**SECURITIES
AND EXCHANGE COMMISSION**





Washington,
D.C. 20549





**FORM
10-QSB**





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


**OF
THE SECURITIES EXCHANGE ACT OF 1934**


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





Commission
File Number 001-31718





**Q
COMM INTERNATIONAL, INC.**


(Exact
name of registrant as specified in its charter)





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


510
East Technology Avenue, Building C, Orem, Utah 84097


(Address,
including zip code, of principal executive office)





(801)
226-4222


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes | X |  No 
|___|





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).








Number of
shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date: As of May 23, 2005, 5,485,794 shares of the issuer’s
common stock were outstanding.






















**Q COMMINTERNATIONAL, INC.**


**QUARTERLY
REPORT ON FORM 10-Q**





March 31,
2005





**TABLE
OF CONTENTS**





**PAGE****PART I**
    **FINANCIAL INFORMATION**Item 1.
    Financial StatementsUnaudited Condensed Consolidated Balance Sheet as of March 31,
      2005 and December 31, 2004
    3Unaudited Condensed Consolidated Statements of Operations and
      Comprehensive Loss for the three months ended March 31, 2005 and
      2004
    4Unaudited Condensed Consolidated Statements of Cash Flows for
      the three months ended March 31, 2005 and 2004
    5Notes to Unaudited Condensed Consolidated Financial
      Statements
    6Item 2.
    Management's Discussion and Analysis of Financial Condition
      and Results of Operations
    15Item 4.
    Controls and Procedures
    25**PART II**
    **OTHER INFORMATION**Item 1.
    Legal Proceedings
    26Item 6.
    Exhibits and Reports on Form 8-K
    26**SIGNATURES**
    28














2
 Table of Contents





**PART I - FINANCIAL INFORMATION**





**Item 1. Financial Statements**





**QCOMM INTERNATIONAL, INC. AND SUBSIDIARIES**





**UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS**





March
      31,
      2005
    
    December
      31, 2004**ASSETS****Current
      Assets:**Cash
      and cash equivalents
    
    $
    777,852
    
    $
    1,698,052Trade
      accounts receivable, net
    
    
    998,887
    
    
    895,388Other
      receivable, net
    
    
    -
    
    
    61,434Inventory,
      net
    
    
    918,586
    
    
    1,081,637Prepaid
      expenses
    
    
    846,849
    
    
    156,375Total
      Current Assets
    
    
    3,542,174
    
    
    3,892,886**Property
      and Equipment, net**
    
    
    4,924,671
    
    
    4,382,953**Other
      Assets:**Restricted
      cash
    
    
    524,928
    
    
    510,692Capitalized
      software development costs, net
    
    
    866,803
    
    
    1,052,344Goodwill
    
    
    144,580
    
    
    144,580Deposits
    
    
    149,740
    
    
    149,719Definite-lived
      intangible assets, net
    
    
    152,328
    
    
    166,667Total
      Other Assets
    
    
    1,838,379
    
    
    2,024,002Total
      Assets
    
    $
    10,305,224
    
    $
    10,299,841**LIABILITIES
      AND STOCKHOLDERS' EQUITY****Current
      Liabilities:**Accounts
      payable
    
    $
    1,247,017
    
    $
    1,525,634Accrued
      expenses
    
    
    385,362
    
    
    281,302Notes
      payable - related party
    
    
    500,000
    
    
    -Capital
      lease obligations - current portion
    
    
    492,410
    
    
    490,374Total
      Current Liabilities
    
    
    2,624,789
    
    
    2,297,310**Capital
      Lease Obligations, net of current portion**
    
    
    261,446
    
    
    382,745Total
      Liabilities
    
    
    2,886,235
    
    
    2,680,055**Commitments
      and Contingencies (Note 7)**
    
    
    -
    
    
    -**Stockholders'
      Equity:**Common
      stock, $.001 par value; 50,000,000 shares authorized, 5,087,794 and
      4,859,044 shares outstanding, respectively
    
