UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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.

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.

NOVO NETWORKS, INC.

QUARTERLY REPORT FORM 10-Q
INDEX

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NOVO NETWORKS, INC.

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

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NOVO NETWORKS, INC.

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

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NOVO NETWORKS, INC.

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

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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.

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

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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

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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.

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

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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

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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.

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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

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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:

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*		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:

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:

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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.

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 280^th 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

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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;

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•		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;

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•		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

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$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.

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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

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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.

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.

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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

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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.

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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 280^th 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,

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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

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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.

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