Edgar Filing: ASCONI CORP

Form 10-QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2005

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No: 000-23712

ASCONI CORPORATION

(Exact name of Small Business Issuer as Specified in Its Charter)

Nevada

91-1395124

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2200 Winter Springs Boulevard, Suite 106, #330

Oviedo, Florida 32765

(Address of Principal Executive Offices)

(407) 245-7379

(Issuer’s Telephone Number)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding as of May 31, 2005
Common Stock, $.001 par value		12,168,678

Transitional Small Business Disclosure Format (check one): ¨ Yes x No

INDEX


			Page No.
PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements

		Condensed Consolidated Balance Sheets – As of March 31, 2005 (unaudited) and December 31, 2004	2

		Condensed Consolidated Statements of Operations and Comprehensive Income – For the Three Months Ended March 31, 2005 and 2004 (unaudited)	3

		Condensed Consolidated Statements of Changes in Shareholders’ Equity For the Three Months Ended March 31, 2004 and 2005 (unaudited)	4

		Condensed Consolidated Statements of Cash Flow For the Three Months Ended March 31, 2005 and 2004 (unaudited)	5-6

		Notes to Condensed Consolidated Financial Statements (unaudited)	7-15

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-25

	Item 3. Controls and Procedures		25

PART II. OTHER INFORMATION

	Item 1. Legal Proceedings		26-27

	Item 6. Exhibits		28

SIGNATURES			29

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this quarterly report are not based on historical facts, but rather reflect the current expectations of our management concerning future results and events.

The forward-looking statements generally can be identified by the use of terms such as “believe,” “expect,” “anticipate,” “intend,” “ plan,” “foresee,” “likely” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. You should review carefully all information, including the financial statements and the notes to the financial statements included in this quarterly report. The following important factors could affect future results, causing the results to differ materially from those expressed in the forward-looking statements in this quarterly report.

•

the timing, impact and other uncertainties related to pending and future acquisitions by us;

•

the impact of new technologies;

•

changes in laws or rules or regulations of governmental agencies; and

•

currency exchange rate fluctuations.

These factors are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in the forward-looking statements in this quarterly report. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements in this quarterly report are made only as of the date of this quarterly report, and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. Investors are advised to consult any further disclosures by us on the subject in our filings with the Securities and Exchange Commission, especially on Forms 10-KSB, 10-QSB and 8-K (if any), in which we discuss in more detail various important factors that could cause actual results to differ from expected or historic results. It is not possible to foresee or identify all such factors. As such, investors should not consider any list of such factors to be an exhaustive statement of all risk, and certainties or potentially inaccurate assumptions. We cannot assure you that projected results will be achieved.

Explanatory Note

The Registrant checked “No” in response to this question because the Registrant’s consolidated financial statements and the information in the notes thereto, as of and for the year ended December 31, 2003 included in the Registrant’s Annual Report on Form 10-KSB for the period ended December 31, 2004 filed with the SEC on May 26, 2005 (the “Annual Report”) were deemed unaudited and as a result the Annual Report failed to comply, in that respect, with the rules and regulations of the SEC. The Registrant’s consolidated financial statements as of and for the year ended December 31, 2003, as included in the Registrant’s Annual Report on Form 10-KSB/A for the year ended December 31, 2003 (the “2003 Annual Report”) were audited by Michaelson & Co., P.A., the Registrant’s former independent auditing firm (“Michaelson”), which firm in its report dated April 2, 2004 expresses an unqualified opinion on those financial statements. Michaelson has advised the Registrant that it will not grant the Registrant permission to reuse its report on the fiscal 2003 consolidated financial statements in the Annual Report. However, Michaelson has not, as of the date hereof withdrawn its opinion on the Registrant’s consolidated financial statements as of and for the year ended December 31, 2003, as included in the 2003 Annual Report. Accordingly, the fiscal 2003 consolidated financial statements are deemed unaudited. Except for certain reclassifications to conform to fiscal 2004 presentations, the fiscal 2003 consolidated financial statements included in the Annual Report have been derived from, without adjustment, those included in the 2003 Annual Report. The omission of a report on the audit of the fiscal 2003 consolidated financial statements from the Annual Report means that the Annual Report failed to comply, in that respect, with the rules and regulations of the SEC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ASCONI CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004

(UNITED STATES DOLLARS)


	March 31, 2005			December 31, 2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	29,420		$	7,256
Accounts receivable, net		3,672,246			3,832,629
Inventories		10,082,405			10,876,878
Refundable taxes and tax deposits		787,343			854,161
Advance payments		1,014,461			732,660
Other		5,704			43,026

TOTAL CURRENT ASSETS		15,591,579			16,346,610

PROPERTY, PLANT AND EQUIPMENT, NET		7,929,126			8,026,764
GOODWILL		223,276			228,183
OTHER		130,640			72,296

TOTAL ASSETS	$	23,874,621		$	24,673,853

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	4,496,829		$	4,934,403
Short-term debt		5,402,061			5,640,234
Deferred revenue		400,027			850,715
Taxes payable		21,012			12,896
Accrued expenses and other current liabilities		458,911			374,926

TOTAL CURRENT LIABILITIES		10,778,840			11,813,174
LONG-TERM LIABILITIES
Lease obligations		—			6,861
Deferred taxes		512,490			464,483

TOTAL LIABILITIES		11,291,330			12,284,518

MINORITY INTEREST		1,481,632			1,480,550

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
Preferred Stock $.001 par value 5,000,000 authorized, 0 outstanding at March 31, 2005 and December 31, 2004		—			—
Common Stock $.001 par value 100,000,000 authorized, 12,168,678 outstanding at March 31, 2005 and December 31, 2004		12,169			12,169
Additional paid in capital		49,197,618			49,405,620
Deferred consulting expense		(215,201	)		(441,703	)
Retained earnings (deficit)		(37,961,222	)		(38,193,706	)
Accumulated other comprehensive income (loss)		68,295			126,405

Total Shareholders’ Equity		11,101,659			10,908,785

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	23,874,621		$	24,673,853

See notes to condensed consolidated financial statements

ASCONI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNITED STATES DOLLARS)

(Unaudited)


	Three Months Ended March 31,
	2005			2004
Net Sales	$	5,292,976		$	4,414,191

Cost of Sales (excluding depreciation and amortization)		3,813,929			2,855,764

Gross Profit		1,479,047			1,558,427

Depreciation and Amortization		211,943			177,963
Selling and Administrative expenses		736,569			755,241

Income (Loss) From Operations		530,535			625,223

Interest expense		191,967			224,285
Other (Income) Expense		41,967			(249,473	)

Income Before Income Taxes and Minority Interest		296,601			650,411

Provision for Income Taxes		43,916			24,595

Income Before Minority Interest		252,685			625,816

Minority Interest in Income (Loss) of Subsidiaries		20,201			(22,907	)

Net Income		232,484			648,723

Other Comprehensive Income (Loss):
Foreign Currency Translation		(58,110	)		355,304

Comprehensive Income	$	174,374		$	1,004,027

Net Income Per Share of Common Stock
Basic and Diluted	$	0.02		$	0.05

Weighted Average Number of Common Shares
Oustanding, Basic and Diluted		12,168,678			12,048,933

See notes to condensed consolidated financial statements

ASCONI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2005

(UNITED STATES DOLLARS)

(Unaudited)


	Common Stock			Additional Paid in Capital (net)			Deferred Consulting Expense			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
	Shares	Par Value		Additional Paid in Capital (net)			Deferred Consulting Expense			Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (loss)			Total Shareholders’ Equity
Balance at December 31, 2003	12,018,735	$	12,019	$	48,361,031		$	(1,033,070	)	$	(39,071,344	)	$	(211,762	)	$	8,056,874
Stock issuance - private placement	38,705		39		67,661			—			—			—			67,700
Adjustments to deferred consulting expense:
Change in value of shares	—		—		(188,833	)		188,833			—			—			—
Amortization of expense	—		—		—			49,300			—			—			49,300
Warrants issued for consulting	—		—		952,000			—			—			—			952,000
Comprehensive income (loss):
Net income	—		—		—			—			648,723			—			648,723
Foreign currency translation	—		—		—			—			—			355,304			355,304

Balance at March 31, 2004	12,057,440	$	12,058	$	49,191,859		$	(794,937	)	$	(38,422,621	)	$	143,542		$	10,129,901