    
    5,088
    
    
    4,859Additional
      paid-in capital
    
    
    28,448,313
    
    
    27,333,779Accumulated
      deficit
    
    
    (21,071,806
    )
    
    (19,775,223
    )Accumulated
      other comprehensive income
    
    
    48,162
    
    
    67,139Stock
      subscription receivable
    
    
    (10,768
    )
    
    (10,768
    )Total
      Stockholders' Equity
    
    
    7,418,989
    
    
    7,619,786Total
      Liabilities and Stockholders' Equity
    
    $
    10,305,224
    
    $
    10,299,841











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








3
 Table of Contents








**Q COMMINTERNATIONAL, INC. AND SUBSIDIARIES**





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







For
      the Three Months Ended
      March
      31,2005
    
    2004**Revenues**
    
    $
    15,303,892
    
    $
    8,487,830**Expenses:**Cost
      of goods sold
    
    
    11,901,712
    
    
    6,174,528Commissions
      and fees
    
    
    2,927,946
    
    
    2,024,907Selling
    
    
    227,365
    
    
    142,697General
      and administrative
    
    
    1,046,258
    
    
    782,639Depreciation
      and amortization (1)
    
    
    483,535
    
    
    399,191Total
      Expenses
    
    
    16,586,816
    
    
    9,523,962**Loss
      from Operations**
    
    
    (1,282,924
    )
    
    (1,036,132
    )**Other
      Income (Expense):**Interest
      income
    
    
    6,740
    
    
    13,948Interest
      and other expense
    
    
    (20,399
    )
    
    (324,315
    )Total
      Other (Expense), net
    
    
    (13,659
    )
    
    (310,367
    )**Loss
      before Income Tax Provision**
    
    
    (1,296,583
    )
    
    (1,346,499
    )**Income
      Tax Provision**
    
    
    -
    
    
    -**Net
      Loss**
    
    $
    (1,296,583
    )
    $
    (1,346,499
    )**Basic
      and Diluted Net Loss per Common Share**
    
    $
    (.26
    )
    $
    (.34
    )**Basic
      and Diluted Weighted Average Common Shares
      Outstanding**
    
    
    4,978,000
    
    
    ****3,995,000**Other
      Comprehensive Loss:**Net
      Loss
    
    $
    (1,296,583
    )
    $
    (1,346,499
    )Foreign
      currency translation adjustment
    
    
    (18,977
    )
    
    -**Other
      Comprehensive Loss**
    
    $
    (1,315,560
    )
    $
    (1,346,499
    )








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







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





4
 Table of Contents








**Q COMMINTERNATIONAL, INC. AND SUBSIDIARIES**





**UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**





For
      the Three Months Ended
      March
      31,2005
    
    2004**Cash
      Flows from Operating Activities:**Net
      loss
    
    $
    (1,296,583
    )
    $
    (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
    
    
    30,000Depreciation
      and amortization
    
    
    483,535
    
    
    399,191Amortization
      of discount on debentures and notes
    
    
    -
    
    
    300,947Change
      in assets and liabilities:Receivables
    
    
    (93,195
    )
    
    (86,690
    )Inventory
    
    
    161,385
    
    
    (584,612
    )Prepaid
      expenses
    
    
    (690,474
    )
    
    -Other
      assets
    
    
    (66
    )
    
    2,737Accounts
      payable
    
    
    (275,862
    )
    
    224,781Accrued
      expense
    
    
    103,994
    
    
    72,405Contingent
      liabilities
    
    
    -
    
    
    (70,000
    )Net
      Cash Used by Operating Activities
    
    
    (1,534,958
    )
    
    (1,057,740
    )**Cash
      Flows from Investing Activities:**Changes
      in restricted cash
    
    
    (14,236
    )
    
    1,450,583Purchase
      of property and equipment
    
    
    (814,857
    )
    
    (511,557
    )Capitalized
      software development costs
    
    
    (26,874
    )
    
    (82,187
    )Purchase
      of intangible assets
    
    
    (6,494
    )
    
    -Net
      Cash Provided (Used) by Investing Activities
    
    
    (862,461
    )
    
