----

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**SECURITIES      AND EXCHANGE COMMISSION**

**FORM      10-Q/A**

**QUARTERLY      REPORT UNDER SECTION 13 OR 15(D)**

**OF      THE SECURITIES EXCHANGE ACT OF 1934**

**FOR      THE QUARTERLY PERIOD ENDED **
**MARCH      31, 2005**

**Q      COMM INTERNATIONAL, INC.**

| Utah                                                                            | 87-0674277                                            |
|---------------------------------------------------------------------------------|-------------------------------------------------------|
| (State                  or other jurisdiction of incorporation or organization) | (I.R.S.                  Employer Identification No.) |
|                                                                            |                                                  |

| Yes | |                  X                  | | No | |___| |
|-----|-----------------------------------------|----|-------|

| Yes | |___| | No | |                  X                  | |
|-----|-------|----|-----------------------------------------|

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**Q          COMM****INTERNATIONAL,          INC.**

**QUARTERLY          REPORT ON FORM 10-Q/A**

**TABLE          OF CONTENTS**

|                           |                                         |                                                                                                                                                                                                            | **PAGE** |
|--------------------------------|----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART                    I**  | **FINANCIAL                    INFORMATION** |                                                                                                                                                                                                            |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           | Item                    1.                   | Financial                    Statements                    (as Restated)                                                                                                                    | 3        |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           |                                         | Unaudited                    Condensed Consolidated Balance Sheets as of March                    31, 2005 and December 31, 2004                                                                                | 4        |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           |                                         | Unaudited                    Condensed Consolidated Statements of Operations and                    Comprehensive Loss for the three months ended March 31, 2005                    and                    2004 | 5        |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           |                                         | Unaudited                    Condensed Consolidated Statements of Cash Flows for                    the three months ended March 31, 2005 and 2004                                                              | 6        |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           |                                         | Notes                    to Unaudited Condensed Consolidated Financial                    Statements                                                                                                            | 7        |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           | Item                    2.                   | Management's                    Discussion and Analysis of Financial Condition                    and Results of Operations                                                                                     | 16       |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           | Item                    4.                   | Controls                    and Procedures                                                                                                                                                                      | 27       |
|                           |                                         |                                                                                                                                                                                                            |     |
| **PART                    II** | **OTHER                    INFORMATION**     |                                                                                                                                                                                                            |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           | Item                    1.                   | Legal                    Proceedings                                                                                                                                                                            | 28       |
|                           |                                         |                                                                                                                                                                                                            |     |
|                           | Item                    6.                   | Exhibits                    and Reports on Form 8-K                                                                                                                                                             | 28       |
|                           |                                         |                                                                                                                                                                                                            |     |
| **SIGNATURES**                 | 30                                           |

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**PART            I - FINANCIAL INFORMATION**

**Item            1****.            Financial Statements**

Overview              of Restatement:

 

Restatement              Overview

 

The              Company has filed this amended              Form 10-Q (“Form 10-Q/A”) for the quarter ended March 31, 2005 for the following              reasons: (1)in response to a comment from the SEC alerting us that              our revenue              recognition policy relating to sales of consigned PINs was not in accordance              with Emerging Issues Task Force Issue No. 99-19, (2)in response to              a comment              from the SEC requiring us to separately identify the amount of terminal              depreciation and software development amortization included in the              caption “Cost              of Goods Sold” in the Statements of Operations, and (3)corrections required as a              result of the facts described in the Company’s Form 8-K filed on June 22, 2005              and as described further below.

 

Revenue              Recognition for Consigned              PIN Sales. The Company has restated revenue for all consigned PIN-based              products              from a “gross” to “net” basis in accordance with Revenue  Recognition               in Financial  Statements  and Emerging  Issues              Task Force Issue              No. 99-19.  As a result, revenue was reduced by $6,826,632 from              $15,303,892              to $8,477,260  for the period ended March 31, 2005 and revenue              was reduced              by $5,770,596 from $8,487,830 to $2,717,234 for the period ended March              31, 2004.              The reduction in revenue has no impact on our net loss, net loss per              common              share, or stockholders’ equity in the years presented because there is a              corresponding reduction reflected in the captions “Cost of Goods Sold” and“Commissions and Fees” in the same years.  Cost of Goods Sold for periods              ended March 31, 2004 and 2003 was reduced by $5,730,779 and $4,656,021,              respectively. Commissions and Fees for periods ended March 31, 2004              and 2003 was              reduced by $1,095,853 and $1,114,575, respectively.

 

Cost              of Goods Sold              Clarification.  In the Company’s Statements of Operations, it has              separately identified the terminal depreciation and software amortization              costs              attributable to Cost of Goods Sold. These costs are referenced in a              footnote to              the Statements of Operations. This change to provide additional information              had              no impact on net loss, net loss per common share, or stockholders’ equity.              Terminal depreciation and software development amortization totaled              $434,258 and              $382,815 for 2004 and 2003, respectively.

 

During              2004, the Company’s former              CFO entered into a transaction without authorization and acted to hide              the              transaction from the Company’s CEO and other members of management, the Board of              Directors, and the Company’s auditors by knowingly making false statements and              intentionally altering documents. This transaction included using Company              funds              to make a $1,525,000 deposit with a third-party vendor for 30,000 Nokia              3300              handsets. Company records were falsified to present $925,000 of this              deposit as              cash. The remaining $600,000 was reserved for at year-end as the Company              believed that portion of the receivable would not be recovered. The              consolidated              balance sheet at December 31, 2004 has been restated to reclassify              $925,000 of              cash as a deposit to the vendor. Only 20,650 of the handsets were actually              received by the Company and the corresponding loss of $600,000 has              been              reclassified from General and Administrative Expense to Cost of Goods              Sold in              the restated consolidated financial statements.

 

In              the Course of this unauthorized              transaction, the $1,525,000 deposit was never repaid.  On July              1, 2005, the              Company formally took ownership of the 20,650 handsets. Also subsequent              to              December 31, 2004, the vendor to whom the deposit was made sold or              took              possession of approximately 9,000 of the handsets without reimbursing              the              Company.  The Company is taking legal action to recover the              value of these              handsets and all losses sustained by the Company in this transaction.               There can be no assurance the Company will successfully recover these              losses              from either the vendor or the former CFO. Subsequent to taking possession              of the              handsets, the Company has sold 6,650_handsets at $31 per handset and              has firm              commitments to sell the remaining 14,000 handsets at $31 per handset.               No              additional losses are expected from this transaction. The Company’s Audit              Committee hired a forensic investigator to inquire into all of these              matters and              believes a thorough and complete investigation has been undertaken              to              date.  

  

At              December 31, 2004, these              restatements had no effect on total assets, net loss, net loss per              common share,              and stockholders’ equity.  They did have the following effect on revenue,              cost of goods sold, general and administrative expenses, cash and deposits:              

  

At              March              31, 2005, these restatements reduced total assets by $285,005 and generated              an              equivalent net loss and reduction stockholders’ equity. The $285,000 net loss              increase the net loss per common share by ($0.06). The restatement              had the              following effect on total assets, revenue and net income: 

 

|                                          |   | Original

March                        31,

2005 |        | Restated

March                        31,

2005 |   | Original

March                        31,

2004 |    | Restated

March                        31,

2004 |        | Original

December                        31,

2004 |   | Restated

December                        31,

2004 |    |
|-----------------------------------------------|--------|--------------------------------------------------|-------------|--------------------------------------------------|--------|--------------------------------------------------|---------|--------------------------------------------------|-------------|-----------------------------------------------------|--------|-----------------------------------------------------|---------|
| Total Assets                                  |   | $                                                | 10,305,224  |                                             | $      | 10,020,219                                       |    |                                             | N/A         |                                                |   | N/A                                                 |    | $ | 10,288,841 |   | $ | 10,288,841 |   |
| Revenues                                      |   | $                                                | 15,303,892  |                                             | $      | 8,477,260                                        |    | $                                                | 8,487,830   |                                                | $      | 2,717,234                                           |    | $ | 40,801,841 |   | $ | 16,576,323 |   |
| Net Income                                    |   |                                             | ($1,296,583 | )                                                |   | ($1,581,588                                      | )       |                                             | ($1,346,499 | )                                                   |   | ($1,346,499                                         | )       |   | ($6,832,808 | ) |   | ($6,832,808 | ) |
|  Earnings                      Per Share |   | $                                                | (.26        | )                                           | $      | (.32                                             | )  | $                                                | (.34        | )                                              | $      | (.34                                                | )  |   |   |   |   |   |   |

 

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**Q****COMM            INTERNATIONAL, INC. AND SUBSIDIARIES**

**UNAUDITED            CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                 |   | March                      31,2005(As                      Restated) |                                | December                      31, 2004(As                      Restated) |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-------------------------------------|--------------------------------------------------------------------------|--------|
| **ASSETS**                                                                                                                                                                           |   |
| **Current                      Assets:**                                                                                                                                             |   |                                                                 |                                     |                                                                     |   |  |   |
| Cash                                                                                                                                                                                 |   | $                                                                    | 402,852                             |                                                                     | $      | 773,052 |   |
| Trade                      accounts receivable, net                                                                                                                                  |   |                                                                 | 998,887                             |                                                                     |   | 895,388 |   |
| Other                      receivables, net                                                                                                                                          |   |                                                                 | -                                   |                                                                     |   | 61,434 |   |
| Inventory,                      net                                                                                                                                                  |   |                                                                 |                        918,586 |                                                                     |   | 1,081,637 |   |
| Deposit                      on handsets, net                                                                                                                                        |   |                                                                 | 639,995                             |                                                                     |   | 925,000 |   |
| Prepaid                      expenses                                                                                                                                                |   |                                                                 | 296,849                             |                                                                     |   | 156,375 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Current Assets                                                                                                                                            |   |                                                                 | 3,257,169                           |                                                                     |   | 3,892,886 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **Property                      and Equipment, net**                                                                                                                                 |   |                                                                 | 4,924,671                           |                                                                     |   | 4,382,953 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **Other                      Assets:**                                                                                                                                               |   |                                                                 |                                     |                                                                     |   |  |   |
| Restricted                      cash                                                                                                                                                 |   |                                                                 | 524,928                             |                                                                     |   | 510,692 |   |
| Capitalized                      software development costs, net                                                                                                                     |   |                                                                 | 866,803                             |                                                                     |   | 1,052,344 |   |
| Goodwill                                                                                                                                                                             |   |                                                                 | 144,580                             |                                                                     |   | 144,580 |   |
| Deposits                                                                                                                                                                             |   |                                                                 | 149,740                             |                                                                     |   | 149,719 |   |
| Definite-lived                      intangible assets, net                                                                                                                           |   |                                                                 | 152,328                             |                                                                     |   | 166,667 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Other Assets                                                                                                                                              |   |                                                                 | 1,838,379                           |                                                                     |   | 2,024,002 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Assets                                                                                                                                                    |   | $                                                                    | 10,020,219                          |                                                                     | $      | 10,299,841 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **LIABILITIES                      AND STOCKHOLDERS' EQUITY**                                                                                                                        |
| **Current                      Liabilities:**                                                                                                                                        |   |                                                                 |                                     |                                                                     |   |  |   |
| Accounts                      payable                                                                                                                                                |   | $                                                                    | 1,247,017                           |                                                                     | $      | 1,525,634 |   |
| Accrued                      expenses                                                                                                                                                |   |                                                                 | 385,362                             |                                                                     |   | 281,302 |   |
| Notes                      payable - related party                                                                                                                                   |   |                                                                 | 500,000                             |                                                                     |   | - |   |
| Capital                      lease obligations - current portion                                                                                                                     |   |                                                                 | 492,410                             |                                                                     |   | 490,374 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Current Liabilities                                                                                                                                       |   |                                                                 | 2,624,789                           |                                                                     |   | 2,297,310 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **Capital                      Lease Obligations, net of current portion**                                                                                                           |   |                                                                 | 261,446                             |                                                                     |   | 382,745 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Liabilities                                                                                                                                               |   |                                                                 | 2,886,235                           |                                                                     |   | 2,680,055 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **Commitments                      and Contingencies (Notes 6, 7, 11, and 13)**                                                                                                      |   |                                                                 |                                     |                                                                     |   |  |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| **Stockholders'                      Equity:**                                                                                                                                       |   |                                                                 |                                     |                                                                     |   |  |   |
| Common                      stock, $.001 par value; 50,000,000 shares authorized, 5,087,794                      and                      4,859,044 shares outstanding, respectively |   |                                                                 | 5,088                               |                                                                     |   | 4,859 |   |
| Additional                      paid-in capital                                                                                                                                      |   |                                                                 | 28,448,313                          |                                                                     |   | 27,333,779 |   |
| Accumulated                      deficit                                                                                                                                             |   |                                                                 | (21,356,811                         | )                                                                        |   | (19,775,223 | ) |
| Accumulated                      other comprehensive income                                                                                                                          |   |                                                                 | 48,162                              |                                                                     |   | 67,139 |   |
| Stock                      subscription receivable                                                                                                                                   |   |                                                                 | (10,768                             | )                                                                        |   | (10,768 | ) |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Stockholders' Equity                                                                                                                                      |   |                                                                 | 7,133,984                           |                                                                     |   | 7,619,786 |   |
|                                                                                                                                                                                 |   |                                                                 |                                     |                                                                     |   |  |   |
| Total                      Liabilities and Stockholders' Equity                                                                                                                      |   | $                                                                    | 10,020,219                          |                                                                     | $      | 10,299,841 |   |

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**Q            COMM****INTERNATIONAL,            INC. AND SUBSIDIARIES**