Balance at December 31, 2004	12,168,678	$	12,169	$	49,405,620		$	(441,703	)	$	(38,193,706	)	$	126,405		$	10,908,785
Adjustments to deferred consulting expense:
Change in value of shares	—		—		(208,002	)		208,002			—			—			—
Amortization of expense	—		—		—			18,500			—			—			18,500
Comprehensive income (loss):
Net income	—		—		—			—			232,484			—			232,484
Foreign currency translation	—		—		—			—			—			(58,110	)		(58,110	)

Balance at March 31, 2005	12,168,678	$	12,169	$	49,197,618		$	(215,201	)	$	(37,961,222	)	$	68,295		$	11,101,659

See notes to condensed consolidated financial statements

ASCONI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNITED STATES DOLLARS)

(Unaudited)


	Three Months Ended March 31,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	232,484		$	648,723
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		211,943			177,963
Deferred income taxes		43,916			13,498
Minority interest		20,201			(22,907	)
Non-cash consulting expense		18,500			232,500
(Increase) decrease in assets:
Accounts receivables		128,172			1,246,801
Advance payments		(289,066	)		(197,227	)
Inventories		664,906			26,735
Other		32,381			33,989
Increase (decrease) in liabilities
Accounts payable		(378,923	)		73,798
Deferred revenue		(450,688	)		(500,736	)
Taxes payable		8,336			(235,482	)
Accrued and other liabilities		110,625			(63,330	)

Net cash provided by operating activities		352,787			1,434,325

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(217,915	)		(668,044	)

Net cash used in investing activities		(217,915	)		(668,044	)

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings (net)		(133,899	)		(781,316	)
Repayment of long-term debt		—			(25,949	)

Net cash used in financing activities		(133,899	)		(807,265	)

Effect of exchange rate changes on cash		21,191			(52,794	)

Net increase (decrease) in cash and cash equivalents		22,164			(93,778	)

Cash and cash equivalents, beginning of period		7,256			155,010

Cash and cash equivalents, end of period	$	29,420		$	61,232

See notes to condensed consolidated financial statements

ASCONI CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNITED STATES DOLLARS)

(Unaudited)


	Three Months Ended March 31,
	2005		2004
Supplemental Disclosures of Cash Flow Information
Interest paid	$	187,313	$	200,817

Taxes paid	$	—	$	173,053

See notes to condensed consolidated financial statements

Asconi Corporation

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.	ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION

Asconi Corporation and its subsidiaries (collectively “the Company”) produce, market and sell premium Moldavian wines in countries outside Moldova, with approximately 89% percent of their revenue coming from sales to the Russian Federation.

Asconi S.R.L. was founded as a limited liability Company formed in the Republic of Moldova in October 1994 and commenced significant operations in 1999. In April 2001, Asconi Corporation, then known as Grand Slam Treasures, Inc. (“Grand Slam”) acquired 100% of the outstanding common stock of Asconi S.R.L. in a share exchange (the “Merger”) for the issuance of 12,600,000 shares (before the affects of the April, 2003 one-for-ten reverse stock split of the common stock of Grand Slam). Subsequent to the Merger, Grand Slam changed its name to Asconi Corporation. Since Grand Slam had no operations and limited assets at the time of the Merger, the Merger was accounted for as a recapitalization of Asconi S.R.L., and Asconi S.R.L. was treated as the continuing entity for accounting purposes.

Asconi S.R.L. acquired a 70% interest in S.A. Fabrica de Vinuri din Puhoi and a 74% interest in S.A. Orhei Vin, both Moldovan entities, in October and December 2000, respectively. The interests were originally acquired by the shareholders of Asconi S.R.L., who subsequently contributed them to Asconi S.R.L. The contribution was recorded based on the historical cost of the interests to the shareholders, $350,000, reduced by the indebtedness of $308,826 incurred in the purchase of the interests for which Asconi S.R.L. assumed responsibility upon the contribution. Those acquisitions were accounted for as purchases.

In December 2001, the Company acquired approximately 25% of S.A. Vitis Hincesti. In March 2002, the Company acquired an additional 21% of S.A. Vitis Hincesti. In June 2002, the Company acquired, through the acquisition of a beneficial interest in an irrevocable trust, an additional 5% interest in S.A. Vitis Hincesti. Through June 2002, the Company accounted for its investment in S.A. Vitis Hincesti using the equity method. The acquisition of the additional interest in June 2002 gave the Company a controlling interest in S.A. Vitis Hincesti, at which time the Company began to consolidate S.A. Vitis Hincesti. In February 2003, the Company subscribed to a subscription offering by S.A. Vitis Hincesti during February 2003 increasing its ownership in S.A. Vitis Hincesti to 61%.

Coppet Finance Limited was incorporated on February 3, 2003 as a British Virgin Island limited company and as a wholly owned subsidiary of Asconi Holding Company Limited (“AHCL”). AHCL operates only as a holding company and is otherwise inactive. AHCL is wholly owned by Asconi Corporation.

The condensed consolidated balance sheets, statements of operations and comprehensive income, statements of changes in shareholders’ equity, and cash flow included herein that are unaudited but include, in the opinion of management, all the adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The financial statements included herein have been prepared in accordance with the rules of the Securities and Exchange Commission for Form 10-QSB and accordingly do not include all footnote disclosures that would normally be included in financial statements prepared in accordance with generally accepted accounting principles, although the Company believes that the disclosures presented are adequate to make the information presented not misleading. The unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.

The nature of the Company’s business is such that the results of interim periods are not necessarily indicative of results that may be expected for any future interim period or for a full year.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Generally Accepted Accounting Principles

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

Basis of consolidation

The consolidated financial statements of the Company include the accounts of Asconi Corporation, Asconi Holding Company Limited, Asconi S.R.L., S.A. Fabrica de Vinuri din Puhoi, S.A. Orhei-Vin, S.A. Vitis Hincesti, and Coppet Finance. All material intercompany balances and transactions have been eliminated.

Economic and political risks

The Company faces a number of risks and challenges since its operations are in the Republic of Moldova and its primary market is in the Russian Federation. The Company may withdraw funds from its subsidiaries in Moldova provided the subsidiaries have paid their income taxes and meet certain other requirements. The requirement to obtain the clearance of the government of Moldova that these requirements have been met can cause delays in the withdrawal of funds.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates.

Cash and cash equivalents

The Company considers cash and cash equivalents to include cash on hand, demand deposits with banks, and cash equivalents having original maturities three months or less.

Accounts receivable and allowance for doubtful accounts

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Accounts receivable are presented net of an allowance for doubtful accounts of $77,739 and $41,439 at March 31, 2005 and December 31, 2004, respectively.

Credit Risk

The Company’s credit risk primarily consists of accounts receivable and advance payments. The majority of the Company’s trade receivables are from entities engaged in the distribution of wines and spirits, and a substantial portion of its trade receivables are from entities engaged in that business in the Russian Federation. The Company is therefore exposed to credit risk which can be significantly affected by changes in the conditions in that industry and in the Russian Federation in particular.

Inventory

Inventories are stated at the lower of cost or market on the first-in, first-out basis, and include raw materials, work in process, finished goods and other inventory such as parts and product merchandise. Raw materials include glass, cork, packaging materials and other materials used in production and bottling of wines. Work in process is primarily bulk wine and finished goods are bottled wine. The cost of finished goods includes direct costs of raw materials such as grapes, packaging, as well as direct labor used in wine production, bottling and warehousing. Indirect production costs consisting primarily of utilities and indirect labor related to the production of wine are also included in the cost of inventory and subsequently in the cost of goods sold. The Company applies full absorption to allocate indirect costs to the vintages in work in process inventory based on volume.

Costs and expenses not directly related to the production activities, such as freight out and the compensation of sales, marketing, accounting and administrative personnel are included in selling, general and administrative expenses of the period in which they are incurred.

In accordance with general practice in the wine industry, wine inventories are included in current assets, although a portion of such inventories may be aged for periods longer than one year.

Property, plant and equipment

Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.

When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where estimated undiscounted future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value of the assets exceeds its fair value. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.

Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The percentages applied are:


·	Buildings	2% - 4.0%
·	Machines and equipment	5% - 10%
·	Vehicles	10%-20%
·	Office equipment	20% - 33%

The costs to acquire land for vineyards, together with the costs to prepare the planting plans, prepare the sites, acquire and plant the rootstock, install any other related equipment and maintain the vineyard are capitalized until the production from the vineyard reaches a commercial level. Once commercial production is achieved, the Company will begin to depreciate the capitalized costs over their estimated useful lives, except that the costs of the land and any development costs such as planting plans and site preparation that have indefinite lives will not be depreciated. Once depreciation begins, depreciation expense, together with the costs of growing, will be deferred as the costs of the unharvested grape crop until that crop is harvested and the costs are transferred to bulk wine. The Company’s vineyards are presently still in development and presently are not expected to reach commercial production until fiscal 2007.