    856,839**Cash
      Flows from Financing Activities:**Issuance
      of common stock
    
    
    1,114,763
    
    
    -Cash
      received from subscription receivable
    
    
    -
    
    
    16,152Proceeds
      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 (Used) by Financing Activities
    
    
    1,495,500
    
    
    (1,220,861
    )**Net
      Decrease in Cash**
    
    
    (901,919
    )
    
    (1,421,762
    )**Effect
      of Foreign Exchange Rates on Cash**
    
    
    (18,281
    )
    
    -**Cash
      and Cash Equivalents, Beginning of Period**
    
    
    1,698,052
    
    
    5,524,774**Cash
      and Cash Equivalents, End of Period**
    
    $
    777,852
    
    $
    4,103,012**Supplemental
      Disclosures of Cash Flow Information****:**Cash
      paid during the period for:Interest
    
    $
    19,106
    
    $
    92,047







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








5
 Table of Contents








**Q COMMINTERNATIONAL, 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. The results of operations for the
period 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 and other receivables. 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.





The other
receivable consists of an amount that became due from a provider of product in
2004 the Company distributes. The product was faulty and was returned to the
distributor. However, the distributor has not reimbursed the Company for the
product to date. While the distributor remains committed to reimburse the
Company for the amount owed of approximately $1,000,000, there is no assurance
that this will take place. Accordingly, the Company has recorded an allowance
for the total amount of this receivable as of March 31, 2005 and December 31,
2004.





**Inventory** -
Inventory consists of prepaid telecommunication products acquired 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
$375,000. Inventory which has been paid for but not received as of the balance
sheet date is reflected as a prepaid expense.





**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.











6
 Table of Contents








**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 estimated 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 receivable 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.





**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 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 No. 99-19 (EITF 99-19). For period ended March 31, 2005 the
Company derived approximately 55% of its revenue through unconsigned PIN
purchases and 44% through PINs purchased on consignment. 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’s service bureau
contracts separately identify pricing for software licensing, purchases of
terminals, future technical support billed at hourly rates, and ongoing fees
based on either transaction volume or revenues processed through the system.
Each of these deliverables has value to the customer on a standalone basis and
comprises a separate unit of accounting, as defined in EITF 00-21. Revenues for
each of these elements are based on the value of the services, software or
terminals sold as determined by vendor specific objective evidence.  Such
revenue represented 0.3% and 1.8% of revenues for the periods ended March 31,
2005 and 2004, respectively.





The
Company also generates revenue from the sale or rental of terminals, minimum
performance fees and sales of other products. These sales are recorded net of
sales discounts and allowances when billed.





**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 and
transaction processing fees paid to a third party. Those costs are recorded
separately in operating expenses. For periods ended March 31, 2005 and March 31,
2004 there was $434,258 and $382,815 respectively, of cost of goods sold related
to depreciation on  terminals
and amortization of capitalized software development costs. Such amounts are
included in depreciation and amortization expense in the accompanying unaudited
consolidated statements of operations and comprehensive loss.








7
 Table of Contents








**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 2,611,243 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 $16,950,000, 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 periods 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 years 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. 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 reduced to the pro forma amounts indicated below:










8
 Table of Contents








**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
    
    2004Net
      loss, as reported
    
    $
    (1,296,583
    )
    $
    (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
    
    $
    (1,480,026
    )
    $
    (1,508,284
    )Basic
      net loss per common share, as reported
    
    $
    (.26
    )
    $
    (.34
    )Pro
      forma net loss per common share
    
    $
    (.30
    )
    $
    (.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,
      2004Point
      of sale terminals and related items - in service
    
    $
    3,188,132
    
    $
    2,987,184Office
      and computer equipment
    
    
    371,820
    
    
    341,140Total
      cost of depreciable equipment
    
    
    3,559,952
    
    
    3,328,324Accumulated
      depreciation and amortization
    
    
    (1,520,606
    )
    
    (1,280,770
    )Property
      and equipment in service, net
    
    
    2,039,346
    
    
    2,047,554Point
      of sale terminals and related items - not placed in
service
    
    
    2,604,569
    
    
    2,054,643Parts
      deposits held by manufacturers
    
    
    280,756
    
    
    280,756Total
    
    $
    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 periods ended March 31,
2005 and March 31, 2004 was $250,287 and $181,927, respectively.