**UNAUDITED            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE            LOSS**

|                                                                                                         |   | For                      the Three Months EndedMarch                      31, |       |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|
|                                                                                                         |   | 2005(As                      Restated)                                        |       | 2004(As                      Restated) |   |
|                                                                                                         |   |                                                                          |       |   |   |
| **Revenues**                                                                                                 |   | $                                                                             | 8,477,260  |   | $ | 2,717,234 |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Operating                      Expenses:**                                                                 |   |                                                                          |            |   |   |  |   |
| Cost                      of goods sold (exclusive of items shown separately below                      (1)) |   |                                                                          | 6,455,938  |   |   | 1,518,507 |   |
| Commissions                      and fees                                                                    |   |                                                                          | 1,832,093  |   |   | 910,332 |   |
| Selling                                                                                                      |   |                                                                          | 227,365    |   |   | 142,697 |   |
| General                      and administrative                                                              |   |                                                                          | 1,046,258  |   |   | 782,639 |   |
| Depreciation                      and amortization                                                           |   |                                                                          | 483,535    |   |   | 399,191 |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| Total                      Operating Expenses                                                                |   |                                                                          | 10,045,189 |   |   | 3,753,366 |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Loss                      from Operations**                                                                |   |                                                                          | (1,567,929 | ) |   | (1,036,132 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Other                      Income (Expense):**                                                             |   |                                                                          |            |   |   |  |   |
| Interest                      income                                                                         |   |                                                                          | 6,740      |   |   | 13,948 |   |
| Interest                      and other expense                                                              |   |                                                                          | (20,399    | ) |   | (324,315 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| Total                      Other (Expense), net                                                              |   |                                                                          | (13,659    | ) |   | (310,367 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Loss                      Before Income Tax Provision (Benefit)**                                          |   |                                                                          | (1,581,588 | ) |   | (1,346,499 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Income                      Tax Provision (Benefit)**                                                      |   |                                                                          | -          |   |   | - |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Net                      Loss**                                                                            |   | $                                                                             | (1,581,588 | ) | $ | (1,346,499 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Basic                      and Diluted Net Loss per Common Share**                                         |   | $                                                                             | (.32       | ) | $ | (.34 | ) |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Basic                      and Diluted Weighted Average Common Shares                      Outstanding**   |   |                                                                          | 4,978,000  |   |   | 3,995,000 |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Other                      Comprehensive Loss:**                                                      |   |                                                                          |            |   |   |  |   |
| Net                      loss                                                                                |   | $                                                                             | (1,581,588 | ) | $ | (1,346,499 | ) |
| Foreign                      currency translation adjustment                                                 |   |                                                                          | (18,977    | ) |   | - |   |
|                                                                                                         |   |                                                                          |            |   |   |  |   |
| **Other                      Comprehensive Loss**                                                            |   | $                                                                             | (1,600,565 | ) | $ | (1,346,499 | ) |

| (1) | Excludes                      $434,258 and $382,815 of depreciation on terminals and amortization                      of                      capitalized software development costs applicable to cost of                      goods sold                      for the periods ended March 31, 2005 and March 31, 2004,                      respectively.  |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Q            COMM **
**INTERNATIONAL,            INC. AND SUBSIDIARIES**

**UNAUDITED            CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

|                                                                                                                  |   | For                      the Three Months EndedMarch                      31, |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|------------|
|                                                                                                                  |   | 2005(As                      Restated)                                        |       | 2004(As                      Restated) |   |
| **Cash                      Flows from Operating Activities:**                                                        |   |                                                                          |       |   |   |
| Net                      loss                                                                                         |   | $                                                                             | (1,581,588 | ) | $ | (1,346,499 | ) |
| Adjustments                      to reconcile net loss to net cash used by operating                      activities: |   |                                                                          |            |   |   |  |   |
| Loss                      on sale or disposal of property and equipment                                               |   |                                                                          | 22,308     |   |   | - |   |
| Provision                      for doubtful accounts                                                                  |   |                                                                          | 50,000     |   |   | 30,000 |   |
| Depreciation                      and amortization                                                                    |   |                                                                          | 483,535    |   |   | 399,191 |   |
| Loss                      on deposit for handset inventory                                                            |   |                                                                          | 285,005    |   |   |   |   |
| Amortization                      of discount on debentures and notes                                                 |   |                                                                          | -          |   |   | 300,947 |   |
| Change                      in assets and liabilities:                                                                |   |                                                                          |            |   |   |  |   |
| Receivables                                                                                                           |   |                                                                          | (93,195    | ) |   | (86,690 | ) |
| Inventory                                                                                                             |   |                                                                          | 161,385    |   |   | (584,612 | ) |
| Prepaid                      expenses                                                                                 |   |                                                                          | (140,474   | ) |   | - |   |
| Other                      assets                                                                                     |   |                                                                          | (66        | ) |   | 2,737 |   |
| Accounts                      payable                                                                                 |   |                                                                          | (275,862   | ) |   | 224,781 |   |
| Accrued                      expenses                                                                                 |   |                                                                          | 103,994    |   |   | 72,405 |   |
| Contingent                      liabilities                                                                           |   |                                                                          | -          |   |   | (70,000 | ) |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| Net                      Cash Used by Operating Activities                                                            |   |                                                                          | (984,958   | ) |   | (1,057,740 | ) |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Cash                      Flows from Investing Activities:**                                                        |   |                                                                          |            |   |   |  |   |
| Changes                      in restricted cash                                                                       |   |                                                                          | (14,236    | ) |   | 1,450,583 |   |
| Purchase                      of property and equipment                                                               |   |                                                                          | (814,857   | ) |   | (511,557 | ) |
| Capitalized                      software development costs                                                           |   |                                                                          | (26,874    | ) |   | (82,187 | ) |
| Purchase                      of intangible assets                                                                    |   |                                                                          | (6,494     | ) |   | - |   |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| Net                      Cash (Used in) Provided by Investing Activities                                              |   |                                                                          | (862,461   | ) |   | 856,839 |   |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Cash                      Flows from Financing Activities:**                                                        |   |                                                                          |            |   |   |  |   |
| Issuance                      of common stock                                                                         |   |                                                                          | 1,114,763  |   |   | - |   |
| Cash                      received from subscription receivable                                                       |   |                                                                          | -          |   |   | 16,152 |   |
| Proceeds                      from issuance of related party notes payable                                            |   |                                                                          | 500,000    |   |   | - |   |
| Payments                      on convertible notes payable                                                            |   |                                                                          | -          |   |   | (1,230,000 | ) |
| Principal                      payments on capital lease obligations                                                  |   |                                                                          | (119,263   | ) |   | (7,013 | ) |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| Net                      Cash Provided by (Used in) Financing Activities                                              |   |                                                                          | 1,495,500  |   |   | (1,220,861 | ) |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Net                      Decrease in Cash**                                                                         |   |                                                                          | (351,919   | ) |   | (1,421,762 | ) |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Effect                      of Foreign Exchange Rates on Cash**                                                     |   |                                                                          | (18,281    | ) |   | - |   |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Cash,                      Beginning of Period**                                                                    |   |                                                                          | 773,052    |   |   | 5,524,774 |   |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Cash,                      End of Period**                                                                          |   | $                                                                             | 402,852    |   | $ | 4,103,012 |   |
|                                                                                                                  |   |                                                                          |            |   |   |  |   |
| **Supplemental                      Disclosures of Cash Flow Information:**                                           |   |                                                                          |            |   |   |  |   |
| Cash                      paid during the period for:                                                                 |   |                                                                          |            |   |   |  |   |
| Interest                                                                                                              |   | $                                                                             | 19,106     |   | $ | 92,047 |   |

----

 

 **Q COMM****INTERNATIONAL, INC. AND              SUBSIDIARIES**

**NOTES              TO              UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT              ACCOUNTING POLICIES**

 

**Nature              of              Business** - The Company's business involves purchasing and reselling              prepaid telecommunication and other products through a proprietary              electronic              point-of-sale activation system known as Qxpress. The Company provides              its              products to end users throughout the United States as well as Canada,              France,              Australia and the Bahamas. The Company has not paid any dividends and              any              dividends that may be paid in the future will depend upon the financial              requirements of the Company and other relevant factors. The Company              is              headquartered in Orem, Utah. In July 2004, the Company acquired Point              de Vente              (PDV), a company located in Quebec, Canada, through the acquisition              of 100% of              its stock. Approximately 95% of the Company’s revenues are generated in the              United States.

 

**Unaudited              Condensed              Consolidated Financial Statements** - The accompanying financial              statements have been prepared by the Company without audit. In the              opinion of              management, all adjustments (which include only normal recurring adjustments)              necessary to present fairly the financial position, results of operations              and              cash flows as of the balance sheet dates, and for periods presented,              have been              made. 

 

Certain information              and              footnote disclosures normally included in financial statements prepared              in              accordance with U.S. generally accepted accounting principles have              been              condensed or omitted. These condensed financial statements should be              read in              conjunction with the financial statements and notes thereto included              in the              Company's December 31, 2004 Form 10-KSB/A. The results of operations              for the              three months ended March 31, 2005 are not necessarily indicative of              the              operating results for the full year. 

 

**Consolidation**              - The consolidated financial statements include the accounts of Q Comm              International, Inc. and its wholly owned subsidiaries, Q Comm, Inc.              and PDV. All              intercompany balances and transactions have been eliminated in consolidation.              

 

**Accounting              Estimates** - The preparation of financial statements in conformity              with U.S. generally accepted accounting principles requires management              to make              estimates and assumptions that affect the reported amounts of assets              and              liabilities, the disclosures of contingent assets and liabilities at              the date of              the financial statements, and the reported amounts of revenues and              expenses              during the reporting periods. Actual results could differ from those              estimates.  Key estimates in the accompanying consolidated financial              statements include, among others, allowances for doubtful accounts              receivable,              allowances for obsolete inventory, impairments of long-lived tangible              and              intangible assets, and accruals for litigation and contingencies.

 

**Cash              Equivalents** - For purposes of financial reporting, the Company              considers all highly liquid debt investments purchased with an original              maturity              of three months or less to be cash equivalents. 

 

**Receivables**              - Accounts receivable consist of trade receivables arising in the normal              course              of business.  At March 31, 2005 and December 31, 2004, the Company              established an allowance for doubtful accounts of $269,175 and $336,931,              respectively, which reflects the Company's best estimate of probable              losses for              uncollectible accounts. The Company determines the allowance based              on the status              and age of the accounts, historical experience, and other currently              available              evidence. Amounts written off as bad debt expense for the periods presented              were              insignificant. 

 

**Inventory**              - Inventory  consists of  prepaid  telecommunication               products sold by the  Company  and is carried at the              lower of cost or              market  value using the  first-in,  first-out               method.               Inventory is carried net of an allowance for obsolescence of approximately              $374,000 and $377,000 as of March 31, 2005 and December 31, 2004,              respectively.  In January 2005, a vendor sold or took possession              of              approximately 9,000 handsets without reimbursing the Company.               The              Company  has expensed this missing inventory and recorded a              receivable from              the vendor, against which it has provided a 100% reserve.  The              Company is              pursuing litigation against the vendor (see Part II, Item 1).

  

**Depreciation**              - Depreciation of property and equipment is provided using the straight-line              method over the estimated useful lives of the assets of three to five              years.

 

**Prepaid**              -              Prepaid expenses at March 31, 2005 include approximately $258,000 for              advanced              payments on PIN inventory plus other additional prepaid expenses.

 

**Deposits              on              Handsets** - Deposits on handsets consist of advanced payments made              for Nokia 3300 handsets.  The Company has a valuation allowance              of $600,000              relating to the deposits on handsets.

 

----

  

**Q            COMM            INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES            TO            UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT            ACCOUNTING POLICIES (Continued)**

 

**Intangible            Assets** - The Company accounts for intangible assets under the            provisions of Statement of Financial Accounting Standards No. 142, "Goodwill            and            Other Intangible Assets" (SFAS No. 142). The Company does not record            amortization on goodwill. 

 

The Company capitalizes            software development costs incurred to develop certain of the Company's            products            and services in accordance with Statement of Position 98-1, "Accounting            for the            Costs of Computer Software Developed or Obtained for Internal Use" (SOP            98-1).            Costs are capitalized only after the technological feasibility of the            project            has been established. In accordance with SFAS No. 142, the Company has            recorded            its software development costs as a definite-lived intangible asset and            is            amortizing these costs over the three-year estimated useful life of the            software. 

 

**Impairment            of            Long-lived Assets****-**In accordance with SFAS No.            144,* *“Accounting for the Impairment or Disposal of Long-Lived            Assets,” long-lived assets, such as property and equipment, and purchased            intangibles subject to amortization, are reviewed for impairment whenever            events            or changes in circumstances indicate that the carrying amount of an asset            may            not be recoverable. Recoverability of assets to be held and used is measured            by            a comparison of the carrying amount of an asset or asset group to undiscounted            future cash flows expected to be generated by the asset. If the carrying            amount            of an asset or asset group exceeds its estimated future undiscounted            cash flows,            an impairment charge is recognized for the amount by which the carrying            amount            of the asset exceeds the fair value of the asset. 

 

**Fair Value            of            Financial Instruments****-**The carrying values            reported in the accompanying condensed consolidated financial statements            for            accounts receivable, other receivables, and accounts payable approximate            fair            values because of the immediate or short-term maturities of these financial            instruments. The carrying values of capital lease and notes payable obligations            also approximate their fair value based on current interest rates and            the length            of time of repayment of the obligations.

 

**Revenue            Recognition** - The Company uses two models to generate revenues: the            broker model and the service bureau model. Under the broker model, which            has            been and continues to be the dominant alternative, the Company sells            its prepaid            products through third-party retail locations. Revenue is recognized            at the time            products are sold. Sales of the Company's products are generally made            directly            to end-users. There is no right of return for products sold and the Company            is            not obligated for further performance after the sale. These sales transactions            are accounted for at "gross" since the Company meets the requirements            specified            by Securities and Exchange Commission Staff Accounting Bulletin No. 104            (SAB            104) and Emerging Issues Task Force Issue No. 99-19 (EITF 99-19). In            cases where            the Company does not own the product sold and another entity retains            such risk            and reward of product ownership or where certain other requirements of            SAB 104            or EITF 99-19 are not met, the Company records revenues on a "net" basis.