Goodwill

Goodwill represents the excess purchase price paid by the Company over the fair value of the tangible and intangible assets and liabilities of S.A. Vitis Hincesti at June 30, 2002, the date of the acquisition. In accordance with SFAS 142, the goodwill is not being amortized, but instead is be subject to an annual assessment of impairment by applying a fair-value based test. As a part of the evaluation, the Company compares the carrying value of goodwill with its fair value to determine whether there has been impairment. As of March 31, 2005, the Company does not believe any impairment of goodwill has occurred.

Revenue recognition

The Company generally recognizes product revenue at the time of shipment, at which time persuasive evidence of an arrangement exists, delivery has occurred (generally triggered by the transfer of the merchandise to a third party shipper under FOB shipping terms), the price is fixed or determinable, and collectibility is probable. Cash payments received in advance of shipment are recorded as deferred revenue. The Company is generally not contractually obligated to accept returns, except for defective product. However, the Company may permit its customers to return or exchange products and may provide pricing allowances on products unsold by a customer. Revenue is recorded net of an allowance for estimated returns, price concessions, and other discounts. Such allowances are reflected as a reduction to accounts receivable when the Company expects to grant credits for such items; otherwise, they are reflected as a liability.

Government grants

The Company receives equipment grants from various non-U.S. governmental agencies. Grants for the purchase of equipment are recorded as reductions of the related equipment cost and reduce future depreciation expense. Grants related to items of operating expenses are recorded in earnings when received.

Starting in 2004, the Company became eligible to receive grants from a non-U.S. government agency to offset the costs of the development of vineyards. Such grants are recorded as reductions of the related vineyard development costs and will reduce future depreciation expense. During 2004 the Company received a grant of approximately $680,000 for the development of vineyards. The Company did not receive any additional grants during the first quarter of 2005.

Shipping and handling costs

The Company classifies shipping and handling costs as part of selling, general and administrative expenses. Total delivery costs were $147,040 and $129,176 for the three months ended March 31, 2005 and 2004, respectively.

The Company’s customers are not charged for shipping and handling costs incurred by the Company prior to transfer of title to the third party shipper under FOB shipping terms.

Employees’ benefits

Mandatory contributions are made by the Moldavian subsidiaries to the Moldavian Government’s health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments. The cost of these payments is charged to the statement of operations in the same period as the related salary cost.

Stock based compensation

As permitted by SFAS No. 123, “Accounting for Stock Based Compensation,” the Company follows the intrinsic value model of Accounting Principles Board Opinion (APB) No. 25 in measuring the cost, if any, to be recorded upon the issuance of stock options or stock awards to employees and directors. Under that method, compensation expense is recorded only for any difference between the fair value of the stock on the date the options or awards are granted and the option exercise price or the price paid for the award.

Stock option or share awards issued to other than employees or directors are recorded at their fair value as required by SFAS No. 123.

The Company presently has no stock option plans and has no outstanding stock options. The Company’s net income (loss) and net income (loss) per share would not have been affected if the Company had accounted for stock options or awards issued to employees and directors using the fair value method of SFAS No. 123.

Other income

Other income for the three months ended March 31, 2005 and 2004 includes foreign currency transaction gains and losses.

Income taxes

Income taxes are determined under the liability method as required by Statement of Financial Accounting Standard No. 109 “Accounting for Income Taxes”. Under SFAS No. 109, deferred income tax assets and liabilities arising from temporary differences between income tax and financial reporting basis of assets and liabilities are recorded based on currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by net operating loss carryforwards. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

Foreign currency accounting

The financial position and results of operations of the Company’s foreign subsidiaries in the Republic of Moldova are measured using the foreign subsidiaries’ local currency, the Moldovan lei, as the functional currency. Revenues and expenses of such subsidiaries have been translated into U.S. Dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity, unless there is a sale or complete liquidation of the underlying foreign investments. Foreign currency translation adjustments resulted in a loss of $58,110 and a gain of $355,304 for the three months ended March 31, 2005 and 2004, respectively.

Transaction gains and losses that arise from the effects of exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income in the results of operations as incurred. Foreign currency transaction adjustments included in operations totaled a loss of $83,289 and a gain of $249,473 for the three months ended March 31, 2005 and 2004, respectively.

Earnings Per Share

The Company has adopted SFAS No. 128, “Earnings Per Share”. Under SFAS No. 128, basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of common shares assumed to be outstanding during the period. Diluted earnings (loss) per share is computed by assuming the issuance of additional shares of common stock (computed using the treasury stock method) for the exercise of outstanding options, warrants or conversion rights, assuming such exercise would have been dilutive. In the periods where losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

For the three months ended March 31, 2005 and 2004 the computation of diluted earnings per share excludes the assumed exercise of an aggregate of 459,600 warrants having exercise prices ranging from $5.00 to $7.50 (weighted average $5.98) as their assumed exercise would have been anti-dilutive.

Financial instruments

The net fair value of all financial assets and liabilities approximates their carrying value.

Recent pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure provisions of FIN 46 are effective for financial statements initially issued after January 31, 2003. Public entities with a variable interest in a variable interest entity created before February 1, 2003 shall apply the consolidation requirements of FIN 46 to that entity no later than the beginning of the first annual reporting period beginning after June 15, 2003. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. Additionally, in December 2003 the FASB issued FASB Interpretation No. 46R (FIN 46R) to update certain aspects of FASB 46. FIN 46R must be adopted no later than the end of the first interim or annual reporting period ending after March 15, 2004. The adoption of FIN 46 and FIN 46R did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, “Inventory Pricing,” that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance of SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We believe that implementing SFAS No. 151 should not have a material impact on our financial condition or results of operations.

(Revised 2004) is effective for the first interim reporting period that begins after January 1, 2006 and must be applied to all options granted or modified after its effective date and also to recognize the cost associated with the portion of any option awards made before its effective date for with the associated service has not been rendered as of its effective date. We are still studying the requirements of SFAS No. 123R (Revised 2004) and have not yet determined what impact it will have on our results of operations and financial position.

In December, 2004 the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29.” APB Opinion No. 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception to fair value for exchanges of similar productive assets and replace it with a general exception for exchange transactions that do not have commercial substance, which are defined as transactions that are not expected to result in significant changes in the cash flows of the reporting entity. SFAS No. 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect that SFAS No. 153 will have a material affect on our financial statements.

Reclassifications

Certain reclassifications have been made to the fiscal 2004 financial statements in order to conform to the classification used in the current year.

3.	ACCOUNTS RECEIVABLE


	March 31, 2005			December 31, 2004
Customers outside of Moldova	$	2,748,761		$	3,033,896
Customers in Moldova		1,001,224			840,172
Less: allowance for doubtful accounts		(77,739	)		(41,439	)

	$	3,672,246		$	3,832,629

Moldovan receivables include approximately $400,000 due from the government of Moldova for its subsidy for the planting of vineyards. Foreign receivables are primarily from the Company’s five largest customers.

4.	INVENTORIES

Inventories are summarized as follows:


	March 31, 2005		December 31, 2004
Raw and other materials	$	2,146,602	$	1,711,133
Bulk wine and alcohol		7,432,747		8,849,868
Bottled wine		503,056		315,877

	$	10,082,405	$	10,876,878

Inventory in the amount of approximately $5,348,000 is pledged as collateral for loans aggregating approximately $3,020,000 at March 31, 2005.

5.	PROPERTY, PLANT AND EQUIPMENT


	March 31, 2005			December 31, 2004
Land for development of vineyards	$	566,000		$	545,595
Vineyards		1,425,913			1,455,184
Land, buildings and construction in progress		2,859,778			2,812,594
Machinery and equipment		9,541,600			9,572,069
Other		425,926			394,663

		14,819,217			14,780,105

Less accumulated depreciation		(6,890,091	)		(6,753,341	)

	$	7,929,126		$	8,026,764

Property, plant and equipment in the amount of approximately $4,100,000 is pledged as collateral for loans aggregating $2,400,000 at March 31, 2005.