9
 Table of Contents








**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
    
    $
    224,561Less
      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. The cost
of the accounts acquired is categorized as a definite-life 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,
      2004Purchase
      price of accounts
    
    $
    206,494
    
    $
    200,000Less
      accumulated amortization
    
    
    (54,166
    )
    
    (33,333
    )Net
      intangible assets
    
    $
    152,328
    
    $
    166,667





Amortization
expense for the period ended March 31, 2005 was $20,833. There was no
amortization expense for the period ended March 31, 2004.





**NOTE
4 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS**





Information
related to capitalized software development costs at March 31, 2005 and December
31, 2004 is as follows:








For
      the three months ended March 31, 2005
    
    For
      the year ended December 31, 2004Capitalized
      software development costs, beginning of period
    
    $
    2,548,986
    
    $
    2,262,249Additional
      costs capitalized during the period
    
    
    26,874
    
    
    286,737Capitalized
      software development costs, end of period
    
    
    2,575,860
    
    
    2,548,986Accumulated
      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 periods ended
March 31, 2005 and 2004, the Company recorded amortization expense of $212,415
and $217,264, respectively.











10
 Table of Contents








**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 debt financing from 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.





**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 cost 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
    
    $
    412,5822006
    
    
    397,502Total
    
    
    810,084Less
      interest and other costs
    
    
    (56,228
    )Present
      value of future minimum lease payments
    
    
    753,856Less
      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 periods 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 $115,000 annually
through 2008.





**NOTE
7 - LITIGATION AND CONTINGENCIES**





In March
2005, the Company filed an action against a PIN provider, due to approximately
$1 million in deactivated PINs received in the fourth quarter of 2004. The
supplier has accepted responsibility for the deactivated PINs, however there is
no assurance of repayment, and management recorded an allowance against the full
amount of the receivable in the fourth quarter of 2004 (see Note 1,
“Receivables”).





On
January 23, 2004, a complaint was filed against the Company claiming that it had
breached an Asset Purchase Agreement between the Company and the plaintiff dated
October 31, 2000. The plaintiff 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. Management
believes the Company appropriately exercised its right of rescission specified
in the agreement and returned the items to the seller, and that no amounts are
due under the contract. The Company plans to vigorously contest the claim.
Management believes that the ultimate outcome of this matter, if any, will not
have a material adverse affect on the Company’s financial position, results of
operations, or liquidity.














11
 Table of Contents








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


**NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
8 - CAPITAL STOCK**





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





**Period
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.





**Period
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), 2003 plan
(100,000 shares) and 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
      December
      31, 2004Shares
    
    Weighted
      Average
      Exercise
      Price
    
    Shares
    
    Weighted
      Average
      Exercise
      PriceOutstanding
      at beginning of period
    
    
    532,667
    
    $
    5.95
    
    
    304,250
    
    $
    10.00Granted
    
    
    217,000
    
    
    3.93
    
    
    502,500
    
    
    4.65Exercised
    
    
    (128,750
    )
    
    4.58
    
    
    -
    
    
    -Forfeited
    
    
    (54,167
    )
    
    6.19
    
    
    (274,083
    )
    
    8.16Expired
    
    
    -
    
    
    -
    
    
    -
    
    
    -Outstanding
      at end of period
    
    
    566,750
    
    
    5.46
    
    
    532,667
    
    
    5.95Exercisable
      at end of period
    
    
    136,498
    
    
    8.53
    
    
    296,998
    
    
    6.68Weighted
      average fair value of options granted
    
    
    217,000
    
    
    3.69
    
    
    502,500
    
    
    4.65





12
 Table of Contents








**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 the
year ended December 31, 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
      ExercisableRange
      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
    
    $
    4.656.50
    
    
    110,000
    
    
    8.7
      years
    
    
    6.50
    
    
    55,000
    
    
    6.5015.00
    
    
    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
    
    TotalStock
      options issued to employees and board members under stock option
      plans
    