 

The Company uses the            service            bureau model primarily with  international customers.             In this            model,  the Company  licenses its  proprietary             software and            sells its point-of-sale  terminals. The customer is responsible            for            operation of the system and providing  services to its retail            stores. The            Company receives an ongoing transaction fee for all sales through the            system,            which is recorded on a "net" basis.

 

**Cost of            Goods            Sold** - Cost of goods sold consists primarily of the costs of            the            prepaid telecommunication and other miscellaneous products sold at retail            and            terminals sold to customers. The full cost of the product, as well as            all direct            costs associated with the sale of the product, is recorded at the time            of sale.            Cost of goods sold does not include commissions and fees paid to brokers            and            other intermediaries transaction processing fees paid to a third            party and            depreciation on terminals in use and amortization expense on capitalized            software. Those costs are recorded separately in operating expenses.            For the            three months ended March 31, 2005 and March 31, 2004 there was $434,258            and            $382,815, respectively, of depreciation onterminals and amortization            of            capitalized software development costs that is considered related to            cost of            goods sold. These amounts are included in depreciation and amortization            expense            in the accompanying unaudited consolidated statements of operations and            comprehensive loss.

 

 

----

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT      ACCOUNTING POLICIES (Continued)**

 

**Net Loss Per Common      Share** - The Company computes net loss per common share in accordance      with Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"      which requires the Company to present basic earnings per share and dilutive      earnings per share when the effect of options/warrants and convertible notes      is      dilutive. Because the Company incurred losses for the three months ended March      31, 2005 and 2004, the effect of options/warrants and convertible notes totaling      2,511,243 and 2,377,076 equivalent shares, respectively, has been excluded      from      the net loss per common share computation since its impact would be      antidilutive. 

 

**Income Taxes**      - The Company accounts for income taxes in accordance with Statement of      Financial Accounting Standards No. 109, "Accounting for Income Taxes." This      statement requires an asset and liability approach for accounting for income      taxes. The Company had available at March 31, 2005, net operating loss carry      forwards of approximately $17,235,000, which may be applied against future      taxable income, if any, and which expire in various years through 2024.

 

**Advertising -**Advertising      costs are expensed as incurred. Advertising costs totaled      $18,860 and $5,561 for the ended March 31, 2005 and 2004, respectively. 

 

**Restricted      Cash** - Restricted cash of $524,928 at March 31, 2005 and $510,692 at      December 31, 2004, is maintained to support letters of credit covering capital      lease arrangements and to secure a bank account used for processing automated      clearinghouse transactions. In order to secure the bank account, the Company      must maintain a balance of 2% of the previous month’s total transactions      processed through the account. 

 

**Stock Options**      - In December 2003, the Financial Accounting Standards Board (FASB) issued      SFAS      No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure,      an amendment of FASB Statement No. 123". This Statement amends SFAS No. 123      to      provide alternative methods of transition for a voluntary change to the fair      value method of accounting for stock-based employee compensation. In addition,      SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require      prominent disclosures in both annual and interim financial statements. 

 

The Company has stock option      plans that provide for stock-based employee compensation, including the granting      of stock options, to certain key employees. The plans are more fully described      in Note 9. The Company accounts for grants to employees and directors under      its      stock option plans in accordance with the recognition and measurement principles      of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related      Interpretations. Under this method, compensation expense is recorded on the      date      of grant only if the current market price of the underlying stock exceeded      the      exercise price. 

 

During the periods presented      in the accompanying financial statements, the Company has granted options under      its 2000, 2003 and 2004 defined stock options plans. The Company has adopted      the      disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost      has been recognized for grants of options to employees and directors in the      accompanying statements of operations and comprehensive income. Had compensation      cost for the Company's stock option plans and agreements been determined based      on the fair value at the grant date for awards in 2005 and 2004 consistent      with      the provisions of SFAS No. 123, the Company's net loss and basic net loss per      common share would have been increased to the pro forma amounts indicated below:      

 

----

 

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT      ACCOUNTING POLICIES (Continued)**

 

|                                                                                                                                                                            |   | For                the                Three Months Ended

March                31, |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                            |   | 2005

(As                Restated)                                                 |       | 2004

(As                Restated) |   |
| Net loss, as reported                                                                                                                                                           |   | $                                                                                  | (1,581,588 | ) | $ | (1,346,499 | ) |
| Plus stock-based employee compensation                expense included in reported net loss, net of related tax effects                                                         |   |                                                                               | -          |   |   | - |   |
| Less stock-based employee compensation                expense determined under fair value based method for all awards,                net of                related tax effects |   |                                                                               | (183,443   | ) |   | (161,785 | ) |
|                                                                                                                                                                            |   |                                                                               |       |   |   |   |   |
| Pro forma net loss                                                                                                                                                              |   | $                                                                                  | (1,765,031 | ) | $ | (1,508,284 | ) |
|                                                                                                                                                                            |   |                                                                               |       |   |   |   |   |
| Basic net loss per common share, as                reported                                                                                                                     |   | $                                                                                  | (.32       | ) | $ | (.34 | ) |
| Pro forma net loss per common share                                                                                                                                             |   | $                                                                                  | (.36       | ) | $ | (.38 | ) |

 

**Translation of      Foreign Currencies** - The Company transacts business in Canadian      dollars through its wholly owned subsidiary, Point de Vente. The foreign      subsidiary uses its local currency as the functional currency. Consequently,      assets and liabilities of the foreign subsidiary have been translated to U.S.      dollars using period-end exchange rates. Income and expense items have been      translated at the average rate of exchange during the period. Any adjustment      resulting from translating the financial statements of the foreign subsidiary      is      reflected as accumulated other comprehensive income, which is a component of      stockholders’ equity.

 

**NOTE 2 - PROPERTY AND EQUIPMENT**

 

The following is a summary      of      property and equipment: 

|   |
|--------|

 

|                                                                                            |   | March                31,

2005 |       | December                31,

2004 |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|-----------------------------------|--------|
| Point of sale terminals and related                items -                in service            |   | $                              | 3,188,132  |                              | $      | 2,987,184 |   |
| Office and computer equipment                                                                   |   |                           | 371,820    |                              |   | 341,140 |   |
|                                                                                            |   |                           |       |                              |   |   |   |
| Total cost of depreciable equipment                                                             |   |                           | 3,559,952  |                              |   | 3,328,324 |   |
| Accumulated depreciation and                amortization                                        |   |                           | (1,520,606 | )                                 |   | (1,280,770 | ) |
|                                                                                            |   |                           |       |                              |   |   |   |
| Property and equipment in service,                net                                           |   |                           | 2,039,346  |                              |   | 2,047,554 |   |
| Point of sale terminals and related                items -                not placed in service |   |                           | 2,604,569  |                              |   | 2,054,643 |   |
| Parts deposits held by manufacturers                                                            |   |                           | 280,756    |                              |   | 280,756 |   |
|                                                                                            |   |                           |       |                              |   |   |   |
| Total                                                                                           |   | $                              | 4,924,671  |                              | $      | 4,382,953 |   |

 

Point of sale terminals held      by the Company in property and equipment will either be sold to customers or      placed in service with the Company retaining ownership. The Company begins      depreciating terminals it owns at the time they are shipped to the broker or      retailer. Depreciation expense for the three months ended March 31, 2005 and      March 31, 2004 was $250,287 and $181,927, respectively. 

 

 

----

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3 - GOODWILL AND DEFINITE-LIVED      INTANGIBLE ASSETS**

 

Goodwill consisted of the      following at each of March 31, 2005 and December 31, 2004:

 

| Goodwill related to acquisition in                2000                                  |   | $      | 224,561 |   |
|-----------------------------------------------------------------------------------------|--------|--------|---------|--------|
| Less accumulated amortization recorded                prior to adoption of SFAS No. 142 |   |   | (79,981 | )      |
| Net goodwill                                                                            |   | $      | 144,580 |   |

 

In accordance with SFAS No.      142, goodwill is no longer amortized. 

 

The Company purchased      approximately 300 customer accounts in August 2004 and purchased additional      customers in the quarter ending March 31, 2005. The cost of the accounts      acquired is categorized as a definite-lived intangible asset and is being      amortized over two years on a straight-line basis. Information related to      purchased intangible assets at March 31, 2005 and December 31, 2004 is as      follows: 

 

|                          |   | March                31,

2005 |    | December                31,

2004 |   |
|-------------------------------|--------|--------------------------------|---------|-----------------------------------|--------|
| Purchase price of accounts    |   | $                              | 206,494 |                              | $      | 200,000 |   |
| Less accumulated amortization |   |                           | (54,166 | )                                 |   | (33,333 | ) |
| Net intangible assets         |   | $                              | 152,328 |                              | $      | 166,667 |   |

 

Amortization expense for the      three months ended March 31, 2005 and 2004 was $20,833 and $0, respectively.      

 

**NOTE 4 - CAPITALIZED SOFTWARE DEVELOPMENT      COSTS**

 

Information related to      capitalized software development costs at March 31, 2005 and December 31, 2004      and for the periods then ended is as follows: 

 

 

|                                                                                |   | For                the                three months ended March 31, 2005 |       | For                the                year ended December 31, 2004 |   |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|--------|
| Capitalized software development costs,                beginning of period          |   | $                                                                       | 2,548,986  |                                                               | $      | 2,262,249 |   |
| Additional costs capitalized during                the                period        |   |                                                                    | 26,874     |                                                               |   | 286,737 |   |
| Capitalized software development costs,                end                of period |   |                                                                    | 2,575,860  |                                                               |   | 2,548,986 |   |
| Accumulated amortization                                                            |   |                                                                    | (1,709,057 | )                                                                  |   | (1,496,642 | ) |
| Capitalized software development costs,                net                          |   | $                                                                       | 866,803    |                                                               | $      | 1,052,344 |   |

 

Included within capitalized      software development costs at March 31, 2005 is approximately $1,100,000 paid      to      third-party software development companies and other outside entities. The      remaining costs are internal costs, which are primarily employee salaries and      benefits, and related capitalized interest of approximately $100,000 recorded      during the time the project was under development. 

 

The Company regularly tests      capitalized software development costs for impairment in accordance with SFAS      No. 142. The Company uses the estimated future undiscounted cash flows related      to its capitalized software development costs and has determined that these      costs were not impaired. The Company amortizes capitalized software development      costs over a three-year period. During the ended March 31, 2005 and 2004, the      Company recorded amortization expense of $212,415 and $217,264,      respectively.

 

 

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**Q        COMM        INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES        TO        UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5 - RELATED PARTY        OBLIGATION**

 

The Company received $500,000        on March 25, 2005 in  exchange for a note payable to a member of the        board        of directors. The unsecured loan was scheduled to mature on June 24, 2005        and        carried a simple annual interest rate of 5 percent. In April 2005, the note        was        repaid and $972 in interest expense was recorded.

  

On        July        11, 2005, the Company received $611,000 in debt financing (as reported in        a Form        8-K filed on that date), from a member of the board of directors. The note        bears        interest at an annual rate of 5% and is payable in full on or before July        7,        2007. The Company also issued the director a warrant  to purchase        230,000        shares of common stock exercisable for a period of five years at a price        of        $3.51 per share. 

 

**NOTE 6 - LEASE        OBLIGATIONS**

 

Certain computer equipment        and        point of sale terminals are leased under capital lease arrangements and are        presented in the accompanying condensed consolidated balance sheets as property        and equipment. At March 31, 2005 and December 31, 2004, the total carrying        amount of equipment held under capital lease agreements was $970,000, and        the        related accumulated amortization was approximately $41,000 and $40,000,        respectively. 

 

Total future minimum lease        payments for capital leases, including interest and other costs, are as        follows:

 

| 2005                                                            |   | $      | 412,582  |   |
|-----------------------------------------------------------------|--------|--------|----------|--------|
| 2006                                                            |   |   | 397,502  |   |
|                                                            |   |   |     |   |
| Total                                                           |   |   | 810,084  |   |
| Less interest and other costs                                   |   |   | (56,228  | )      |
|                                                            |   |   |     |   |
| Present value of future minimum lease                  payments |   |   | 753,856  |   |
|                                                            |   |   |     |   |
| Less current portion                                            |   |   | (492,410 | )      |
|                                                            |   |   |     |   |
| Long-term portion                                               |   | $      | 261,446  |   |

 

Two capital lease arrangements        require the Company to maintain letters of credit equal to 50% of the original        lease amounts during the term of the lease. The Company secures the letters        of        credit with a restricted cash account at a financial institution totaling        approximately $440,000 at March 31, 2005 and December 31, 2004.

 

The Company is committed        under        non-cancelable operating leases for office space and office equipment. Rent        expense paid for the three months ended March 31, 2005 and 2004 was $30,799        and        $9,239, respectively. The Company's future minimum rental payments under        operating leases amount to approximately $90,000 annually through 2008.

 

**NOTE 7 - LITIGATION        AND        CONTINGENCIES**

 

On January 23, 2004, Dial-Thru        filed a complaint against the Company claiming that the Company had breached        an        Asset Purchase Agreement dated October 31, 2000. Dial-Thru asserts that the        Company owes $4,000,000 in consideration for assets purchased and earn-out        fees        for referral services. In February 2004, the Company filed a motion to dismiss        the case on the grounds that under the agreement in question the proper venue        for this case was the federal or state courts in Orem, Utah. In April 2004,        the        California court issued a tentative ruling granting the Company’s motion for        dismissal. The proceedings were stayed pending the outcome of the matter        in the        state of Utah. In July 2004, the plaintiff filed substantially the same suit        against the Company in the United States District Court in the State of Utah.        On        August 2, 2005, the parties completed mediation of the dispute and reached        a        settlement whereby the Company paid Dial-Thru $225,000 on August 9, 2005.