6.	SHAREHOLDERS’ EQUITY

The Company is authorized to issue 100,000,000 shares of its common stock and 5,000,000 shares of preferred stock. Each share of common stock is entitled to one vote. Preferred shares have no voting rights. At its discretion, the Board of Directors may declare dividends on shares of common stock, although the Board does not anticipate paying dividends in the foreseeable future.

In January 2004, the Company issued approximately 38,700 shares of common stock pursuant to stock purchase agreements whereby the Company sold shares at an offering price of $1.75 for aggregate gross offering proceeds of $67,700.

In February 2004, the Company entered into a consulting agreement for strategic consulting services. The term of the agreement is for one year, however, either party can terminate the agreement after six months. The Company issued to the consultants, who are unrelated to the Company, 100,000 warrants exercisable at $7.00, which expire in April 2009 and 100,000 warrants exercisable at $7.50, which expire in June 2009. The contract does not contain a “substantial incentives for non-performance” as that term is defined under EITF Issue 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, or provisions for the forfeiture of the warrants in the event of non-performance. Accordingly, as required by EITF 96-18 and EITF 00-18, the warrants were valued as of the inception of the contract using the Black Scholes model. The value of the warrants under the Black Scholes model was $4.76 per warrant, and expense was amortized over the six month minimum life of the contract on a straight-line basis. The consulting expense recorded for this contract for the three months ended March 31, 2004 totaled $158,000, and is included in selling, general and administrative expense.

Warrants outstanding at March 31, 2005 are as follows:


Number of warrants	Exercise price		Exercise period
259,600	$	5.00	December, 2004 to December, 2006
100,000	$	7.00	April, 2004 to April, 2009
100,000	$	7.50	June, 2004 to June, 2009

7.	SHAREHOLDER LITIGATION AND SEC INVESTIGATION

Other than as set forth below, we are not a party to any pending legal proceedings or are aware of any pending legal proceedings against us that, individually or in the aggregate, would have a material adverse affect on our business, results of operations or financial condition.

Shareholder Class Actions. On or about April 16, 2004, one of the Company’s shareholders filed a class action complaint, Maureen E. Alfred, et al. vs. Constantin Jitaru, Anatolie Sirbu and Asconi Corp, Case 04-CV-534 in the United States District Court, Middle District of Florida (the “Alfred” complaint) alleging that the Company, along with Constantin Jitaru, its President, CEO and Chairman of the Board, and Anatolie Sirbu, its CFO, Treasurer and Secretary, violated certain federal securities laws. The complaint, which requested unspecified damages, alleged, among other things, that the defendants made material misrepresentations and omissions of material facts concerning the Company’s business performance and financial condition and failed to disclose certain related party transactions, thereby overstating the Company’s financial condition during a period from May 2003 to March 2004. The complaint specifically cited the Company’s March 23, 2004 press release in which the Company disclosed that it would be restating its financial statements for the fiscal quarters ended June 30, 2003 and September 30, 2003. The complaint alleged violations of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder against all of the defendants, as well as Section 20(a) violations against Messrs. Jitaru and Sirbu.

Subsequent to the filing of the Alfred complaint, seven additional class action complaints, which sought unspecified damages, were filed, in the Middle District of Florida. These complaints contained allegations that were substantially similar in nature to those in the Alfred complaint, except that while the proposed Class Period in the Alfred complaint was from May 15, 2003 to March 23, 2004, the other complaints’ proposed Class Period was from June 11, 2001 to March 23, 2004.

All eight class action complaints have since been dismissed without prejudice, and none of the eight class action complaints are pending.

Shareholder Derivative Suits

Five shareholders derivative actions, which sought unspecified damages, were filed in the United States District Court, Middle District of Florida, commencing on or about June 30, 2004, naming seven of the Company’s directors and certain executive officers as defendants, and naming the Company as a nominal defendant. The five shareholders derivative suits alleged, among other things, breaches of fiduciary duty and other alleged common law violations by such directors and officers. The shareholder derivative actions contained allegations substantially similar to the foregoing class actions, and claimed that the Company has been injured as a result of the foregoing now-dismissed class actions and the conduct that was alleged in the foregoing class actions. Four of the shareholders derivative suits have since been voluntarily dismissed by the plaintiffs. The Company has filed a motion seeking dismissal of the remaining shareholders derivative suit; the Court has not yet ruled on the Company’s motion to dismiss.

The Company intends to defend itself in the remaining action vigorously. There is no assurance, however, that such matter will be resolved in the Company’s favor. An unfavorable outcome of this matter may have a material adverse impact on the Company’s business, results of operations, financial position, or liquidity. Because the remaining litigation is in an early stage, the Company is unable to predict the outcome or reasonably estimate any range of loss, if any, that may result and accordingly and has not recorded any liability of any judgment or settlement that may result from the resolution of these matters.

Securities and Exchange Commission Investigation. On December 29, 2003, the Company received a request from the Denver regional office of the SEC to voluntarily produce documents and information as part of an informal inquiry into certain accounting practices of Asconi. The matters under investigation include, among others, the Company’s accounting treatment of the issuance of 5,000,000 shares to each of Constantin Jitaru and Anatolie Sirbu. The SEC requested voluntary production of documents relating to the Company’s accounting and financial policies, practices and procedures in fiscal 2001, fiscal 2002 and fiscal 2003.

The SEC Denver staff followed up several times on its original questions and the Company provided, to the best of its ability, all information required to these follow up inquiries. The SEC staff also requested and received testimony from the Company’s Chief Executive Officer Constantin Jitaru, Chief Financial Officer Anatolie Sirbu, Chief Operating Officer Serguei Melnik and Interim Chief Accounting Officer Alex Brinister. Messrs. Jitru and Sirbu provided voluntary testimony in August, 2004, and Messrs. Melnik and Brinister provided voluntary testimony in September, 2004.

In January, 2005 The Company was advised that the SEC had elevated the informal inquiry to a formal investigation, and that they wanted to take additional testimony from Alex Brinister. Mr. Brinister provided such additional testimony on March 8, 2005.

On March 29, 2005, the Company received a Wells Notice from the staff of the SEC relating to the Company’s alleged failure to record expenses relating to the May 2003 issuances of 10,000,000 shares of its securities to two of its executive officers and of 100,000 shares to Serguei Melnik. The Wells Notice stated that the SEC staff intends to recommend that a civil or administrative enforcement action be brought against the Company, alleging violations of Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-11 and 13a-13 thereunder. On the same date, Alex Brinister, also received a Wells Notice from the SEC staff also relating to the May, 2003 share issuances. This Wells Notice stated that the SEC staff intends to recommend that a civil or administrative enforcement action be brought against Mr. Brinister, alleging violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting Asconi’s alleged violations of the Exchange Act, as well as administrative proceedings against Mr. Brinister pursuant to Rule 102(e) of the SEC’s Rules of Practice.

Under the SEC’s procedures, a Wells Notice recipient has an opportunity to respond to the SEC staff’s intended recommendation before the SEC initiates a civil action. The Company and Mr. Brinister have been cooperating in the SEC staff’s investigation and intend to respond promptly to the respective Wells Notices, in which responses, they intend to vigorously defend their actions.

There can be no assurance that this matter will be resolved in a manner favorable to the Company or Mr. Brinister. The Company is unable to predict the outcome of this matter, including what action, if any, the SEC might take, including the imposition of fines, penalties or other possible remedies. The Company will also likely continue to incur additional costs related to the SEC investigation and Wells responses, including both additional accounting and legal fees. Also, a significant amount of management’s time and attention will be diverted until these matters conclude.

8.	RELATED PARTY TRANSACTIONS

The Company purchased bulk wine and grape juice from VinExport, a Romanian company. Constantin Jitaru and Anatolie Sirbu, two of the Company’s directors and officers, each owned 30% of the outstanding securities of VinExport during 2004 and until May 2005. Both Mr. Jitaru and Mr. Sirbu disposed of their respective ownership in VinExport during May, 2005 The bulk wine is purchased for the purpose of blending, bottling and selling in the regular course of business. The Company did not purchase bulk wine from VinExport during the three months ended March 31, 2005 or 2004.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Asconi S.R.L. was founded as a limited liability company formed in the Republic of Moldova in October 1994 and commenced significant operations in 1999. In April 2001, Asconi Corporation, then known as Grand Slam Treasures, Inc. (“Grand Slam”) acquired 100% of the outstanding common stock of Asconi S.R.L. in a share exchange (the “Merger”) for the issuance of 12,600,000 shares (before the affects of the April, 2003 one-for-ten reverse stock split of the common stock of Grand Slam). Subsequent to the Merger, Grand Slam changed its name to Asconi Corporation. Since Grand Slam had no operations and limited assets at the time of the Merger, the Merger was accounted for as a recapitalization of Asconi S.R.L., and Asconi S.R.L. was treated as the continuing entity for accounting purposes.