    
    521,416
    
    
    -
    
    
    521,416Stock
      options issued to employees outside stock option plans
    
    
    45,334
    
    
    -
    
    
    45,334Total
    
    
    566,750
    
    
    -
    
    
    566,750Warrants
      issued to non-employees
    
    
    355,833
    
    
    1,588,660
    
    
    1,944,493Total
      options and warrants outstanding
    
    
    922,583
    
    
    1,588,660
    
    
    2,511,243





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





For the
periods ended March 31, 2005 and 2004, the Company had one customer that
accounted for 36% and 46% of revenues, respectively. The Company’s prepaid
wireless products accounted for 89% and 90% of total revenues for the periods
ended March 31, 2005 and 2004, respectively.











13
 Table of Contents








**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 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 have an arrangement that provides 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.





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.” The
issue is to determine 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 EVENT**





Subsequent
to March 31, 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.





In April
2005 a $500,000 related party note was repaid.











14
 Table of Contents








**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 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. The Company has responded to the SEC and is awaiting a
follow-on response from the SEC, the outcome of which could affect the method by
which we recognize revenue and prompt an amended filing of the 2004 Form 10-KSB
and this Form 10-Q.





**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 $21.1 million. For each of the periods ended March
31, 2005 and March 31, 2004 net losses were $1.3 million. 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 $0.9 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.**





Our
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 were
approximately 0.3% in the first quarter 2005 and (1.1)% 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 3.1% in the first
quarter 2005 and 3.4% 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





15
 Table of Contents








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, 89% of our revenue for the
period 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 periods ended March 31, 2005, our three largest customers accounted for
approximately 50% 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 lower net
profits or a greater net loss.





**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.**





16
 Table of Contents








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
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 the 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 earnings 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.





17
 Table of Contents








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. 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.





18
 Table of Contents








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 period 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. We recognize revenues at the gross sales price of the
products and record cost of goods sold for the cost of the products sold.
Commissions and fees paid to brokers and retailers are recorded as operating
expense.





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 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
    
    2004Amount
    
    Percentage
    
    Amount
    
    PercentageWireless
    
    $
    13,657,118
    
    
    89.2
    %
    $
    7,449,894
    
    
    87.8
    %Debit
      Card
    
    
    732,141
    
    
    4.8
    
    
    236,779
    
    
    2.8Long
      Distance
    
    
    295,112
    
    
    1.9
    
    
    167,105
    
    
    2.0Wholesale
      Products
    
    
    225,890
    
    
    1.5
    
    
    14,645
    
    
    0.2Fees
    
    
    90,985
    
    
    0.6
    
    
    146,959
    
    
    1.7Wireless
      Phone Features
    
    
    76,268
    
    
    0.5
    
    
    32,740
    
    
    0.4Service
      Bureau
    
    
    51,286
    
    
    0.3
    
    
    156,997
    
    
    1.8Home
      Dial Tone
    
    
    38,810
    
    
    0.3
    
    
    48,292
    
    
    0.6Terminal
      Sales
    
    
    22,065
    
    
    0.2
    
    
    1,700
    
    
    0.0Gift
      Card
    
    
    26,380
    
    
    0.2
    
    
    28,841
    
    
    0.3Other
    
    
    87,837
    
    
    0.5
    
    
    203,878
    
    
    2.4Totals
    
    $
    15,303,892
    
    
    100.0
    %
    $
    8,487,830
    
    
    100.0
    %





Prepaid
wireless continues to be our largest source of revenue. The prepaid wireless
industry is projected to continue to grow and we anticipate that it will
continue to be our largest revenue source. Our prepaid wireless products include
many major national carriers and many smaller regional carriers. We frequently
add new wireless products as the demand arises.





19
 Table of Contents








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 periods ended March 31, 2005 and March 31, 2004 these revenue
represented 1.5% and 0.2% 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. While we make this business
model available to all our customers, we expect the majority of revenues from
service bureau customers will be from customers outside the United States since
that is the only business model we offer them. This revenue model will provide
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 period ended March 31, 2005 and 2004, this source of
revenue decreased to 0.3% of total revenue from 1.8%, respectively.