 

 

----

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8 - CAPITAL STOCK**

 

A summary of common stock transactions subsequent      to March 31, 2005 is as follows: 

 

On April 12, 2005, the Company      issued 400,000 shares of unrestricted common stock at $5.00 per share through      a      private placement for an aggregate of $2,000,000 in cash.

  

On July 11, 2005, the Company      issued 427,000 restricted common shares at $3.07 per share for an aggregate      of      $1,311,000 in cash.

 

On July 11, 2005, the Company      issued warrants to purchase 230,000 shares of common stock exercisable      for      a period of five years at a price of $3.51 per share.

 

A summary of common stock transactions for the      three months ended March 31, 2005 and 2004, is as follows: 

 

**Three      Months Ended March 31, 2005**

 

The Company sold 128,750      shares of unrestricted common stock at $4.58 to $4.65 per share through the      exercise of stock options for an aggregate of $589,763 in cash. 

 

The Company sold 100,000      shares of restricted common stock at $5.25 per share through the exercise of      warrants for an aggregate of $525,000 in cash.

 

**Three      Months Ended March 31, 2004**

 

None.

 

**NOTE 9 - STOCK OPTIONS      AND WARRANTS**

 

The Company is authorized      to      issue stock options under three existing stock option plans approved by      stockholders. The 2000 plan (133,333 shares), the 2003 plan (100,000 shares)      and      the 2004 plan (500,000 shares) allow for up to 733,333 shares to be issued      under      substantially similar terms. A summary of the status of options granted at      March      31, 2005 and December 31, 2004, and changes during the periods then ended are      as      follows:

 

|                                                          |   | For                the                Three Months Ended

March                31,                2005 |     | For                the                Year Ended

March                31,                2004 |   |
|---------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|----------|------------------------------------------------------------------------------------------------|--------|
|                                                          |   | Shares                                                                                                 |     | Weighted                Average

Exercise                Price                                 |   | Shares |   | Weighted                Average

Exercise                Price |   |
| Outstanding at beginning of period                            |   |                                                                                                   | 532,667  |                                                                                           | $      | 5.95 |   |   | 532,667 |   | $ | 5.95 |   |
| Granted                                                       |   |                                                                                                   | 217,000  |                                                                                           |   | 3.93 |   |   | 217,000 |   |   | 3.93 |   |
| Exercised                                                     |   |                                                                                                   | (128,750 | )                                                                                              |   | 4.58 |   |   |  (128,750) |   |   | 4.58 |   |
| Forfeited                                                     |   |                                                                                                   | (54,167  | )                                                                                              |   | 6.19 |   |   | (54,167 | ) |   | 6.19 |   |
| Expired                                                       |   |                                                                                                   | -        |                                                                                           |   | - |   |   | - |   |   | - |   |
|                                                          |   |                                                                                                   |     |                                                                                           |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |   |                                                                                                   | 566,750  |                                                                                           |   | 5.46 |   |   | 566,750 |   |   | 5.46 |   |
|                                                          |   |                                                                                                   |     |                                                                                           |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |   |                                                                                                   | 136,498  |                                                                                           |   | 8.53 |   |   | 136,498 |   |   | 8.53 |   |
|                                                          |   |                                                                                                   |     |                                                                                           |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options                granted |   |                                                                                                   | 217,000  |                                                                                           |   | 3.69 |   |   | 217,000 |   |   | 3.69 |   |

 

 

----

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 9 - STOCK OPTIONS AND WARRANTS      (Continued)**

 

The fair value of each option      granted is estimated on the date granted using the Black-Scholes option pricing      model with the following weighted-average assumptions used for grants during      the      three months ended March 31, 2005 and 2004: expected dividend yields of zero,      expected life of 10 years, expected volatility of 113% and [124%], respectively,      and risk-free interest rates of 4.3%. 

 

A summary of the status of      stock options outstanding at March 31, 2005 is presented below:

 

|                                                   |   | Options                Outstanding |                         | Options                Exercisable                         |   |
|--------------------------------------------------------|--------|------------------------------------|------------------------------|------------------------------------------------------------|--------|
| Range                of                Exercise Prices |   | Number                Outstanding  |                         | Weighted                Average Remaining Contractual Life |   | Weighted                Average Exercise Price |   | Number                Exercisable |   | Weighted                Average Exercise Price |   |
| $                3.59 - $                4.92          |   |                               | 414,583                      |                                                       |   | 9.5                years |   | $ | 4.22 |   |   | 40,164 |   | $ | 4.65 |   |
|                  6.50                             |   |                               | 110,000                      |                                                       |   | 8.7                years |   |   | 6.50 |   |   | 55,000 |   |   | 6.50 |   |
| 15.00                                                  |   |                               |                  42,167 |                                                       |   | 1.4                years |   |   | 15.00   |   |   | 41,334 |   |   | 15.00   |   |
| $                3.59 - $                15.00         |   |                               | 566,750                      |                                                       |   | 8.7                years |   |   | 5.46 |   |   | 136,498   |   |   | 8.53 |   |

 

 

At March 31, 2005, the Company      had outstanding warrants to purchase 1,944,493 shares of common stock (including      1,265,000 publicly traded warrants) that were issued to non-employees under      various agreements with exercise prices ranging from $5.25 to $24.75 per share      and a weighted average exercise price of $9.14 per share, expiring between      April      2005 and November 2008. The warrants were valued on the date of issue using      the      Black-Scholes pricing model and the following assumptions: exercise price of      the      warrant stated in the agreements, $6.00 underlying stock price, 140% volatility,      five year expected life, 2.9% risk free interest rate and expected dividend      yield of zero. During the period ended March 31, 2005, no warrants were issued      or expired, and 100,000 warrants with an exercise price of $5.25 were exercised.      

 

A summary of all stock options      and warrants outstanding at March 31, 2005 is presented below:

 

 

|                                                                                                       |   | Compensatory |    | Non-Compensatory |   | Total     |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------|---------|------------------|--------|-----------|--------|
| Stock options issued to employees and                board                members under stock option plans |   |         | 521,416 |             |   | -         |   |   | 521,416 |   |
| Stock options issued to employees outside                stock option plans                                |   |         | 45,334  |             |   | -         |   |   | 45,334 |   |
|                                                                                                       |   |         |    |             |   |      |   |   |   |   |
| Total                                                                                                      |   |         | 566,750 |             |   | -         |   |   | 566,750 |   |
| Warrants issued to non-employees                                                                           |   |         | 355,833 |             |   | 1,588,660 |   |   | 1,944,493 |   |
|                                                                                                       |   |         |    |             |   |      |   |   |   |   |
| Total options and warrants                outstanding                                                      |   |         | 922,583 |             |   | 1,588,660 |   |   | 2,511,243 |   |

 

| **NOTE** | ** 10                -                CONCENTRATION OF REVENUES** |
|----------|------------------------------------------------------------------------|

 

For the three months ended      March 31, 2005 and 2004, the Company had one customer that accounted for 11%      and      48% of revenues, respectively. The Company’s prepaid wireless products accounted      for 92% and 72% of total revenues for the three months ended March 31, 2005      and      2004, respectively.

 

 

----

 

**Q      COMM      INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES      TO      UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 11 - EMPLOYMENT      AGREEMENTS**

 

The Company had an employment      agreement with its former Chief Financial Officer (CFO), which was scheduled      to      expire on December 31, 2005. If the Company terminated the agreement without      cause, or if the CFO terminated the agreement for good reason, the CFO was      entitled to receive the lesser of one year’s salary or payment through the      expiration date of the agreement. In addition, any stock options would vest      immediately. The agreement was terminated during 2004. The Company and the      CFO had an arrangement that provided the CFO the continuation of his      base      wages, the right to retain existing stock option agreements and a retention      bonus if he remains employed by the Company through May 31, 2005.       Subsequent to May 31, 2005, Mr. Openshaw has relinquished his retention      bonus.

 

The Company has an employment      agreement with its President/CEO, which expires on December 31, 2006. The      agreement may be extended for successive one-year periods. If the Company      terminates the agreement without cause, or if the President/CEO terminates      the      agreement for good reason, the President/CEO is entitled to receive the greater      of one year’s salary plus any target cash bonus he would be eligible to receive      during that year or payment through the expiration date of the agreement. In      addition, any stock options would vest immediately. The President/CEO was also      granted an option to purchase 150,000 shares of common stock at the $3.59 market      price per share on the date of grant in January 2005. 

 

**NOTE 12 - RECENTLY ENACTED ACCOUNTING      STANDARDS**

 

The Emerging Issues Task Force      has issued EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its      Application to Certain Investments.” This Issue addresses the meaning of      other-than-temporary impairment and its application to debt and equity      securities. The Company does not expect this statement to have a material impact      on its financial position, results of operations or liquidity. 

 

In December 2004, the      Financial Accounting Standards Board (FASB) issued SFAS No. 153, “Exchanges of      Nonmonetary Assets—an amendment to APB Opinion No. 29.” This statement requires      exchanges of similar productive assets to now be accounted for at fair value,      the basic principle for nonmonetary transactions, unless the exchange lacks      commercial substance. The Company does not expect the adoption of SFAS No.      153      to have a material impact on its financial position, results of operations      or      liquidity. 

 

In December 2004, the FASB      issued two Staff Positions that provide accounting guidance for the effects      of      the American Jobs Creation Act of 2004 that was signed into law on October      22,      2004. SFAS 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income      Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the      American Jobs Creation Act of 2004” states the manufacturers’ deduction provided      for under this legislation should be accounted for as a special deduction      instead of a tax rate change. SFAS 109-2, “Accounting and Disclosure Guidance      for the Foreign Earnings Repatriation Provision within the American Jobs      Creation Act of 2004”, allows additional time to evaluate the effects of the      legislation for repatriation of foreign earnings. The Company does not expect      these statements to have a material impact on its financial position, results      of      operations or liquidity. 

 

In December 2004, the FASB      issued SFAS No. 123R, “Share-Based Payments”. SFAS No. 123R is a revision of      SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB 25.      Among other items, SFAS No. 123R eliminates the use of APB 25 and the intrinsic      value method of accounting, and requires companies to recognize the cost of      employee services received in exchange for awards of equity instruments, based      on the grant date fair value of those awards, in the financial statements.      The      effective date of SFAS No. 123R is the first reporting period beginning after      June 15, 2005, which is the third quarter of the Company’s year ending December      31, 2005. The Company has not yet determined the model it will use to measure      the fair value of awards of equity instruments to employees upon the adoption      of      SFAS No. 123R. The impact of SFAS No. 123R on the Company’s results of      operations cannot be predicted at this time because it will depend on the number      of equity awards granted in the future, as well as the model and assumptions      used to value the awards.

 

**NOTE 13 - SUBSEQUENT EVENTS**

 

On April 12, 2005, the Company      issued 400,000 shares of unrestricted common stock at $5.00 per share through      a      private placement for an aggregate of $2,000,000 in cash. 

 

On May 7,, 2005, a $500,000      related party note was repaid.

 

On May 31, 2005, the Company’s      former Chief Financial Officer resigned. On that same day, the Company hired      Mark W. Robinson as Chief Financial Officer, Treasurer and Secretary.

 

On July 11, 2005, the Company      issued 427,000 restricted common shares at $3.07 per share for an aggregate      of      $1,311,000 in cash.

 

On July 11, 2005,       the      Company issued a note in the amount of $611,000. The note bears interest at      an      annual rate of 5% and is payable in full on or before July 7, 2007. The Company      also issued a warrant to purchase 230,000 shares of common stock exercisable      for      a period of five years at a price of $3.51 per share. 

 

On August 2, 2005, the Company      and Dial-Thru International completed the mediation of the dispute described      above in Note 9, and reached a settlement whereby the Company paid Dial-Thru      $225,000. 

 

 

----

 

**Item      2.****Management's Discussion and Analysis of Financial      Condition and Results of Operations**

 

*Pursuant to the "safe      harbor" provisions of the Private Securities Litigation Reform Act of 1995,      readers of this report are advised that this document contains both statements      of historical facts and forward-looking statements. Forward-looking statements      are subject to risks and uncertainties, which could cause our actual results      to      differ materially from those indicated by the forward-looking statements.      Examples of forward-looking statements include, but are not limited to (i)      projections of revenues, income or loss, earnings or loss per share, capital      expenditures, dividends, capital structure and other financial items, (ii)      statements regarding our plans and objectives including product enhancements,      or      estimates or predictions of actions by customers, suppliers, competitors or      regulatory authorities, (iii) statements of future economic performance, and      (iv) statements of assumptions underlying other statements. Readers are      cautioned that the actual results could differ materially from the anticipated      results as expressed in these forward-looking statements due to one or more      of      the following risk factors.*

 

**RISK      FACTORS**

 

You should carefully consider      the risks described below, our financial statements and the notes to those      statements, before you purchase any of our securities.

 

**The Securities and Exchange Commission      (“SEC”) is currently reviewing the Company’s 2004 10-KSB filing.**

 

We received a comment letter      from the SEC on May 5, 2005 requesting clarification on several matters      including the rationale for reporting revenue on a gross versus net basis for      certain consigned inventory we sell. The Company has responded to the SEC and      is      awaiting a follow-on response from the SEC.  We have agreed to change      the      method by which we recognize revenue and have amended both our Form 10-KSB      and      this Form 10-Q. However, there can be no assurance that the SEC will not have      further comment and require additional changes.

 

**We have no history of profitable      operations. Continuing losses could exhaust our capital resources and force      us      to discontinue operations.**

 

From the date on which we      became a C corporation in 1998 through March 31, 2005, we incurred cumulative      losses of $21.4 million. For the three-month periods ended March 31, 2005 and      March 31, 2004, net losses were $1.6 million and $1.3 million, respectively.      Unless we can significantly increase the number of terminals in use, we will      continue to incur losses for the foreseeable future. Our working capital may      not      be sufficient to sustain us until we reach profitability.

