December of 1999 and January of
2000. The Defendants denied the allegations and vigorously defended against
the Plaintiffs claims and sought all other appropriate relief. The Plaintiffs
claimed actual damages of approximately $17.4 million and requested additional
exemplary damages, costs of court and attorneys fees. The Defendants
submitted the claims to their insurance carriers. The district judge denied
the Plaintiffs motion to transfer the case to Dallas County and ruled that it
should instead proceed in Harris County. However, it was reassigned to the
280th Judicial District Court. The Plaintiffs and the Defendants mediated the
case on February 9, 2004, and the claims were settled at that time on terms in
which we did not expend any cash or assets. As part of the settlement, we
received all of the outstanding Series C Convertible Preferred Stock from the
holders thereof, including the Plaintiffs, without any additional
consideration, and the shares were subsequently retired. As previously reported, we, along with the liquidating trust, filed a lawsuit
on June 17, 2002, against Qwest, a former customer and vendor, and John L.
Higgins, a former employee and consultant, in the Eighth Judicial District
Court of Clark County, Nevada. The amended plan called for certain causes of
action to be pursued by the liquidating trust against various third parties,
including Qwest, in an attempt to marshal sufficient assets to make
distributions to creditors. We were a co-proponent of the amended plan and
suffered independent damages as a result of Qwests actions. Accordingly, we
and the liquidating trust asserted, among other things, the following claims
against Qwest: (i) breach of contract, (ii) conversion, (iii) misappropriation
of trade secrets, (iv) breach of a confidential
relationship, (v) fraud, (vi) breach of the covenant of good faith and fair
dealing, (vii) tortious interference with existing and prospective business
relations, (viii) aiding and abetting Mr. Higginss misconduct, (ix) civil
conspiracy and (x) unjust enrichment. The following claims also have been
asserted against Mr. Higgins: (i) breach of contract, (ii) breach of fiduciary
duties, (iii) breach of a confidential relationship, (iv) fraud, (v) aiding and
abetting Qwests misconduct, (vi) civil conspiracy and (vii) unjust enrichment.
In addition to an award of attorneys fees, we and the liquidating trust are
seeking such actual, consequential and punitive damages as may be awarded by a
jury or other trier of fact. Qwest filed a motion to stay the litigation and
compel arbitration on August 14, 2002. On March 13, 23




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2003, a hearing was held
to determine the proper forum for the various claims. After listening to oral
arguments, the district judge granted Qwests motion. On April 2, 2003, we,
along with the liquidating trust, filed a petition with the Supreme Court of
Nevada, asking it to direct the district judge to reconsider her order. On
August 13, 2003, our petition was denied. Accordingly, an arbitrator was
appointed on December 30, 2003. He presided over a preliminary hearing on
February 4, 2004, and he originally set the matter for a final hearing on July
7, 2004. On April 22, 2004, the arbitrator granted Qwests request to postpone
the final hearing until September 27, 2004. On September 16, 2004, the
arbitrator granted Qwest an additional continuance of the final hearing until
November 1, 2004. In October of 2004, we entered into settlement discussions
with Qwest, and the negotiations are ongoing. The final hearing was continued pending the outcome of the settlement discussions. We have previously disclosed in other reports filed with the SEC certain other
legal proceedings pending against us and our subsidiaries. Consistent with the
rules promulgated by the SEC, descriptions of these matters have not been
included in this Quarterly Report because they have neither been terminated nor
has there been any material developments during the fiscal year ended June 30,
2004. Readers are encouraged to refer to our prior reports for further
information concerning other legal proceedings affecting us and our
subsidiaries. We and our subsidiaries are involved in other legal proceedings from time to
time, none of which we believe, if decided adversely to us or our subsidiaries,
would have a material adverse effect on our business, financial condition or
results of operations. 
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information Currently, the Audit Committee of our Board of Directors consists of Peter J.
Mixter and John Stevens Robling, Jr. While these two individuals are
independent for purposes of National Association of Securities Dealers
(NASD) Rule 4200(a)(15), our Audit Committee Charter and other NASD rules
require this committee to be composed of at least three directors, with the
NASD rules requiring each of them to be independent. We are not presently
governed by NASD rules and will not be until such time, if any, we re-apply and
are accepted on the NASD Small Cap or National Market. We are currently
considering our options, including, without limitation, the possible
appointment of another independent director to serve on the audit committee or
the amendment of our Audit Committee Charter. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  31.1
    
    Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Principal Financial and Accounting
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.  (b)
    
    Reports on Form 8-K  None 24




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Novo
Networks, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. NOVO NETWORKS, INC.Date: November 12, 2004
    
    By:
    
    /s/ Steven W. CapleSteven W. CaplePresident(Principal Executive Officer)Date: November 12,2004
    
    By:
    
    /s/ Patrick G. MackeyPatrick G. MackeySenior Vice President(Principal Financial and Accounting Officer)
 25