Historically,
our results of operations have been characterized by relatively high revenues
but relatively low profits. 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, our margins were approximately 0.3% for
the period ended March 31, 2005 and (1.1)% for the comparable period in 2004.
The contribution margin excluding depreciation on terminals and amortized
software development costs were approximately 3.1% for the period ended March
31, 2005 and 3.4% for the comparable period in 2004. The
change in margins is primarily driven by the increase in lower margin wireless
products and lower fees. In addition, because of these relatively small margins,
a minor change in the price that we pay for products would have a substantial
effect on our margins and profit 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, as
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.





20
 Table of Contents








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
periods ended March 31, 2005 and 2004.





For
      the Quarter Ended
      March
      31,
      2005
    For
      theQuarter
      Ended
      December
      31,
      2004
    For
      theQuarter
      Ended
      September
      30,
      2004
    For
      theQuarter
      Ended
      June
      30,
      2004
    For
      theQuarter
      Ended
      March
      31,
      2004**Broker
      Model**Net
      activations (1)
    396
    450
    288
    70
    175Terminal
      acquired (2)
    
    200Total
      activated terminals
    2,721
    2,325
    1,675
    1,387
    1,317Average
      activated terminals
    2,523
    1,734
    1,531
    1,352
    1,230Average
      monthly net revenue per activated terminal (3)
    59
    68
    75
    69
    73**Service
      Bureau Model**Net
      terminals placed
    266
    (200)
    50
    -
    453Total
      terminals in service
    1,578
    1,312
    1,512
    1,462
    1,462Total
      activated terminals
    978
    712
    912
    962
    662Average
      monthly net revenue per activated terminal (4)
    17
    14
    11
    11
    6








(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


(4)
Excludes one-time revenues from terminal sales, installation fees and license
fees.





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 6,000-7,000 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) net 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.





21
 Table of Contents








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.





We
evaluate our service bureau model in different ways. While we measure ARPU for
these customers, the revenues from software licensing and profits from terminal
sales are likely to be more significant than the transaction fees from sales of
products. The total net profit on a per-customer basis is the measure we focus
on rather than transaction fees per unit. As our service bureau customers
continue to grow we will have more meaningful data of this nature to report. Our
strategy with respect to service bureau revenues is to selectively choose
opportunities that will bring us the most net revenues. There is no assurance
that we will be successful in this strategy.





**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 condition 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 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. Our service bureau contracts
separately identify pricing for software licensing, purchases of terminals,
future technical support billed at hourly rates, and ongoing fees based on
either transaction volume or revenues processed through the system. Each of
these deliverables has value to the customer on a standalone basis and comprises
a separate unit of accounting, as defined in EITF 00-21. Revenues for each of
these elements are based on the value of the services, software or terminals
sold as determined by vendor specific objective evidence.





*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" on our statement of operations. Cost of goods sold fluctuate due to
changes in the mix of our products and discount rates offered by carriers. As
already noted, we expect to experience greater fluctuations in revenues and
margins as we introduce our service bureau revenue model.





22
 Table of Contents








*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 estimated 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 the, 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
    
    2004Revenues
    
    
    100.0
    %
    
    100.0
    %Expenses:Cost
      of goods sold
    
    
    77.8
    
    
    72.7Commissions
      and fees
    
    
    18.7
    
    
    23.9Selling
    
    
    1.5
    
    
    1.7General
      and administrative
    
    
    6.8
    
    
    8.9Depreciation
      and amortization (1)
    
    
    3.2
    
    
    4.7Loss
      from operations
    
    
    (8.4
    )
    
    (11.9
    )Total
      other expense - net
    
    
    (0.1
    )
    
    (3.6
    )Net
      loss
    
    
    (8.5
    )%
    
    (15.5
    )%





(1)
Includes cost of goods sold related to depreciation on terminals and
amortization of software development. For periods ended March 31, 2005 and March
31, 2004, these costs total 2.8% and 4.5% of revenue, respectively.