 

**If we cannot raise capital at a time      when      we need to do so, we may not be able to adequately and timely respond to      competitive developments.**

 

In the future, we may need      to      raise additional capital to meet the capital requirements of our business or      to      take advantage of expansion or acquisition opportunities. If we are unable      to do      so, we may not be able to increase our revenues or achieve profitability. Even      if we are able to secure additional capital by selling equity or equity-linked      securities, these securities could dilute the ownership percentage of our      existing stockholders. The securities that we might sell could also have rights,      preferences or privileges senior to those of our common stock. We cannot assure      you that we will be able to obtain additional financing when needed on      acceptable terms or at all. In April 2005, we raised $2,000,000 through the      issuance of 400,000 shares of unrestricted common stock at $5.00 per share.      We      also have a guaranteed commitment for up to $2.9 million from a member      of      the board of directors to finance current operations, if necessary. If we are      unable to obtain additional financing on terms satisfactory to us when needed,      our operations could be substantially curtailed and the price of our common      stock could decline significantly.

 

**Our margins have historically been low,      which makes it difficult to achieve profitability.**

 

We incurred negative margins,      after taking into account the cost of the products sold through the Qxpress      system and the fees and commissions payable to distributors, brokers and      retailers, depreciation on terminals and software amortization costs of      approximately (2.9%) in the first quarter 2005 and (3.5)% for the comparable      period in 2004. Our contribution margins, after taking into account the cost      of      the products sold through the Qxpress system and the fees and commissions      payable to distributors, brokers and retailers, and excluding depreciation      on      terminals and software amortization costs were approximately 2.2% in the first      quarter 2005 and 10.6% for the comparable period in 2004. As a consequence,      for      us to be profitable to any meaningful extent, we must do one or more of the      following:

-  increase the number of revenue generating          terminals; 
-  add new products with higher profit margins          to our portfolio; or 
-  develop new revenue models. 
-  increase our revenue per          terminal 

 

----

 

In order to increase our      revenue from our historical business, we must increase the number of terminals      in use. In order to expand our product line, we must enter into relationships      with the suppliers of these products, establish new sales channels or expand      existing channels and develop processing applications to handle the new      products. Finally, new revenue models must be accepted by the market and may      have ancillary adverse consequences, such as recognizing revenue on a "net"      basis rather than a "gross" basis as we do now.  We cannot assure you      that      we will be able to achieve any of the above goals.

 

**The future success of our business will      require a substantial marketing effort on our part, including expending      significant amounts of capital that could otherwise be used to purchase or      develop new products.**

 

Our future success depends      on      our ability to successfully market our point-of-sale activation system as the      preferred distribution method. This will require us to allocate a significant      amount of our working capital to sales and marketing. This will reduce the      amount of working capital available to develop new products and services. There      is no assurance that our marketing efforts will be successful.

 

**Most of our revenue growth is derived      from a single class of product -- prepaid wireless -- which makes us      particularly vulnerable to changes in consumer preferences and market      saturation.**

 

Although we currently offer      a      variety of prepaid products, 92% of our revenue for the three months ended      March      31, 2005 was generated from sales of prepaid wireless products. The market      for      prepaid wireless has experienced substantial growth in past years. Our revenues      have grown as this market has developed and expanded in the United States.      We      cannot assure you that this market will continue to grow. If it does not and      we      do not develop new products, our rate of revenue growth could decline rapidly,      resulting in higher net losses. 

 

**Most of our business is placed through      a      small number of brokers. The loss of any one of these accounts could reduce      our      revenues.**

 

A small number of brokers      account for a large percentage of our revenue. One aspect of our growth strategy      is to increase the breadth of our account base. However, a high level of      customer concentration could continue for the foreseeable future. For the three      months ended March 31, 2005, our three largest customers accounted for      approximately 27% of revenues and our top ten customers accounted for 57% of      revenues. We cannot assure you that the level of sales to these brokers will      be      sustained from year to year and there is a risk that these principal brokers      may      not continue to sell our products in the future. To the extent that any      significant broker reduces its reliance on us, terminates its relationship      with      us, or defaults on payments, our revenues in the relevant fiscal period could      decline substantially, which would result in increased net losses. 

 

**The industry in which we operate is      highly competitive, has low barriers to entry and has rapidly changing      technology. Increased competition could result in margin erosion, which would      make profitability even more difficult to achieve.**

 

The market for prepaid      transaction processing and information management services is becoming      increasingly competitive and is highly fragmented. This market includes      companies that provide either point-of-sale activation terminals only, such      as      HyperCom and VeriFone, or information management services only, such as      Blackstone, PreSolutions and DebiSys, as well as companies that provide      integrated solutions, such as LDC Direct. In addition to companies that are      focused solely on the prepaid transactions market, we also face competition      from      companies, such as First Data Corporation, that provide transaction processing      and information management services to the postpaid market. We could also face      competition from e-commerce solution providers. Finally, we may in the future      face competition from suppliers, such as telecommunication companies who may      decide to provide electronic solutions directly to brokers and merchants.

 

The industry in which we      compete is characterized by low barriers to entry, rapidly changing technology,      evolving industry standards, frequent new product and service introductions,      and      changing customer demands. Some of our competitors have substantially greater      financial resources and/or pre-existing market share that may enable them to      establish a stronger competitive position than we have, in part through better      marketing opportunities. Current competitors or new market entrants could      introduce products with features that may render our system obsolete or      uncompetitive. To be competitive and serve our customers effectively, we must      respond on a timely and cost-efficient basis to changes in technology, industry      standards, and procedures and customer preferences. The cost to modify our      products, services or infrastructure in order to adapt to these changes could      be      substantial and we cannot assure you that we will have the financial resources      to fund these expenses. Increased competition could result in reduced margins,      as well as a loss of market share and brand recognition.

 

**We depend on brokers and other      intermediaries to distribute our point-of-sale terminals. Our relationships      with      these brokers are usually short-term, nonexclusive arrangements, which can      be      terminated** **at will. As a result, we cannot prevent them      from selling competitive products or discontinuing their relationship with      us.**

 

 

----

We rely on independent      brokers, distributors, wholesalers and other intermediaries to distribute our      point-of-sale activation system to retail merchants. Currently, we distribute      through approximately 70 brokers. In order for us to achieve a meaningful level      of market penetration, we must significantly increase this number. Until now,      our relationships with our brokers have generally been on a short-term,      non-exclusive basis allowing them to reduce or cancel their business with us      without penalty and with little or short notice. The prepaid products that      we      sell are widely available from a number of sources. We are not able to offer      exclusive products or price advantages to our brokers. Rather, we rely on the      quality of our Qxpress system to induce brokers to contract with us. If we      do      not continue to offer performance and service advantages, our brokers may not      aggressively market our system to their retail networks or may terminate their      relationship with us. We cannot assure you that we will continue to derive      revenue, at current levels, or at all, from our existing brokers, or that we      will be able to successfully establish relationships with new brokers.

 

**We have no control over the prices      suppliers charge us for their products and we may not always be able to pass      through price increases to our customers. As a result, price increases could      have a negative impact on our margins and our ability to achieve profitability.**

 

We depend on suppliers to      provide us with prepaid products that we can resell. We have no control over      the      prices they charge us. Depending on the competitive environment, increases      in      the costs of our products may reduce our margins.

 

**If we do not protect our proprietary      technology and intellectual property rights against infringement or      misappropriation, and defend against third parties assertions that we have      infringed on their intellectual party rights, we may lose our competitive      position in the markets in which we operate.**

 

We believe that our      proprietary software and hardware provides us with a competitive advantage.      While we have filed patent applications relating to various features of the      Qxpress 200 terminal and proprietary technology, we cannot assure you that      these      applications will be approved, or that even if approved, they will provide      us      with meaningful protection. Other than our patent applications described above,      we rely on trade secret laws and common law principles to protect our      proprietary rights. For example, we have not registered or applied to register      either "Qxpress" or "Qxpress 200" or any other trademarks, trade names, service      marks, service names or copyrights that we may own or use.

 

Despite our efforts to protect      our rights, unauthorized parties may attempt to copy aspects of our      point-of-sale terminals or the source code to our software or to obtain or      use      information that we regard as proprietary. The scope of any proprietary rights      that we may have is uncertain and is not sufficient to prevent others from      developing and selling competing products and services, which could have a      material adverse effect on our business. In addition, third parties may assert      infringement claims against us or claim that we have violated their intellectual      property rights. While we know of no basis for any claims of this type, the      existence of and ownership of intellectual property can be difficult to verify      and we have not made an exhaustive search of all patent filings. If any of      our      proprietary rights are misappropriated or we are forced to defend our      intellectual property rights, we may have to incur substantial costs. We may      not      have the financial resources to prosecute any infringement claims we may have      or      defend any infringement claims that are brought against us. Even if we do,      defending or prosecuting our proprietary rights will divert valuable working      capital and management's attention from business and operational issues.

 

**Significant rapid growth could strain      our      internal resources, which could lead to a lower quality of customer service,      reporting problems and delays in meeting important deadlines. If we do not      upgrade our internal systems and controls we may not be able to manage this      growth properly.**

 

**Any significant revenue      growth will strain our existing financial and operating resources. For example,      the accounting system we currently use is limited in its financial reporting      and      we may need to purchase new accounting software and to hire additional qualified      people for our accounting department as we grow**.

 

The Company is planning to      upgrade its accounting systems and is actively recruiting for additional      qualified accounting personnel. Expanding our operations will increase the      demands on our senior management and our customer service departments. We will      need to continually improve our management, operational, financial and other      departments to manage our growth properly and any failure to do so may lead      to      inefficiencies and/or redundancies and may impair our ability to provide      accurate and timely information and reports to our stockholders.

 

**The market price of our common stock      has      been volatile and may continue to fluctuate significantly because of various      factors, some of which are beyond our control.**

 

Our stock price has been      extremely volatile, fluctuating over the last two years between $2.00 and      $14.85. These fluctuations have been unrelated to or disproportionately affected      by our operating performance. The market price of our common stock could      continue to fluctuate significantly in response to a variety of factors, some      of      which may be beyond our control. These factors may include one or more of the      following:

-  Quarterly operating results falling below          or          exceeding expectations in any given period; 
-  Changes in economic conditions generally          or          in the telecommunications or banking industries; 
-  Market fluctuations relating to markets          generally or market sectors that include our competitors, which may or          may not          be based on results of operations or other announcements by us or our          competitors; 
-  Fluctuations in our revenue which may or          may          not be related to changes in the way we conduct our business; 
-  Announcements by our competitors of new          technological innovations, service offerings, contracts, acquisitions or          strategic relationships; 
-  Departures of key personnel; and 
-  Changes in business or regulatory          conditions. 

----

 

 

In the past, following periods      of market volatility, stockholders have instituted securities class action      litigation. While we have not been involved in securities litigation to date,      if      we were to be involved in securities litigation, we could incur a substantial      cost and experience diversion of resources and the attention of management      away      from our business. We cannot predict the future performance of the capital      markets in general and stocks in our market sector in particular, and we cannot      assure you that the price for our common stock will not drop significantly      in      the future.

 

**The existence of outstanding options,      warrants and convertible securities may preclude us from obtaining additional      equity financing.**

 

The existence of outstanding      options, warrants and convertible securities could make it more difficult to      obtain or increase the cost of additional equity financing. The holders of      these      options and warrants have the opportunity to profit from a rise in the value      or      market price of our common stock and to exercise them at a time when we could      obtain equity capital on more favorable terms than those contained in these      securities.

 

**We have a limited number of stockholders      and our stock is thinly traded.**

 

As of March 31, 2005, there      were approximately 320 stockholders of record and our average daily share volume      for the three months ended March 31, 2005 was approximately 12,000 shares.      The      relatively low number of stockholders and trading volume may create significant      volatility in our share price or other adverse market conditions that negatively      affect stockholders.

 

**Overview**

 

The following is a discussion      of certain factors affecting our results of operations, liquidity and capital      resources. You should read the following discussion and analysis in conjunction      with our condensed consolidated financial statements and related notes that      are      included herein. 

 

Our business consists of the      purchase and resale of prepaid telecommunication and other products through      our      proprietary electronic point-of-sale system, Qxpress. The key components of      the      Qxpress system include the Qxpress 200 terminals, our data center, the software      that runs the terminals and the data center, and the communication protocols      that connect the terminals to the data center. The Qxpress system was introduced      in September 2002. Prior to that date, we used third-party equipment and      software. We expect to experience substantial growth in our historical business      while expanding our product line to include a broad range of other prepaid      products and to provide transaction processing and information management      services to other vendors of prepaid products, both in the United States and      abroad. 

 

Historically, revenues from      international operations have accounted for 1% to 4% of annual revenues. In      2003, we began generating revenues from customers in Canada, France, the Bahamas      and Australia. Given prepaid wireless is much more common and accepted in      Europe, Asia and Latin America than it is in North America, we will continue      to      explore new international opportunities.

 

We expect that revenues from      international operations will grow over the next few years and will represent      a      more meaningful portion of our overall revenues, particularly as prepaid      wireless is much more common and accepted in Europe, Asia and Latin America      than      it is in North America. 