Asconi S.R.L. acquired a 70% interest in S.A. Fabrica de Vinuri din Puhoi and a 74% interest in S.A. Orhei-Vin, both Moldovan entities, in October and December 2000, respectively. The interests were originally acquired by the shareholders of Asconi S.R.L., who subsequently contributed them to Asconi S.R.L. The contribution was recorded based on the historical cost of the interests to the shareholders. Those acquisitions were accounted for as purchases.

In December 2001 we acquired 25% of S.A. Vitis Hincesti. On March 7, 2002, we acquired an additional 21% of S.A. Vitis Hincesti. In June 2002, we acquired, through the acquisition of a beneficial interest in an irrevocable trust, an additional 5% interest in S.A. Vitis Hincesti. Through June 2002 we accounted for our investment in S.A. Vitis Hincesti using the equity method. The acquisition of the additional interest in June 2002 gave us the controlling interest in S.A. Vitis Hincesti, at which time we began to consolidate S.A. Vitis Hincesti. In February 2003 we subscribed to a subscription offering by S.A. Vitis Hincesti, increasing our ownership in S.A. Vitis Hincesti to 61%.

Key Business Challenges and Risks

The nature of our operations, and the locations in which we operate and sell our products, create certain challenges and risks to us. These challenges and risks are discussed in Item I of the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004.

We see certain of the factors as especially important to understanding our results of operations, financial condition and cash flows, and the reasons why historical financial results may not be indicative of our future operating performance. The following discusses those factors.

Regulatory and economic conditions in Moldova. We produce all of our wines in Moldova, and as a result we may be affected by changes in the regulatory and economic conditions in Moldova.

The wine industry is subject to extensive regulation by the Moldovan Ministry of Agriculture and various foreign agencies, and local authorities. These regulations and laws dictate such matters as licensing requirements, trade and pricing practices, permitted distribution channels, permitted and required labeling, advertising and relations with wholesalers and retailers. Any expansion of our existing facilities or development of new vineyards or wineries may be limited by present and future zoning ordinances, environmental restrictions and other legal requirements. For example, in spring of 2005 the Moldovan government effectuated the adoption of legislation that resulted in additional value added taxes of 20% on imported rootstocks, which will increase the cost of planting vineyards. Vineyard development is one of the major projects undertaken by us, which will continue in the future years. The taxes were not imposed on the rootstocks imported by us in 2004; however, the taxes were imposed on the rootstocks we imported in spring of 2005. In addition, new regulations, requirements and/or increases in excise taxes, income taxes, property and sales taxes or international tariffs, could reduce our profits.

The Republic of Moldova has undergone significant political and economic change since 1990 and any substantial change in current laws or regulations (or in the interpretations of existing laws or regulations), whether caused by changes in the government of Moldova or otherwise, could have an impact on our results of operations. The Republic of Moldova became the first former republic of the USSR to elect a communist majority parliament and therefore a communist president in 2001. Current political forces in the parliament are promoting significantly greater government controls over the economy and in particular over agricultural production. If the president and

parliament decide to exert additional control over agricultural production, our business, financial condition and results of future operations could suffer. We could be forced to sell some of our land or vineyards, restrict the acres of vineyards that we are allowed to harvest or limit the amount of wine we are permitted to bottle and/or sell in the Republic of Moldova or export to other countries. We may also be required to pay additional taxes and/or fees in connection with our production of wine and we may not have as much control over the operations of our day-to-day business operations in the Republic of Moldova. Additionally, because we export most of our products, actions by the government implement additional controls on import and export operations, whether prompted by concerns over money laundering or other concerns, could limit our ability to quickly respond to customer needs in other countries and/or bring in capital into the Republic of Moldova for business operations.

Finally, although our Moldova subsidiaries incur most of their expenses in the lei, many of their sales are to customers outside of Moldova and are therefore denominated in currencies other than the lei (principally the U.S. dollar). Additionally, our Moldova subsidiaries have certain bank loans that are denominated in U.S. dollars, and make certain purchases that are denominated in U.S. dollars. As a result, our operating results can be affected by changes in the exchange rate between the lei and other currencies, principally the U.S. dollar. Such exchange rates reflect, and may change, as a result of changes in economic and political conditions in Moldova. See “Foreign Currency Exchange Rates” below.

Economic conditions in our key markets. We derived approximately 99% of our total revenue in the fiscal 2004 and approximately 95% of our total revenue in the first quarter of 2005 from sales of our products outside Moldova, with approximately 83% of our total revenue coming from sales in the Russian Federation. While the Russian market will remain our principal channel of distribution for the foreseeable future, over the last three years we have worked to lessen our dependence on this market and increase our sales to other geographic areas. These efforts have enabled us to increase our overall sales while decreasing the percentage of our total sales accounted for by exports to the Russian Federation from approximately 95% in fiscal 2000 to approximately 83% in fiscal 2004. Our plan is to attempt to reduce our sales in the Russian Federation to about 70% of our total revenues over the next five years by increasing our sales to our other current markets and entering new markets, including the United States, Central and Western Europe and Israel. However, our business will remain heavily influenced by the general economic conditions in the countries in which we currently do business, especially the Russian Federation. A significant deterioration in these conditions, including a reduction in consumer spending levels, could reduce our sales. In addition, we are affected by political and economic developments in any of the other countries where we market and distribute our products. Our operations are also subject to the imposition of import, investment or currency restrictions, including tariffs and import quotas or any restrictions on the repatriation of earnings and capital. For example, the Government of Ukraine unilaterally doubled excise taxes on imported wines during fiscal 2003 in order to protect Ukrainian producers. Although our sales to Ukraine have not decreased as a result of this increased excise tax, the growth of our sales in the Ukrainian market might otherwise have been higher. These disruptions can affect our ability to import and export products and repatriate funds, which in turn can affect the level of consumer demand for our products, leading to a decrease in our levels of sales or profitability.

Competition. Our wines compete in all of the wine market segments with many other Moldovan and foreign wines. Our wines also compete with popular-priced generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for shelf space in retail stores and for marketing focus by our independent distributors, many of which carry extensive brand portfolios.

We have made a concerted effort to increase the quality of our products, as we believe that offering a superior product will increase our ability to both enter new markets and increase our market share in our current markets. Our competitive advantage in the Russian Federation market is our large product line and strong brand image, which is maintained through the efforts, including advertising and sales campaigns, of our distributors in the Russian Federation. Our goal is to increase to use the popularity of our wines and our brand recognition to increase the volume of our sales and to obtain increases in the prices we obtain from our distributors.

However, wholesaler, retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of our products, including their quality or pricing, compared to competitive products. Unit volume and dollar sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers and retailers which could affect their purchases of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase advertising or promotional expenditures, or the number of our personnel to maintain our competitive position, or for other reasons.

Distribution network. We sell our products to distributors for resale to retail outlets including grocery stores, package liquor stores, club and discount stores and restaurants. Sales to our largest buyer, who is an importer and a distributor in the Russian Federation, GB Holding Vin, represented approximately 24% of our revenues in fiscal 2004, while sales to our largest distributor during fiscal 2003 and fiscal 2002, Iantarnaia Grozdi, represented approximately 24% of our revenues in each of fiscal 2003 and 2002. Sales to our five largest distributors combined, Iantarnaia Grozdi, GB Holding Vin, Expovin, Sever and Davis, all of whom are in the Russian Federation, represented approximately 74% of our revenue in fiscal 2004 and 82% of our revenues for fiscal 2003. Our sales to these distributors are expected to continue to represent a substantial amount of our net revenues in the near future. Distribution channels for alcoholic beverage products have been characterized in recent years by rapid change, including consolidations of certain distributors. In addition, distributors and retailers of our products offer products which compete directly with our products for retail shelf space and consumer purchases. Our agreements with our distributors are for a one year term, and are renewed on an annual basis. In the future, our distributors and retailers may decide to not continue to purchase our products or provide our products with adequate levels of promotional support. Changes in the financial condition of these distributors, consumer preferences or consumer spending in the Russian Federation could affect both the quantity and price level of the wines that we are able to sell to these distributors.