23
 Table of Contents








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





Three
      months ended March 31,
    
    Increase
      (Decrease)2005
    
    2004
    
    $
    
    %Revenues
    
    $
    15,303,892
    
    $
    8,487,830
    
    $
    6,816,062
    
    
    80.3
    %Expenses:Cost
      of goods sold
    
    
    11,901,712
    
    
    6,174,528
    
    
    5,727,184
    
    
    92.8Commissions
      and fees
    
    
    2,927,946
    
    
    2,024,907
    
    
    903,039
    
    
    44.6Selling
      expenses
    
    
    227,365
    
    
    142,697
    
    
    84,668
    
    
    59.3General
      and administrative expenses
    
    
    1,046,258
    
    
    782,639
    
    
    263,619
    
    
    33.7Depreciation
      and amortization (1)
    
    
    483,535
    
    
    399,191
    
    
    84,344
    
    
    21.1Total
      expenses
    
    
    16,586,816
    
    
    9,523,962
    
    
    7,062,854
    
    
    74.2Loss
      from operations
    
    
    (1,282,924
    )
    
    (1,036,132
    )
    
    246,792
    
    
    23.8Total
      other expense - net
    
    
    (13,659
    )
    
    (310,367
    )
    
    (296,708
    )
    
    (95.6
    )Net
      loss
    
    $
    (1,296,583
    )
    $
    (1,346,499
    )
    $
    (49,916
    )
    
    (3.7
    )%











(1)
Includes $434,258 and $382,815 of cost of goods sold related to depreciation on
terminals and amortization of software development, for periods 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 ($6.2 million) and prepaid debit card ($0.5
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 period ended March 31, 2005 as percentage of
revenues was 80.1% compared to 77.2% for the period ended March 31, 2004.
Excluding terminal depreciation and software development amortization expense,
cost of good sold for the three months ended March 31, 2005 as percentage of
revenues was 77.7% compared to 72.7% 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. Changes in cost of goods
sold as a percentage of revenues are also attributable to our mix of product
sales. 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. Cost of goods sold will also be
influenced by the relative growth experienced in our two business models, the
traditional broker model and the service bureau model.





*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 19.1% compared to 23.9% for the three months ended
March 31, 2004. Commissions and fees for the period 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 LCD 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.





24
 Table of Contents








*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 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 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 instrument.





**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 $917,000 and a current
ratio of 1.3 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 $1.4 million (includes $0.9 million in PIN inventory and $0.5
million 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 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.





**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 designing and evaluating the
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we
necessarily were required to apply our judgment in evaluating the cost-benefit
relationship of possible controls and procedures.





At the
end of the period covered by this Quarterly Report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(c) under the Securities Exchange Act of
1934, as Amended). Based on the foregoing, the Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures
were not effective due to certain material weaknesses in the Company’s internal
controls over financial reporting.





25
 Table of Contents








**Changes
in Internal Control Over Financial Reporting**





During
the quarter ended March 31, 2005, we put into effect certain changes in our
internal controls over financial reporting, including disclosure controls and
procedures, to address the deficiencies noted in our Form 10-KSB for the year
ended December 31, 2004. These changes included timely reconciliation of balance
sheet accounts and improved controls over our PIN inventory. Our remediation
efforts are ongoing as we continue to address areas requiring
improvement.





**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.
We will vigorously contest the claim. At this point, we do not believe that the
eventual outcome of the matter will have a material adverse impact on our
financial position, results of operations or liquidity.





In March
2005, we filed an action against The Phone Store for $1.0 million in deactivated
PIN inventory received from the Phone Store. We filed the compliant in the
Fourth Judicial District Court.





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





(a)
Exhibits:





Exhibit
      No.
    Description3.1(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*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)
  26
 Table of Contents
 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.


#
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.

























27
 Table of Contents





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.
      RobinsonMark
      W. RobinsonChief
      Financial Officer(Principal
      Financial and Accounting Officer)Date:
    June
      2, 2005

































28