 

The Qxpress system is designed      to replace the traditional distribution system for prepaid products, which      consists of vouchers and hard cards that must be purchased by the retail      merchant and that are subject to a number of problems, including loss, theft      and      inventory financing and management issues. The new Qxpress system can support      the sale of a broad range of prepaid products in electronic format from a single      terminal placed in convenience stores and other retail establishments. Using      a      Qxpress terminal, a retail merchant can sell wireless telephone time,      traditional long distance service or other telephone products, add credit to      a      prepaid debit card, add wireless time to a customer’s account by electronic bill      payment and sell other prepaid products. In general, the prepaid product is      sold      in the form of a personal identification number, or "PIN," that the customer      can      use to add time to a prepaid cellular handset, make long distance calls or      add      funds to a debit card by calling the provider of the product and providing      the      PIN. The consumer pays for the product by paying the retail establishment in      which the terminal is located. The terminal records the transaction and sends      the relevant information to our data center where it is processed and accounting      and transaction records are generated. Revenue from these purchases is split      among the retail merchant, the broker that placed the terminal with the retail      merchant, the provider of the prepaid product and us. 

 

Our system is designed to      accommodate transactions involving virtually any prepaid product that can be      delivered electronically. Within the prepaid transaction market, our initial      focus has been on the telecommunications market. As a distributor of prepaid      products in this market, we purchase PINs from national and regional      telecommunication carriers and distribute these through our established networks      of retail outlets, such as convenience stores, wireless product stores, check      cashing stores, grocery stores and discount stores. The prepaid transaction      market is rapidly expanding into various types of non-telecommunications      products, such as gift and loyalty cards, prepaid debit cards, bill payment      and      money transfer. In addition to distributing traditional telecommunication      products, our system is currently used to provide many of these products as      well. 

 

 

----

 

During 2004, we announced      that      we have also modified our software to run on a VeriFone 3700 series terminal.      This terminal is capable of providing both our prepaid application, which calls      into our data center and functions much the same as our Qxpress 200 terminal,      and standard debit/credit card processing through the merchant’s processor for      such transactions. The ability to offer our prepaid solution to the market      through this alternative hardware option provides us with an opportunity to      expand our market share. While the VeriFone terminal does not offer as many      options as our Qxpress terminal for selling prepaid products, it is an excellent      solution for customers who prefer to have only one terminal in their retail      establishment. In 2005, we plan to further expand the devices through which      we      distribute prepaid products, such as additional debit/credit terminal models.      We      believe that expanding the number and type of devices that can connect to our      data center and sell our prepaid products will provide access to additional      customers and increased revenues to us in the future. 

 

During the three months ended      March 31, 2005, we announced we were developing our flexible prepaid application      to run on Ingenico’s multi-application terminals including the Elite series, the      i5300 terminal, and the upcoming 5100 platform for delivery of our products      and      services. 

 

**Sources of Revenue**

 

Our principal source of      revenue has been the resale of prepaid telecommunication products, including      wireless, long distance and other products that we purchase directly from      carriers or indirectly from distributors who purchase these products from the      carriers. 

 

Our standard business model      is      referred to as our broker model. In this model, we provide a full range of      products and services to our customers, including our product library, PIN      management, transaction processing, and customer service to the retail      locations. Revenue is  recognized on a “gross” basis for our prepaid      products and a “net” basis for all consigned products.  We record cost of      goods sold for the cost of the products sold. Commissions and fees paid to      brokers and retailers are recorded as operating expenses. 

 

Beginning in 2003, we began      offering our service bureau business model. Under this model, our customers      license our data center software and purchase Qxpress terminals from us. These      customers are responsible for functions such as inventory management, product      ownership, report generation, and ACH funds transfer. Our agreements with these      customers also provide ongoing fees for software maintenance and transactions      processed through their system. Because we do not provide or control the      products sold, we do not meet the requirements of EITF 99-19 to record these      sales at “gross.” Transaction processing, license and maintenance fees are all      recorded on a “net” basis. Sales of terminals are recorded at the sales price      and a corresponding cost of sale is recognized.

 

The table below illustrates      the revenues we derived from our principal products and services and the      percentage of total revenues represented by this amount. The discussion that      follows focuses on the sources of revenue that we believe are the most important      to our present and future results of operations. 

 

|                              |   | For                the Three Months Ended March 31, |      |
|-----------------------------------|--------|-----------------------------------------------------|-----------|
|                              |   | 2005(As                Restated)                    |      | 2004(As                Restated) |   |
|                              |   | Amount                                              |      | Percentage |   | Amount |   | Percentage |   |
| Wireless                          |   | $                                                   | 7,822,143 |   |   | 92.3 | % | $ | 1,957,005 |   |   | 71.9 | % |
| Wholesale                Products |   |                                                | 225,890   |   |   | 2.7 |   |   | 14,645 |   |   | 0.5 |   |
| Fees                              |   |                                                | 90,985    |   |   | 1.1 |   |   | 146,959 |   |   | 5.4 |   |
| Long                Distance      |   |                                                | 71,681    |   |   | 0.8 |   |   | 102,759 |   |   | 3.8 |   |
|                              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |
| Service                Bureau     |   |                                                | 51,286    |   |   | 0.6 |   |   | 156,997 |   |   | 5.8 |   |
| Home                Dial Tone     |   |                                                | 38,810    |   |   | 0.5 |   |   | 48,292 |   |   | 1.8 |   |
| Debit Cards                       |   |                                                | 37,555    |   |   | 0.4 |   |   | 60,140 |   |   | 2.2 |   |
| Gift                Card          |   |                                                | 26,380    |   |   | 0.3 |   |   | 28,841 |   |   | 0.1 |   |
| Terminal                Sales     |   |                                                | 22,065    |   |   | 0.3 |   |   | 1,700 |   |   | 1.1 |   |
| Wireless Phone Features           |   |                                                | 2,514     |   |   | 0.0 |   |   | 0.0 |   |   | 0.0 |   |
| Other                             |   |                                                | 87,951    |   |   | 1.0 |   |   | 203,878 |   |   | 7.5 |   |
|                              |   |                                                |      |   |   |   |   |   |   |   |   |   |   |
| Totals                            |   | $                                                   | 8,477,260 |   |   | 100.0 | % | $ | 2,717,234 |   |   | 100.0 | % |

 

 

----

 

Prepaid debit card is a      relatively new product for the prepaid industry and is represents a growing      segment of our business. This product allows a user to load funds onto a stored      value card that will then function the same as a typical debit card. We generate      revenues by receiving a share of the load fee charged to the consumer. We      currently offer two products that bear the MasterCard logo. We believe the      convenience of a stored value card for the cash-based consumer and increased      market awareness of this product will result in increased revenues to us in      the      future.

 

Prepaid long distance revenue      continues to be a focus of the Company. Our marketing analysis suggests that      we      can increase prepaid long distance revenues by improving our product offering      and by providing informative and attractive point of sale advertising materials      to our brokers and merchants. 

 

Wholesale products are items      such as PINs (such as wireless phone, long distance phone and debit card PINs)      that we purchase and take ownership of, and later sell to other distributors      outside our customer network. We are able to use our supplier relationships      to      provide certain products to distributors who do not have such access. Margins      for these product sales in our industry are typically 1% over cost. For the      three months ended March 31, 2005 and March 31, 2004 these revenues represented      2.7% and 5.4% of total revenue, respectively. These revenues are all cash based      and we do not incur costs for these product sales besides the cost of the      product. These transactions are recorded at gross. We do not emphasize this      source of revenue but respond to opportunities that present themselves.

 

Fee revenue is earned on      terminal rentals and performance fees. Performance fees include fees charged      when weekly rentals from a terminal fall below the agreed-upon minimum level      and      other miscellaneous fees. We are seeing increased pricing pressures and      discounting with fees, terminal rental, and terminal sales due to competitive      factors. We anticipate competition will continue to force lower fee revenue      in      the future.

 

Wireless phone features      include custom ring tones that are downloaded to a wireless handset and      email/text messaging capabilities. We expect these custom features to continue      to provide an increased source of revenues in 2005.

 

We first began setting up      service bureau customers in 2003. This revenue model is diminishing as a percent      of total revenue, but provides higher margins than our traditional broker model      since there are few direct costs to offset against the fee revenues. We acquired      our service bureau customer in Canada in July 2004, which contributed to the      decline in service bureau revenues. For the three months ended March 31, 2005      and 2004, this source of revenue decreased to 0.6% of total revenue from 5.8%,      respectively. 

 

Historically, our results      of      operations have been characterized by relatively high revenues but relatively      low margins. Under our broker model, we book the entire value of the transaction      as revenues. Our cost of sales includes the amount we pay for the product;      it      does not include the fees and commissions we pay the broker and the retailer      who      participated in the sale. After subtracting the commissions and fees paid to      the      brokers and retailers (which vary substantially directly with revenues in our      historical sales model) and depreciation on terminals and amortized software      development costs, we incurred negative margins of approximately (2.9%) for      the      three months ended March 31, 2005 and (3.5)% for the comparable period in 2004.      The contribution margin excluding depreciation on terminals and amortized      software development costs was approximately 2.2% for the three months ended      March 31, 2005 and 10.6% for the comparable period in 2004.  The change      in      margins is primarily driven by the increase in lower margin wireless products      and lower fees. For the three months ended March 31, 2005, we recorded a      $285,000 loss in deposit on handset inventory, which reduced the margin by      (3.4%). In addition, because of these thin margins, a minor change in the price      that we pay for products would have a substantial effect on our net income      or      loss if we were not able to (or, in the case of price decreases, were not      required to) pass the difference on to our customers. 

 

The resale of prepaid      telecommunication products has historically been a commodity market with most      price increases or decreases being passed through the distribution chain to      the      end user. However, the amount of margin available to each participant in the      distribution chain can be affected by various factors, such as the functions      provided and risk assumed by the participant and the volume and payment terms      on      which the participant can purchase product. Historically, our ability to      purchase products at attractive rates has been negatively impacted by our      inability to purchase in volume and our status as an uncertain credit, which,      in      some cases, has resulted in our inability to purchase product directly from      the      supplier. In those cases, we have purchased product from a reseller at a markup      from the supplier price. We believe that, if our business expands and our      financial condition becomes more stable, there may be opportunities to increase      margins in our historical business by purchasing a greater percentage of our      product directly from the carrier and by purchasing in greater volume. However,      the telecommunications business in general, and the wireless business in      particular, are changing rapidly and it is not possible to anticipate potential      changes that may occur in the distribution chain. There is no assurance that      we      will be successful in realizing these opportunities.

 

 

----

 

Substantially all of our      revenues are collected through automated clearinghouse, or ACH, transactions      initiated by us within 72 hours of the sale of the product. In an ACH      transaction, funds are electronically transferred from the merchants' accounts      to our accounts. As a result, we have virtually no receivables from retailers      and we do not have expenses associated with billing and collection. In most      cases, the brokers through whom we distribute our system are responsible for      any      unpaid ACH transactions from retailers so we experience relatively little bad      debt expense from our product sales through terminals. We generate receivables      from sales of terminals and from license fees and consulting services provided      to assist service bureau customers in setting up and operating data centers.      

 

**Operating Metrics**

 

We monitor our business and      measure performance in a number of ways. Several of these key measures are      shown      in the table below along with the results for the three months ended March      31,      2005 and 2004. 

 

|                                                                  | For                the                Quarter Ended

March                31,

2005 | For                the                Quarter

Ended

December                31,

2004 | For                the                Quarter

Ended

September                30,

2004 | For                the                Quarter

Ended

June                30,

2004 | For                the                Quarter

Ended

March                31,

2004 |
|-----------------------------------------------------------------------|-------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|
| **Broker Model**                                                      |                                                                                |                                                                                    |                                                                                     |                                                                                |                                                                                 |
| Net activations (1)                                                   | 396                                                                                 | 450                                                                                     | 288                                                                                      | 70                                                                                  | 175                                                                                  |
| Terminal acquired (2)                                                 |                                                                                | 200                                                                                     |                                                                                     |                                                                                |                                                                                 |
| Total activated terminals                                             | 2,721                                                                               | 2,325                                                                                   | 1,675                                                                                    | 1,387                                                                               | 1,317                                                                                |
| Average activated terminals                                           | 2,523                                                                               | 1,734                                                                                   | 1,531                                                                                    | 1,352                                                                               | 1,230                                                                                |
|                                                                  |                                                                                |                                                                                    |                                                                                     |                                                                                |                                                                                 |
| Average monthly net revenue per activated                terminal (3) | 33                                                                                  | 22                                                                                      | 24                                                                                       | 22                                                                                  | 23                                                                                   |

 

(1)  A terminal      is defined as activated when it generates its first revenue at retail site.

(2)  In July      2004, we acquired our service bureau customer, Point de Vente. 

(3)  Includes      gross revenues less cost of goods sold and commissions paid to brokers and      retailers and excludes depreciation and amortization allocable to cost of goods      sold

 

Note: Given the service bureau model is a      declining portion of our business, we will not publish the service bureau      metrics shown above in future SEC filings. 

 

The exact timing of earnings      before interest, taxes, depreciation and amortization (EBITDA) break even      depends on many items including how aggressively we add to our sales      organization, which increases our short-term burn rate, our actual sales      results, the pace of our growth and the relative numbers of in service broker      terminals and in service bureau terminals. Based on our current sales      organization growth plans, we believe our cash flow break even point will likely      be at approximately 7,000 broker units. There is no assurance that this break      even point will be realized as forecasted given changes in economic and      competitive factors.

 

Our broker model revenues      depend on the following factors: i) number of terminals in service, ii) average      gross sales per terminal, iii)  margin on product sales, and iv) fees      and      other ancillary charges. The first factor is shown in the data on units shipped,      exchanged, canceled and net units placed. The other factors are captured in      the      measurement of average revenue per terminal (referred to as “ARPU”).

 

During 2004, we had a higher      rate of returned units than anticipated, which was due to the bankruptcy of      a      significant broker. We anticipate that the rate of canceled units will be lower      as a percentage of total units shipped in 2005. 

 

Regarding units in service,      our goal for 2005 is to activate substantially more terminals. Our strategy      to      achieve this includes increasing our sales force in order for us to gain more      market exposure and we plan to hire new sales personnel over the course of      the      year. We anticipate that our selling expenses will outpace revenues in the      near      term, but that the long-term benefits of the additional sales personnel will      outweigh the costs. There is no assurance however that we will be successful      in      this strategy. 