Cost and availability of grapes and other raw materials. Our business is heavily dependent upon raw materials, such as grapes, grape juice in bulk, grains and packaging materials which we purchase from third-party suppliers. We could experience shortages of raw materials due to supply, production or shipment difficulties, which could decrease our ability to supply goods to our customers. We are also directly affected by increases in the costs of such raw materials. In the past, we have experienced significant increases in the cost of grapes. In fiscal 2004 we planted approximately 925 acres of vineyards. Those vineyards would be expected to produce their first harvest in the fall of 2007, and reach their full production capacity in the fall of 2009. We believe that having our own vineyards will provide us with more control over the access to and cost and quality of the grapes we use. Although we believe we have adequate sources of grape supplies, in the event demand for certain wine products exceeds expectations, we could experience shortages. A shortage in the supply of wine grapes could result in an increase in the price of some or all of the grape varieties we purchase and a corresponding increase in our wine production costs. If we cannot increase prices because of competitive pressure, increased grape supply costs could reduce our profits.

Seasonality. Our revenues and operating results may vary from quarter to quarter due to seasonal changes in consumer consumption habits. For example, sales volumes tend to increase during the summer months and the holiday season and decrease after the holiday season. As a result, our sales and earnings are typically highest during the third and fourth calendar quarter and lowest in the first calendar quarter. Seasonal factors also affect our cash flows and the levels of borrowing. For example, our borrowing levels typically are highest during fall when we have to pay growers for grapes harvested and make payments related to the harvest.

Capital. The wine industry is a capital-intensive business which requires substantial capital expenditures to improve or expand wine production and to develop or acquire vineyards. We estimate our need for capital expenditures at approximately $10 million over three years to be used for planting additional acres of vineyards, renovating and upgrading our production facilities. Further, the acquisition of grapes and bulk wine require substantial amounts of working capital. In order to ensure continued growth in our operations, we estimate that we will need to increase our working capital by 30% annually. These funds will be used to increase our purchases of grapes as well as other raw materials such as glass, cork and labels. These capital expenditures and working capital requirements will have to be financed from cash flows from operations, additional borrowings or additional equity financing. There is no assurance we will be able to attract sufficient debt or equity capital, and in particular our ability to attract equity capital may be adversely effected if the price of our common stock declines as the result of negative publicity about the restatement of our financial statements for fiscal 2002 and the first three quarters of fiscal 2003 or the due to the related litigation (see Note 5 of Notes to Condensed Consolidated Financial Statements). If we do not attract capital for current operations and capital expenditures, we may not be able to increase our production and sales, and our ability to compete with our more technologically advanced competitors who are able to invest in modern winemaking equipment will be adversely affected.

Foreign currency exchange rates. Our net income may be significantly affected by changes in the exchange rates between the lei and other currencies, in particular the U. S. Dollar. See “Critical Accounting Policies and Estimates – Foreign currency accounting.”

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 2 of Notes to the Condensed Consolidated Financial Statements. However, certain accounting policies and estimates are particularly important to the understanding of the our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside the control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. The following discusses our significant accounting policies and estimates.

Revenue recognition. We generally recognize product revenue at the time of shipment, at which time persuasive evidence of an arrangement exists, delivery has occurred (generally triggered by the transfer of the merchandise to a third party shipper under FOB shipping terms), the price is fixed or determinable, and collectibility is probable. Cash payments received in advance of shipment are recorded as deferred revenue. We generally are not contractually obligated to accept returns, except for defective product. However, we may permit our customers to return or exchange products and may provide pricing allowances on products unsold by a customer. Revenue is recorded net of an allowance for estimated returns, price concessions, and other discounts. Those estimates are based on historical experience and future projections, and actual future allowances may vary significantly from estimates. Returns, price concessions and other discounts have historically not been material, and a hypothetical 10% change in the estimate of the level of future returns, price concessions and other discounts would not have had a material affect on the results of operations for the three months ended March 31, 2005.

Allowance for doubtful accounts. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Our estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that our estimate of the allowance for doubtful accounts will change. Historically our bad debt experience and allowances for doubtful accounts have not fluctuated significantly, and any reasonably likely change in the assumptions we currently use would not have a material affect on our results of operations. However, we are not able to predict future changes in the financial condition of our customers and, if circumstances related to our customers deteriorate, our estimated of the recoverability of our trade receivables could be materially affected, and we may be required to record additional allowances.

Inventory. We carry our inventory at the lower of cost, determined on a first-in, first-out basis, or market value. To date we have not had to record any allowance to reduce our inventories from cost to market value. In estimating market value and determining the need for an allowance for the valuation of our inventories, we must estimate future demand and prices based on historic experience, current market conditions and assumptions about future market conditions and expected demand. If actual market conditions and future demand are less favorable than projected, inventory write-downs, which are charged to costs of goods sold, may be required. A hypothetical 10% change in the sales prices used to estimate market value would not have had a material affect on the need to record an inventory allowance for the three months ended March 31, 2005.

Impairment of property, plant and equipment. Property, plant and equipment are carried at cost and are depreciated over their useful lives. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where estimated undiscounted future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value of the assets exceeds its fair value. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. Estimates of future cash flows are subject to a significant degree of uncertainty, and may change over time. Significant changes in such estimates may cause a write-down for the impairment of property, plant and equipment. A hypothetical 10% change in the estimated future cash flows used to determine if an impairment had occurred would not have had a material affect on need to record an impairment loss for the three months ended March 31, 2005.

Income Taxes. As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from the difference in the financial reporting and tax treatments of specific items, such as depreciation, the allowance for doubtful accounts, and other items. These differences result in deferred tax assets and liabilities. We also record a deferred tax asset for the net operating loss carryforwards we have in the United States. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Our future tax expense as reported in the financial statements will be affected by extent to which we establish a valuation allowance or increase or decrease the allowance in a period. To date, we have recorded a valuation allowance for the entire amount of our deferred tax assets (primarily net operating loss carryforwards) in the United States as we cannot currently determine that it is more likely than not that we will generate sufficient taxable income in the U.S. to use those net operating loss carryforwards. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust the valuation allowance, which could materially impact our financial position and results of operations.

Foreign currency accounting. The financial position and results of operations of our foreign subsidiaries in the Republic of Moldova are measured using the foreign subsidiaries’ local currency, the Moldovan lei, as the functional currency since that is the currency of the primary environment in which those companies generate their revenues and expenses. Revenues and expenses of such subsidiaries are translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities are translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders’ equity. The amount of future translation gains or losses will be affected by any changes in the exchange rate between the lei and the U.S. dollar.

Although our Moldova subsidiaries incur most of their expenses in the lei, many of their sales are to customers outside of Moldova and are therefore denominated in currencies other than the lei (principally the U.S. dollar). Additionally, our Moldova subsidiaries have certain bank loans that are denominated in U.S. dollars, and make certain purchases that are denominated in U.S. dollars. As required by SFAS No. 52, “Foreign Currency Translation”, at the time of such a U.S dollar denominated transaction the subsidiary records the revenue and related receivable, or the bank debt or other liability, in lei on the basis of the exchange rate in effect on the date of the transaction. However, if the exchange rate between the lei and the currency in which the transaction is denominated changes between the date of the original transaction and the date the resulting receivable is collected or liability is paid, the amount received or paid, when converted to lei, will be different than the receivable or liability originally recorded, resulting in a foreign currency transaction gain or loss which is recorded in the results of operations. Additionally, at the end of each reporting period the lei amounts for the receivables, bank debts and accounts payable of our Moldova subsidiaries that are denominated in U.S. dollars are adjusted to reflect the amount in lei expected to be received or paid when the receivable is collected or the liability settled on the basis of the exchange rate at the end of the period. These adjustments also produce foreign currency transaction gains or losses which are recorded in the results of operations.

As a result, in periods in which the value of the lei increases against the value of the U.S. dollar, we will recognize a net foreign currency transaction gain if our Moldova subsidiaries have U.S. dollar denominated liabilities that exceed their U.S. dollar denominated receivables, or we will incur a net foreign currency transaction loss if our Moldova subsidiaries have U.S. dollar denominated receivables that exceed their U.S. dollar denominated liabilities. Conversely, in periods in which the value of the lei declines against the value of the U.S. dollar, we will incur a net foreign currency transaction loss if our Moldova subsidiaries have U.S. dollar denominated liabilities that exceed their U.S. dollar denominated receivables, or we will recognize a net foreign currency transaction gain if our Moldova subsidiaries have U.S. dollar denominated receivables that exceed their U.S. dollar denominated liabilities. The amount of these gains or losses will depend on the amount, if any, by which the U.S. dollar denominated receivables of our Moldova subsidiaries exceed their U.S. dollar denominated liabilities, or vice versa, and the amount, if any, by which the value of the lei changes against the value of the U.S. dollar. The following table sets forth the exchange rates (expressed in Moldova lei to U.S. $1.00) as of the beginning and end of the three months ended March 31, 2005 and 2004 as quoted by the National Bank of Moldova:


	Three months ended March 31,
	2005	2004
Exchange rate at beginning of period	12.46	13.22
Exchange rate at end of period	12.62	12.41

For the three months ended March 31, 2004 the value of the lei increased 6.1% against the U.S. dollar. We recognized a net foreign currency transaction gain of $249,473 as the amount of the U.S dollar denominated liabilities of our Moldova subsidiaries exceeded the amount of their U.S. dollar denominated receivables. For the three months ended September 30, 2005, the value of the lei decreased 1.3% against the U.S. dollar. We recognized a net foreign currency transaction loss of $83,289, as the amount of the U.S dollar denominated liabilities of our Moldova subsidiaries exceeded the amount of their U.S. dollar denominated receivables.

We cannot predict the amount, if any, by which the lei will increase or decrease in value against the U.S. dollar. Additionally, the amount of the U.S. dollar denominated receivables and liabilities of our Moldova subsidiaries will vary from period to period. At March 31, 2005 the U.S. dollar denominated liabilities of our Moldova subsidiaries exceeded their U.S. dollar denominated receivables by approximately $7.0 million. Assuming no change in the amount by which the U.S. dollar denominated liabilities of our Moldova subsidiaries exceeded their U.S. dollar denominated receivables, a hypothetical 1% increase in the value of the lei against the U.S. dollar would cause us to recognize a net foreign currency transaction gain of $70,000, which a hypothetical 1% decrease in the value of the lei against the U.S. dollar would cause us to recognize a net foreign currency transaction loss of $70,000.

Results of Operations

Three Months Ended March 31, 2005 As Compared To Three Months Ended March 34, 2004

Revenues. Revenues increased by $878,785 or 19.9% to $5,292,976 for the three months ended March 31, 2005 from $4,414,191 for the three months ended March 31, 2004. The increase in revenues was the result of the increase in sales volumes partially offset by a decrease in average prices. Our case sales increased by approximately 124,400 cases, or 27.3% to approximately 580,400 cases for the three months ended March 31, 2005 from approximately 456,000 cases for the three months ended March 31, 2004. The average price of a case decreased from $9.68 for the three months ended March 31, 2004 to $9.12 for the three months ended March 31, 2004. The average price decreased as the result of the shift in the assortment of wines sold during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. The average price per case of bottled wine will vary from quarter to quarter based on the seasonal and other effects on the nature of the wine sold (i.e., higher priced versus lower priced wines, wines sold in larger packages versus wines sold in smaller packages), as well as based on changes in market conditions, as a result of which average per case prices for a single fiscal quarter may not be indicative of trends in average prices that will continue throughout the remainder of the year. In addition, the average price per case as expressed in U.S. dollars may be affected by the percentage of a period’s sales that are not denominated in U.S. dollars and changes in the exchange rate between the U.S. dollar and the currency in which the sale is denominated.

Cost of Sales and Gross Profit. Cost of sales increased by $958,165 or 33.6% to $3,813,929 for the three months ended March 31, 2005 from $2,855,764 for the three months ended March 31, 2004. Gross profit decreased by $79,380 to $1,479,047 for the three months ended March 31, 2005 from $1,558,427 for the three months ended March 31, 2004. The gross profit percentages were 35.3% and 27.9% for the three months ended March 31, 2004 and 2005, respectively. The gross profit percentage decreased for the three months ended March 31, 2005 from the gross profit percentage for the three months ended March 31, 2004 primarily as the result of the increase in certain costs of production, primarily the cost of grapes purchased from independent growers. Our gross profit margin is materially affected by the price we pay to purchase grapes and bulk wine. In the harvest which took place in the fall of 2003 the prices we paid for grapes and bulk wine were generally higher than they were in 2002. The grapes and bulk wine purchased in the fall of 2003 produced some of the wines being marketed by us starting in the second half of fiscal 2004 and are producing wines that are being marketed by us in 2005. If we are not able to increase the prices we charge our distributors to offset this higher cost of grapes and bulk wine, our gross profit percentage may decrease.

Our gross profit margin can also be affected by the mixture of our sales among various package sizes. In general the sales price per equivalent case of wine, and the resulting gross profit, will be lower for larger package sizes. In response to a shift in consumer preference to larger packaging we have over the last several fiscal quarters increased production of wines packaged in 1.5 liter bottles as well as 2 and 3 liter bag-in-the-box packages. This shift in the product mix has resulted in lower prices per equivalent case of wine, as discussed above, and accordingly, lower gross profit. If we are unable to increase the prices we charge our distributors for larger package products, our gross profits could be adversely affected in the future.

Additionally, in response to a shift in consumer preference to red wine we have over the last three years shifted our purchases of grapes and production of wine to increase the percentage that is red wine and decrease the percentage that is white wine. To date this shift in our purchases and production has not adversely affected our gross profit percentages. However, if our decisions concerning the allocation of our purchases of grapes and production of wine between red and white wines fail to match consumer preferences, our gross profit percentage could be adversely affected.

Selling and Administrative Expenses. Selling and administrative expenses decreased by $18,672 or 2.5% to $736,569 for the three months ended March 31, 2005 from $755,241 for the three months ended March 31, 2004. Selling, general and administrative expenses were 17.1% of revenues in the three months ended March 31, 2004 and 13.9% of revenues in the three months ended March 31, 2005. The principal components of the decrease in selling, general and administrative expenses was the decrease resulting from the non-recurring nature of non-cash consulting fees of approximately $232,000 incurred during the three months ended March 31, 2004, partially offset by increases in legal and other professional fees, allowance for doubtful accounts, as well as expenses related to our usage of trademarks owned by the Moldovan government.

Depreciation and Amortization. Depreciation and amortization expense increased to $211,943 for the three months ended March 31, 2005 from $177,963 for the three months ended March 31, 2004 as the result of additions of new equipment during the ongoing renovation of our wineries in 2004. A substantial portion of the additions to our property, plant and equipment during 2004 consisted of costs relating to the development of our vineyards and equipment which was put into service during the three months ended March 31, 2004, at which point we started to depreciate such equipment in accordance with the Company’s accounting policies. This resulted in higher depreciation in 2004 and will result in higher depreciation expense in future periods. The costs relating to the Company’s vineyards will not be depreciated until the vineyards achieve commercial production, which we presently expect to occur in fiscal 2007. See Notes 2 and 5 of Notes to Condensed Consolidated Financial Statements.

Income (loss) from Operations. As a result of the foregoing, our income from operations for the three months ended March 31, 2005 was $530,535 as compared to a $625,223 income from operations for the three months ended March 31, 2004. This decrease was primarily due to decrease in selling prices, the increases in production costs, primarily the prices paid for grapes during 2003 grape harvest season, as well as higher allowance for doubtful accounts and the increase in depreciation expense, discussed above.

Interest Expense. Interest expense decreased by $32,318 or 14.4% to $191,967 for the three months ended March 31, 2005 from $224,285 for the three months ended March 31, 2004. This decrease was primarily due to the decrease in our average levels of debt partially offset by an increase in our average borrowing rate on debt.

Other (Income) Expense. Other expense totaled $41,967 during the three months ended March 31, 2005 as compared to other income of $249,473 during the three months ended March 31, 2004. This change was primarily the result of the foreign currency transaction loss of $83,289 we incurred during the three months ended March 31, 2005 as compared to a foreign currency transaction gain of $249,473 for the three months ended March 31, 2004.

Minority Interest in Income of Subsidiaries. Minority interest in income of subsidiaries represents the portion of the income of S.A. Fabrica de Vinuri din Puhoi, S.A. Orhei-Vin, and S.A. Vitis Hincesti attributable to the portions of those companies owned by others. The minority interest in income of subsidiaries increased from a negative $22,907 for the three months ended March 31, 2004 to $20,201 for the three months ended March 31, 2005 as the result of the higher net income in subsidiaries with smaller ownership by us such as S.A. Orhei Vin and S.A. Vitis Hincesti.