 

----

 

As discussed above, we plan      to      develop other distribution methods for distributing products using our back-end      data center. As we add customers who use distribution methods other than our      Qxpress terminal (e.g. electronic cash registers), our focus will shift from      terminals in service to total retail locations regardless of the method of      product distribution.

 

Our strategy with average      revenue per terminal is to focus our sales efforts on quality brokers and retail      chains with established prepaid sales histories, maintain or better the pricing      in our contracts with new brokers, gain better discounts from suppliers by      securing direct relationships and buying larger quantities, and continue to      charge rental and minimum performance fees on all terminals placed. We show      ARPU      for terminals outstanding during the year and for terminals excluding those      shipped within the last 60 days because our experience shows that it generally      takes 60-90 days for a terminal to ramp up to full revenue potential.

 

**Critical Accounting Policies and      Estimates**

 

The discussion and analysis      of      our financial condition and results of operations are based on our financial      statements that have been prepared according to U.S. generally accepted      accounting principles. In preparing these financial statements, we are required      to make estimates and judgments that affect the reported amounts of assets,      liabilities, revenues and expenses and related disclosures of contingent assets      and liabilities. We evaluate these estimates on an on-going basis. We base      these      estimates on historical experience and on various other assumptions that we      believe are reasonable under the circumstances, the results of which form the      basis for making judgments about the carrying values of assets and liabilities.      Actual results may differ from these estimates under different assumptions      or      conditions. We consider the following accounting policies to be the most      important to the portrayal of our financial position and results of operations,      and that require the most subjective judgment. 

 

*Revenue recognition*

 

We record revenue at the time      of product sale or when services are provided. Under our broker model, sales      of      our prepaid products are generally made directly to end-users. There is no      right      of return for products sold and we are not obligated for further performance      after the sale. These sales transactions are accounted for at “gross” since they      meet the requirements specified by Securities and Exchange Commission Staff      Accounting Bulletin No. 104 (SAB 104) and Emerging Issues Task Force Issue      No.      99-19 (EITF 99-19). 

 

We provide certain products      and services which do not include the sale of a PIN, including bill payment      applications, PIN-less transactions for certain debit cards and money transfer.      In these cases we do not meet the requirements for gross revenue reporting      under      applicable accounting standards. In these cases, we record the fee we receive      as      revenue on a net basis. We charge various types of fees related to the use      of      the terminal or other services provided, such as rental fees, minimum      performance fees and activation fees. Fees are recognized when billed.       Under our service bureau model, software license, transaction processing      and maintenance fees are all recorded on a net basis when earned. 

 

*Cost of goods sold*

 

Cost of goods sold primarily      represents the cost of the personal identification number, or PIN, or other      product sold. The cost of a PIN is set by the carrier and is expressed in terms      of a percentage discount from the denomination value. This discount ranges      from      12% to 25% for cellular and home dial tone products and 40% to 50% for long      distance products. We do not have minimum purchase contracts or exclusivity      agreements with any carrier. Historically, price increases are passed on to      customers in the form of lower broker and merchant commissions, which are      recognized as operating expenses under the caption "commissions and fees" in      our      statements of operations and comprehensive income. Cost of goods sold fluctuates      due to changes in the mix of our products and discount rates offered by      carriers. 

 

  

----

 

*   Software      development costs*

 

We have invested a      considerable amount of capital in our proprietary Qxpress 200 terminal and      data      center. We account for this investment in accordance with Statement of Position      98-1, “Accounting for the Costs of Computer Software Developed or Obtained for      Internal Use” and Statement of Financial Accounting Standards No. 142, “Goodwill      and Other Intangible Assets.” Costs incurred before we established the      technological feasibility of the project were recorded as research and      development expenses. Once technological feasibility was established, costs      incurred to develop the data center software and the embedded software in the      terminal were capitalized. These costs include salaries paid to software      engineers employed by us and fees paid to third parties for software      development. Since the new system was placed in service, maintenance costs      and      nominal upgrades have been expensed while costs of new software projects under      development have been capitalized upon reaching technological feasibility.      Capitalized costs are amortized over the estimated useful life of the software,      which is three years. We periodically evaluate the recoverability of our      capitalized software development costs based on the expected future cash flows      from this asset and record an impairment charge should the asset carrying value      exceed the fair value.

 

*Impairment of long-lived      assets*

 

In accordance with Statement      of Financial Accounting Standards No. 144,* *“Accounting for the      Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as      property and equipment, and purchased intangibles subject to amortization,      are      reviewed periodically for impairment whenever events or changes in circumstances      indicate that the carrying amount of an asset may not be recoverable.      Recoverability of assets to be held and used is measured by a comparison of      the      carrying amount of an asset or asset group to undiscounted future cash flows      expected to be generated by the asset. If the carrying amount of an asset or      asset group exceeds its estimated future cash flows, an impairment charge is      recognized for the amount by which the carrying amount of the asset exceeds      the      fair value of the asset. 

 

*Stock options and warrants*

 

We have adopted the      disclosure-only requirements of Statement of Financial Accounting Standards      No.      123, “Accounting for Stock-Based Compensation,” as provided by Statement of      Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation      -- Transition and Disclosure -- an amendment to FASB Statement No. 123.” As a      result, no compensation costs are recognized for stock options granted to      employees, officers and directors. Options and warrants granted to non-employees      are recorded as an expense on the date of grant based on the then estimated      fair      value of the option or warrant. 

 

**Results of Operations**

 

The following table sets forth      statement of operations data as a percentage of revenues. These results may      not      be indicative of future operating results. As noted earlier, these percentages      can be expected to change substantially as a result of our implementation of      different sales models and other factors. 

 

|                                                                              |   | Three                months ended March 31,      |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                              |   | 2005                (As                Restated) |   | 2004                (As                Restated) |   |
|                                                                              |   |                                             |   |   |   |
| Revenues                                                                          |   |                                             | 100.0  | % |   | 100.0 | % |
| Expenses:                                                                         |   |                                             |   |   |   |   |   |
| Cost of goods sold (exclusive of items                shown separately below (1)) |   |                                             | 76.2   |   |   | 55.9 |   |
| Commissions and fees                                                              |   |                                             | 21.6   |   |   | 33.5 |   |
| Selling                                                                           |   |                                             | 2.7    |   |   | 5.3 |   |
| General and administrative                                                        |   |                                             | 12.3   |   |   | 28.8 |   |
| Depreciation and amortization                                                     |   |                                             | 5.7    |   |   | 14.7 |   |
| Loss from operations                                                              |   |                                             | (18.5  | ) |   | (38.1 | ) |
| Total other expense – net                                                   |   |                                             | (0.2   | ) |   | (11.4 | ) |
| Net loss                                                                          |   |                                             | (18.7  | )% |   | (49.6 | )% |

 

(1)  Excludes      cost of goods sold related to depreciation on terminals and amortization of      software development. For the three months ended March 31, 2005 and March 31,      2004, these costs total 5.1% and 14.1% of revenue, respectively.

 

----

  

The following table presents      our unaudited condensed consolidated statements of operations, showing dollar      and percentage changes from 2005 to 2004. 

 

|                                                                              |   | Three                months ended March 31,      |       | Increase                (Decrease)               |   |
|-----------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|--------------------------------------------------|--------|
|                                                                              |   | 2005                (As                Restated) |       | 2004                (As                Restated) |   |  $ |   | % |   |
|                                                                              |   |                                             |       |                                             |   |   |   |   |   |
| Revenues                                                                          |   | $                                                | 8,477,260  |                                             | $      | 2,717,234 |   | $ | 5,760,026 |   |   | 212.0 | % |
| Expenses:                                                                         |   |                                             |       |                                             |   |   |   |   |   |   |   |   |   |
| Cost of goods sold (exclusive of items                shown separately below (1)) |   |                                             | 6,455,938  |                                             |   | 1,518,507 |   |   | 4,937,431 |   |   | 325.2 |   |
| Commissions and fees                                                              |   |                                             | 1,832,093  |                                             |   | 910,332 |   |   | 921,761 |   |   | 101.3 |   |
| Selling expenses                                                                  |   |                                             | 227,365    |                                             |   | 142,697 |   |   | 84,668 |   |   | 59.3 |   |
| General and administrative expenses                                               |   |                                             | 1,046,258  |                                             |   | 782,639 |   |   | 263,619 |   |   | 33.7 |   |
| Depreciation and amortization                                                     |   |                                             | 483,535    |                                             |   | 399,191 |   |   | 84,344 |   |   | 21.1 |   |
|                                                                              |   |                                             |       |                                             |   |   |   |   |   |   |   |   |   |
| Total expenses                                                                    |   |                                             | 10,045,189 |                                             |   | 3,753,366 |   |   | 6,291,823 |   |   | 167.9 |   |
|                                                                              |   |                                             |       |                                             |   |   |   |   |   |   |   |   |   |
| Loss from operations                                                              |   |                                             | (1,567,929 | )                                                |   | (1,036,132 | ) |   | 531,797 |   |   | 51.3 |   |
| Total other expense - net                                                         |   |                                             | (13,659    | )                                                |   | (310,367 | ) |   | (296,708 | ) |   | (95.6 | ) |
|                                                                              |   |                                             |       |                                             |   |   |   |   |   |   |   |   |   |
| Net loss                                                                          |   | $                                                | (1,581,588 | )                                                | $      | (1,346,499 | ) | $ | (235,089 | ) |   | (17.5 | )% |

 

 

 

(1)  Excludes      $434,258 and $382,815 of cost of goods sold related to depreciation on terminals      and amortization of software development, for the three months ended March      31,      2005 and March 31, 2004, respectively.

 

**Three months ended March 31, 2005      compared to three months ended March 31, 2004**

 

*Revenues.* Our      revenues increase for the three months ended March 31, 2005, over the comparable      period of 2004 was driven by an increased number of terminals in the field.      Most      revenue categories experienced increases between periods, with the largest      increases coming from wireless ($5.9 million). We expect the following factors      to positively impact revenues in 2005: i) our installed base of terminals at      the      beginning of 2005, many of which have been recently installed and therefore      only      marginally contributed to revenues in the first quarter of 2005; ii) the      advantages we are able to offer the market with our proprietary system as      previously described; iii) the addition of new means of product distribution,      such as debit/credit card terminals and PC-based delivery of product; iv) the      addition of new products to our library, such as gift/loyalty cards and bill      pay; and v) the continued growth of the prepaid wireless market. There is no      assurance that these factors will positively affect revenues in 2005.

 

*Cost of goods sold*.      Our cost of goods sold (including terminal depreciation and software development      amortization expense) for the three months ended March 31, 2005 as percentage      of      revenues was 81.9 compared to 70.6 for the three months ended March 31, 2004.      Excluding terminal depreciation and software development amortization expense,      cost of goods sold for the three months ended March 31, 2005 as percentage      of      revenues was 76.2% compared to 55.8% for the three months ended March 31, 2004.      This increase in cost of sales was a result of, i) an increase in the mix of      lower margin wireless products; and ii) lower fees.  In the future,      we      expect our cost of goods sold will fluctuate as a percent of revenue as changes      occur in our product mix, level of fees charged and discount rates offered      by      carriers.

 

*Commissions and fees.*These expenses are principally commissions paid to retailers and brokers      for product sales through the Qxpress terminals and are a fixed percentage      of      the product sales price. Commissions and fees for the three months ended March      31, 2005 as percentage of revenues was 21.6% compared to 33.5% for the three      months ended March 31, 2004. Commissions and fees for the three months ended      March 31, 2005 increased in terms of absolute dollars but decreased as a percent      of revenue. This percentage decrease was a result of a shift in product mix      toward lower margin wireless products and correspondingly lower commission      payments to brokers. Our contracts with brokers generally protect us from any      price decreases from carriers. Historically, a component of commissions and      fees      is a transaction processing fee paid to LDC for transactions processed through      the LDC terminals. Since we were able to transfer all remaining customers to      our      new Qxpress system during 2004 the Company had no LDC transactions fees for      the      three months ended March 31, 2005. 

 

*Selling*. Selling      expenses for the three months ended March 31, 2005 increased by approximately      $85,000 compared to the comparable period in 2004. Components of this increase      are increased expenses for base salaries of $46,000 which resulted from adding      five additional sales personnel, an increase of approximately $31,000 in sales      commissions from a commission plan instituted in 2005 and approximately $7,000      in additional travel related expenses. We may continue to experience increases      in selling costs from additional sales staff and increased advertising and      marketing program expenses in 2005. 

 

----

 

*General and      administrative.* General and administrative expenses increased during the      three months ended March 31, 2005 compared to the comparable period in 2004      and      as a percentage of revenues. General and administrative increased by $264,000      for the three months ended March 31, 2005 compared to the comparable period      in      2004. This increase is due to additional staffing and related higher gross      salaries of $123,000, external accounting fees of $118,000, an increase in      benefit costs of $24,000, an increase in board related expenses of $21,000,      an      increase in rent expense of $20,000, and an increase in phone expense of      $14,000.

 

The increases were offset,      in      part, by a decrease of approximately $47,000 in investor relations expenses,      and      a decrease of approximately $9,000 in legal fees. The Company will be making      the      necessary investment in 2005 to comply with SOX requirements and make additional      investments in its internal control systems and corporate infrastructure. As      revenue increases, we expect general and administrative expenses to decrease      as      a percentage of revenue. However, in the immediate future, we expect to incur      costs in advance of the business growth that they are intended to support.

 

*Depreciation and      amortization.* Depreciation and amortization expenses for the three months      ended March 31, 2005 increased by approximately $84,000 compared to the      comparable period in 2004. These increases are attributable primarily to higher      amortization of software development costs for the three months ended March      31,      2005 and to higher depreciation expenses from an increased number of terminals      in service. As we continue to amortize capitalized software development costs      and we increase the number of terminals in service, we expect depreciation      and      amortization expenses to increase. 