Income Taxes. Income taxes increased from $24,595 for the three months ended March 31, 2004 to $43,916 for the three months ended March 31, 2005. The increase was primarily the result of the increase in deferred income taxes resulting from base differences in fixed assets acquired during 2004. The effective tax rates were 14.8% for the three months ended March 31, 2005 and 3.8% for the three months ended March 31, 2004. The effective tax rates differ from the statutory rates principally due to foreign taxes and the effects of changes in the valuation allowance we have recorded against the deferred tax asset for our net operating loss carryforwards in the U.S. We have recorded a valuation allowance for all of the deferred tax asset related to our net operating loss carryforwards as we cannot currently determine that it is more likely than not that we will generate sufficient taxable income in the U.S. to use those net operating loss carryforwards.

Net Income (loss). As a result of the foregoing, our net income was $232,484 for the three months ended March 31, 2005 as compared to net income of $648,723 for the three months ended March 31, 2004. This decrease primarily resulted from the decrease in the selling prices for our products, the increases in production costs, primarily the prices paid for grapes during 2003 grape harvest season, as well higher allowance for doubtful accounts and the increases in depreciation expense, minority interests in income of subsidiaries and income taxes as discussed above. The decrease in net income was also the result of the $332,762 fluctuation from a foreign currency transaction gain during the three months ended March 31, 2004 to a foreign currency transaction loss during the three months ended March 31, 2005 as discussed above.

Liquidity and Capital Resources

During the three months ended March 31, 2005 and 2004 our operations produced positive cash flows, which we used during both periods to invest in property, plant and equipment and to repay bank loans.

Cash flows from operations were $352,787 for the three months ended March 31, 2005 as compared to the cash flows from operations of $1,434,325 for the three months ended March 31, 2004. The $1,081,538 decrease in our operating cash flows from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily the result of the decline in our operating results, which, decreased from net income of $648,723 for the three months ended March 31, 2004 to net income of $232,484 for the three months ended March 31, 2005. The decrease in cash flows generated by this $416,239 decrease in net

income was supplemented by aggregate cash outflows of $1,118,677 resulting from higher advance payments and lower levels of accounts payable and deferred revenue, and offset by aggregate cash inflows of $903,703 primarily resulting from decreases in trade receivables and inventories as well as the increase in accrued expenses and other current liabilities.

For the three months ended March 31, 2005 we used $217,915 in investing activities to invest in additional production facilities and the development of our vineyards. We financed these investments using cash flows from operations. We also used $133,899 for repayments of short-term debt, which resulted in the use of cash flows by financing activities of $133,899.

For the three months ended March 31, 2004 we used $668,044 in investing activities to invest in additional land for the planting of vineyards and additional production equipment. We financed these investments using cash flows from operations. We also continued to repay our short-term debt and obligations on capital leases, which resulted in the total use of cash flows for financing activities of $807,265.

Our debt capital has been in the form of borrowings secured by inventory and equipment and capital leases. At March 31, 2005 we had an aggregate of approximately $5.4 million of such borrowings, all of which is due in fiscal 2004. Our equipment borrowings are generally secured by specific assets, while our inventory borrowings generally allow us to borrow up to specified percentages of our inventories. Our debt agreements do not contain covenants that require the maintenance of specified financial ratios. We are in compliance with all of the covenants in our debt agreements.

We have no unused lines of credit or other borrowing facilities at March 31, 2005. However, we have been able in the past to re-negotiate with our existing lenders to extend our refinancing of our previous debt or obtain new debt, which will have the effect of increasing the cash flow from operations we can use to finance our capital expenditures. The debt levels we carry generally undergo seasonal changes with higher levels of debt during the third and the forth quarter of a calendar year to support purchases of grapes during grape harvest seasons. The debt levels generally decrease during the first and the second quarter reflecting repayments of debt incurred during the second half of the previous year.

As of March 31, 2005, we had a cash balance of $29,420, and net working capital of $4,812,739. This compares with a cash balance of $7,256 and net working capital of $4,533,436 at December 31, 2004. We currently believe that our existing working capital and the cash flows from our operations will be sufficient to fund our operations and capital expenditures for the remainder of fiscal 2005. However, additional increases in the level of our operations could require additional capital, and there can be no assurance that we would be able to obtain any such additional working capital. If we need additional working capital and are unable to obtain it our operations could be adversely affected.

Off Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements falling within the definition of Item 303(c) of Regulation S-B.

Inflation

To date inflation has not had a material impact on our operations.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities an interpretation of ARB No. 51” (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure provisions of FIN 46 are effective for financial statements initially issued after January 31, 2003. Public entities with a variable interest in a variable interest entity created before February 1, 2003 shall apply the consolidation requirements of FIN 46 to that entity no later than the beginning of the first annual reporting period beginning after June 15, 2003. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. Additionally, in December 2003 the FASB issued FASB Interpretation No. 46R (FIN 46R) to update certain aspects of FASB 46. FIN 46R must be adopted no later than the end of the first interim or annual reporting period ending after March 15, 2004. The adoption of FIN 46 and FIN 46R did not have a material impact on our financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), “Share Based Payment,” which eliminates the use of APB Opinion No. 25 and will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the reward—the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated for the company using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123R (Revised 2004) is effective for the first interim reporting period that begins after January 1, 2006 and must be applied to all options granted or modified after its effective date and also to recognize the cost associated with the portion of any option awards made before its effective date for with the associated service has not been rendered as of its effective date. We are still studying the requirements of SFAS No. 123R (Revised 2004) and have not yet determined what impact it will have on our results of operations and financial position.

ITEM 3. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-QSB (the “Quarterly Report”) our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations the Company’s disclosure controls and procedures as they existed as of March 31, 2005. As defined under Sections l3a-l5(e) and 15d-l5(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, our Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder.

Further, there were no changes in the Company’s internal controls over financial reporting during the fiscal quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

All eight class action complaints have since been dismissed without prejudice, and none of the eight class action complaints are pending.

Shareholder Derivative Suits

Operating Officer Serguei Melnik and Interim Chief Accounting Officer Alex Brinister. Messrs. Jitru and Sirbu provided voluntary testimony in August, 2004, and Messrs. Melnik and Brinister provided voluntary testimony in September, 2004.

On March 29, 2005, the Company received a Wells Notice from the staff of the SEC relating to the Company’s alleged failure to record expenses relating to the May 2003 issuances of 10,000,000 shares of its securities to two of its executive officers and of 100,000 shares to Serguei Melnik. The Wells Notice stated that the SEC staff intends to recommend that a civil or administrative enforcement action be brought against the Company, alleging violations of Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-11 and 13a-13 thereunder. On the same date, Alex Brinister, also received a Wells Notice from the SEC staff also relating to the May, 2003 these share issuances. This Wells Notice stated that the SEC staff intends to recommend that a civil or administrative enforcement action be brought against Mr. Brinister, alleging violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting Asconi’s alleged violations of the Exchange Act, as well as administrative proceedings against Mr. Brinister pursuant to Rule 102(e) of the SEC’s Rules of Practice.

ITEM 6. EXHIBITS.

(a)

Exhibits


Exhibit		Description of Exhibit
3.1		Restated Articles of Incorporation.⁽¹⁾

3.2		Amended and Restated Bylaws.⁽¹⁾

31.1		Rule 13a-14 (a) and15d-14 (a) certification by Constantin Jitaru, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾

31.2		Rule 13a-14 (a) and 15d-14 (a) certification by Anatolie Sirbu, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾

32.1		Certification by Constantin Jitaru, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽²⁾

32.2		Certification by Anatolie Sirbu, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽²⁾

(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB, filed on August 20, 2001, file no. 0-23712.

(2)	Filed herewith.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.


		ASCONI CORPORATION

Date: June 15, 2005		/s/ Constantin Jitaru
		Constantin Jitaru,
		President and Chief Executive Officer
		(Principal Executive Officer)

EXHIBIT INDEX


Exhibit		Description of Exhibit
3.1		Restated Articles of Incorporation.⁽¹⁾

3.2		Amended and Restated Bylaws.⁽¹⁾

31.1		Rule 13a-14 (a) and 15d-14(a) certification by Constantin Jitaru, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾

31.2		Rule 13a-14 (a) and 15d-14 (a) certification by Anatolie Sirbu, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002⁽²⁾

32.1		Certification by Constantin Jitaru, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽²⁾

32.2		Certification by Anatolie Sirbu, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.⁽²⁾

(1)	Incorporated by reference to our Quarterly Report on Form 10-QSB, filed on August 20, 2001, file no. 0-23712.

(2)	Filed herewith.

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