 

*Total other expense -      net.* Other income and expense consists primarily of interest income and      expense. Net other expense for the three months ended March 31, 2005 and 2004      was approximately $14,000 and $310,000, respectively. This decrease represents      lower interest expense related to debentures sold in 2003 that were repaid      in      full on March 31, 2004. Most of the interest expense, $300,000 for three months      ended March 31, 2004, was in the form of amortization of discount on these      debt      instruments. 

 

**Liquidity and Capital      Resources**

 

Historically, we have financed      our working capital requirements through cash flows from operating activities,      the sale of common stock, proceeds from short-term borrowings, and proceeds      from      the sale of convertible debentures and notes. 

 

As of March 31, 2005, we had      working capital of approximately $632,000 and a current ratio of 1.24 to 1.

 

As of March 31 2005, we own      approximately 6,200 Qxpress terminals available for placement. This inventory      will provide us the means to grow substantially in 2005 without the associated      capital costs. We anticipate that our inventory of PINs, which was $1.2 million      (includes $914,000 in PIN inventory and $258,000 in deposits made on PINs which      were not yet received) at March 31, 2005, will continue to grow as our business      expands. Due to the short order time required for these products, we are able      to      keep our inventory in the range of 13 days’ sales. Our future capital      requirements will depend both on the rate of growth of our business and the      mix      of revenue models that we employ. Models that require us to maintain a large      inventory of prepaid products or to continue to own terminals and/or to invest      in transaction processing facilities will require relatively large amounts      of      capital. The capital requirements of our service bureau model, which has      diminished as a percent of total revenue are substantially less. 

 

Subsequent to March 31, 2005,      we issued 400,000 shares of unrestricted common stock at $5.00 per share through      a private placement. We expect to raise additional funds in 2005, through the      sale of equity, debt or convertible securities. We have a guaranteed commitment      for up to $0.9 million in additional funding from a member of the board of      directors if additional cash is required.  We will continue to monitor      capital requirements and we anticipate that we will require additional working      capital to support growth during 2005. On July 11, 2005, we issued 427,000      common shares at $3.07 per share for an aggregate of $1,311,000 in cash and      the      Company issued a note in the amount of $611,000. The note bears interest at      an      annual rate of 5% and is payable in full on or before July 7, 2007.  The      Company also issued a warrant to purchase 230,000 shares of common stock      exercisable for a period of five years at a price of $3.51 per share.

 

----

 

**Item      4.****Control and Procedures**

 

**Disclosure****Controls and      Procedures**

 

We maintain disclosure      controls and procedures designed to ensure that financial information required      to be disclosed in our reports filed under the Securities Exchange Act of 1934,      as amended (the Exchange Act), is recorded, processed, summarized, and reported      within the required time periods, and that such information is accumulated      and      communicated to our management, including our Chief Executive Officer and Chief      Financial Officer, as appropriate, to allow for timely decisions regarding      disclosure. 

 

In connection with the      completion of its audit of, and the issuance of its report on, our consolidated      financial statements for the year ended December 31, 2004, Tanner LC identified      deficiencies that existed in the design or operation of our internal control      over financial reporting that it considered to be "significant deficiencies” or      material weaknesses." The Public Company Accounting Oversight Board (“PCAOB”)      has defined “significant deficiency” as a control deficiency, or a combination      of control deficiencies, that adversely affects the company’s ability to      initiate, authorize, record, process, or report external financial data reliably      in accordance with generally accepted accounting principles such that there      is      more than a remote likelihood that the misstatement of the company’s annual or      interim financial statements that is more than inconsequential will not be      detected.  The PCAOB has defined a “material weakness” as a "significant      deficiency or combination of significant deficiencies that results in more      than      a remote likelihood that a material misstatement of the annual or interim      financial will not be prevented or detected."

 

The significant deficiencies      or material weakness in our internal controls relate to segregation of      incompatible duties, the timely reconciliation of general ledger accounts      (including cash), controls over inventory (including the potential for employees      to purposefully or inadvertently delete PIN’s without authorization or systems      control), accounting for acquisitions, and impairment of intangible      assets.  Additionally, the significant deficiencies or material weaknesses      in our internal control over certain disclosures in the footnotes to the      financial statements was related to the stock option disclosures required by      SFAS No. 148 and income taxes required by SFAS No. 109.  We have disclosed      these significant deficiencies and material weaknesses to the Audit Committee      of      our Board of Directors

 

As disclosed in the      Restatement Overview set forth on page 2 of this report above, the      Company’s former CFO entered into an unauthorized transaction and thereafter      knowingly made false statements and intentionally altered documents to hide      the      transaction from the other members of the Company’s management, from the Board      of Directors, and from the Company’s outside auditors.  The opportunity for      this former CFO to enter into such a transaction was the result of insufficient      segregation of duties.  The Company is in the process of implementing      appropriate segregation of duties, among other things, as described below.       We have disclosed this unauthorized transaction and the subsequent      misrepresentations by our former CFO to the Audit Committee of our Board of      Directors. 

 

We are in the process of      improving our internal controls in an effort to remediate these significant      deficiencies and material weaknesses through the hiring of additional accounting      staff and through improved supervision and training of our accounting      staff.  Additional effort is needed to fully remedy these significant      deficiencies material weaknesses and we are continuing our efforts to improve      and strengthen our internal controls over financial reporting.  Our      management and Audit Committee will continue to work with our outside advisors      with the goal to implement internal controls over financial reporting that      are      adequate and effective. 

 

There has been no change in      our internal control over financial reporting during the fourth quarter ended      December 31, 2004 that has materially affected, or is reasonably likely to      materially affect, our internal control over financial reporting. 

 

During 2004, the Company’s      former CFO entered into a transaction without authorization and acted to hide      the transaction from the Company’s CEO and other members of management, the      Board of Directors, and the Company’s auditors by knowingly making false      statements and intentionally altering documents.  This transaction included      using Company funds to make a $1,525,000 deposit with a third-party vendor      for      30,000 Nokia 3300 handsets.  Company records were falsified to present      $925,000 of this deposit as cash.  The remaining $600,000 was reserved      for      at year-end 2004 as the Company believed that portion of the receivable would      not be recovered.  The consolidated balance sheet at December 31, 2004      has      been restated to reclassify $925,000 of cash as a deposit to the vendor.       Only 20,650 of the handsets were actually received by the Company and      the      corresponding loss of $600,000 has been reclassified from General and      Administrative Expense to Cost of Goods Sold in the restated consolidated      financial statements. 

 

In the Course of this      unauthorized transaction, the $1,525,000 deposit was never repaid.       On July      1, 2005, the Company formally took ownership of the 20,650 handsets.  Also      subsequent to December 31, 2004, the vendor to whom the deposit was made sold      or      took possession of approximately 9,000 of the handsets without reimbursing      the      Company.  The Company is taking legal action to recover the value of      these      handsets and all losses sustained by the Company in this transaction.       There can be no assurance the Company will successfully recover these losses      from either the vendor or the former CFO.  Subsequent to taking possession      of the handsets, the Company has sold 6,650_handsets at $31 per handset and      has      firm commitments to sell the remaining 14,000 handsets at $31 per handset.       No additional losses are expected from this transaction.  The Company’s      Audit Committee hired a forensic investigator to inquire into all of these      matters and believes a thorough and complete investigation has been undertaken      to date.  

 

----

 

 

**Changes in Internal Control Over      Financial Reporting**

 

None.

 

**PART II****- OTHER INFORMATION**

 

**Item      1****. Legal Proceedings**

 

As of March 31, 2005, we are      not a party to any legal proceedings, except as set forth below.

 

In January 2004, Dial-Thru      International Corporation filed a lawsuit against us in the Superior Court      of      the State of California, County of Los Angeles, claiming damages of $4 million      as a result of our breach of an agreement that was signed in October 2000.       It is our position that claim is without merit as we properly exercised a      contractual right to terminate the agreement.  In February 2004, we      filed a      motion to dismiss the case on the grounds that under the agreement in question      the proper venue for this case was the federal or state courts in Orem, Utah.       In April 2004, the California court issued a tentative ruling granting      our      motion for dismissal.  The proceedings were stayed pending the outcome      of      the matter in the state of Utah.  In July 2004, Dial-Thru filed      substantially the same suit against us in the United States District Court      in      the State of Utah.  On August 2, 2005, the parties mediated the dispute      and      reached a settlement whereby the Company paid Dial-Thru $225,000.  

  

**Item      6.****Exhibits and Reports on Form 8-K**

 

(a) Exhibits:

 

| Exhibit No. | Description                                                                                                                                                                  |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                         |
| 3.1(i)      | Articles of Incorporation (1)                                                                                                                                                |
| 3.1(ii)     | Amendment to Articles of Incorporation                (2)                                                                                                                    |
| 3.2         | Amended and Restated Bylaws (2)                                                                                                                                              |
| 4.1         | Specimen Stock Certificate (2)                                                                                                                                               |
| 4.2         | Form of warrant agreement, including                form                of warrant (2)                                                                                       |
| 4.3         | Form of unit certificate (2)                                                                                                                                                 |
| 4.4         | Form of representative's warrant                (2)                                                                                                                          |
| 10.1        | 2000 Stock Option Plan (2)                                                                                                                                                   |
| 10.2        | 2003 Stock Option Plan (2)                                                                                                                                                   |
| 10.3        | Securities Purchase Agreement, dated                February 10, 2003 (2)                                                                                                    |
| 10.4        | Form of 12% Secured Convertible Debentures                due March 31, 2004 (2)                                                                                             |
| 10.5        | Form of Stock Purchase Warrant                (2)                                                                                                                            |
| 10.6        | Form of Lock-Up Agreement executed                by all                officers, directors and 5% shareholders (2)                                                          |
| 10.7        | Form of Lock-Up Agreements for 12%                Secured                Convertible Debenture holders (2)                                                                   |
| 10.8        | Employment Agreement between Q Comm                International, Inc. and Paul C. Hickey (2)                                                                                |
| 10.9        | Employment Agreement between Q Comm                International, Inc. and Terry D. Kramer (3)                                                                               |
| 10.10       | Employment Agreement between Q Comm                International, Inc. and Michael K. Openshaw (3)                                                                           |
| 10.10       | Employment Agreement between Q Comm                International, Inc. and Michael D. Keough (4)                                                                             |
| 10.10       | Securities Purchase Agreement, dated                May                20, 2003 (2)                                                                                          |
| 10.11       | Form of 12% Unsecured Promissory Note,                due                August 31, 2004, dated May 20, 2003 (2)                                                             |
| 10.12       | Form of Stock Purchase Warrant, dated                May                20, 2003 (2)                                                                                         |
| 10.13       | Service Agreements between Q Comm                International, Inc. and each of Cellcards of Illinois, Iowa Wireless                and                Hargray Wireless (2) |
| 10.14       | Agreement between Q Comm International,                Inc. and PreCash Corporation (2)                                                                                      |
| 10.15       | WGR Ltd. Agreement (2)                                                                                                                                                       |
| 10.16       | Marceco Ltd. Agreement (2)                                                                                                                                                   |
| 10.17       | Success Concepts Enterprises Inc. Agreement                (2)                                                                                                               |
| 10.18       | 510 East Technology Avenue Lease                (3)                                                                                                                          |
| 10.19#      | Agreement between Q Comm International,                Inc. and Cricket Communications, Inc.                                                                                 |
| 14          | Code of Ethics (2)                                                                                                                                                           |
| 21          | Subsidiary schedule                (3)                                                                                                                                       |

 

----

| 31.1 | Chief                Executive Officer Certification pursuant to section 302 of the                Sarbanes-Oxley Act of 2002* |
|------|--------------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Chief                Financial Officer Certification pursuant to section 302 of the                Sarbanes-Oxley Act of 2002* |
| 32.1 | Chief                Executive Officer Certification pursuant to section 906 of the                Sarbanes-Oxley Act of 2002* |
| 32.2 | Chief                Financial Officer Certification pursuant to section 906 of the                Sarbanes-Oxley Act of 2002* |

_____________________________________

* Included as an exhibit herein.

 

(1)  Previously      filed on February 24, 2000, as an exhibit to Form 10-SB, and on March 20, 2000,      as an exhibit in the Company's Current Report on Form 8-K and incorporated      herein by reference.

(2)  Previously      filed as an exhibit to the Company’s Registration Statement on Form SB-2      (File No. 333-104232) and incorporated herein by reference.

(3)  Previously      filed as an exhibit to Form 10-KSB on March 31, 2003 and incorporated herein      by      reference. 

(4)  Previously      filed as an exhibit to Form 10-KSB on April 12, 2005 and incorporated      herein by reference.   

 #        Application has been made to the Securities and Exchange Commission to seek      confidential treatment of certain portions of this exhibit under Rule 406 of      the      Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of      1934. Omitted material for which confidential treatment has been requested      has      been filed separately with the Securities and Exchange Commission.

 

(b) Reports on Form 8-K

 

On January 10, 2005, we filed      a Current Report on Form 8-K under Item 5.02 regarding the sale of unregistered      securities. 

 

On March 17, 2005, we filed      a      Current Report on Form 8-K under Item 1.01 regarding the execution of a material      contract with Leap/Cricket.

 

 

 

 

 

 

 

 

 

----

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or      15(d) of the Securities Exchange Act of 1934, the registrant has duly caused      this report to be signed on its behalf by the undersigned, thereunto duly      authorized.

 

Q Comm International, Inc.

 

 

| By:    | /s/ Mark W.                Robinson                                 |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                |
|   | Mark W. Robinson                                                                                                                                                                                                                    |
|   | Chief Financial Officer                                                                                                                                                                                                             |
|   | (Principal Financial and Accounting                Officer)                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                |
| Date:  | August 10, 2005

 

 

 

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