**SECURITIES
        AND EXCHANGE COMMISSION**
 
 Washington,
        D.C. 20549
 
 **FORM
        10-Q**
 
 **QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 **FOR
        THE QUARTERLY PERIOD ENDED** **SEPTEMBER
        30, 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).
 
 Yes
              |___|
              No
              |
                  X
                  |
 
 Number
        of
        shares outstanding of each of the issuer's classes of common stock, as of
        the
        latest practicable date: As of November 14, 2005, 5,914,794 shares of the
        issuer’s common stock were outstanding.
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 
 
 Yes
              |___|
              No
              |
                  X
                  |
 
  
  
 
 **Q
        COMM INTERNATIONAL, INC.**
 **QUARTERLY
        REPORT ON FORM 10-Q**
 
 September
        30, 2005
 
 **TABLE
        OF CONTENTS**
 
 
 **PAGE****PART
                  I**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements
              3Unaudited
                  Condensed Consolidated Balance Sheets as of
                  September 30, 2005 and December 31, 2004
              3Unaudited
                  Condensed Consolidated Statements of Operations and
                  Comprehensive Loss for the Three and Nine Months Ended September
                  30, 2005
                  and 2004
              4Unaudited
                  Condensed Consolidated Statements of Cash Flows for
                  the Nine Months Ended September 30, 2005 and 2004
              5Notes
                  to Unaudited Condensed Consolidated Financial
                  Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              16Item
                  4.
              Controls
                  and Procedures
              28**PART
                  II**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              29Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              29
 
 
  2
 Table
            of Contents
 **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 **Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED BALANCE SHEETS**
 
 September
                  30,
                2005
              
              December
                  31,
                2004
                (as
                  restated)**ASSETS****Current
                  Assets:**Cash
              
              $
              1,310,434
              
              $
              773,052Trade
                  accounts receivable, net
              
              
              1,227,133
              
              
              895,388Other
                  receivables, net
              
              
              -
              
              
              61,434Inventory,
                  net
              
              
              1,163,129
              
              
              1,081,637Deposit
                  on handsets, net
              
              
              -
              
              
              925,000Prepaid
                  expenses
              
              
              14,780
              
              
              156,375Total
                  Current Assets
              
              
              3,715,476
              
              
              3,892,886**Property
                  and Equipment, net**
              
              
              3,245,776
              
              
              4,382,953**Other
                  Assets:**Restricted
                  cash
              
              
              535,987
              
              
              510,692Capitalized
                  software development costs, net
              
              
              481,477
              
              
              1,052,344Goodwill
              
              
              144,580
              
              
              144,580Deposits
              
              
              146,982
              
              
              149,719Definite-lived
                  intangible assets, net
              
              
              110,664
              
              
              166,667Total
                  Other Assets
              
              
              1,419,690
              
              
              2,024,002Total
                  Assets
              
              $
              8,380,942
              
              $
              10,299,841**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              785,570
              
              $
              1,525,634Accrued
                  expenses
              
              
              406,767
              
              
              281,302Capital
                  lease obligations - current portion
              
              
              494,130
              
              
              490,374Total
                  Current Liabilities
              
              
              1,686,467
              
              
              2,297,310**Long
                  Term Liabilities:**Note
                  payable - related party, net of unamortized discounts of $513,447,
                  and $0,
                  respectively
              
              
              100,553
              
              
              -Capital
                  lease obligations, net of current portion
              
              
              11,820
              
              
              382,745Total
                  Long Term Liabilities
              
              
              112,373
              
              
              382,745Total
                  Liabilities
              
              
              1,798,840
              
              
              2,680,055**Commitments
                  and Contingencies (Notes 6, 7, 11, and 13)****Stockholders'
                  Equity:**Common
                  stock, $0.001 par value; 50,000,000 shares authorized, 5,914,794
                  shares
                  and 4,859,044 shares outstanding, respectively
              
              
              5,915
              
              
              4,859Additional
                  paid-in capital
              
              
              32,322,376
              
              
              27,333,779Accumulated
                  deficit
              
              
              (25,773,341
              )
              
              (19,775,223
              )Accumulated
                  other comprehensive income
              
              
              37,920
              
              
              67,139Stock
                  subscription receivable
              
              
              (10,768
              )
              
              (10,768
              )Total
                  Stockholders' Equity
              
              
              6,582,102
              
              
              7,619,786Total
                  Liabilities and Stockholders' Equity
              
              $
              8,380,942
              
              $
              10,299,841
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.
  3
 Table
            of Contents
  
 **Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
        LOSS**
 
 For
                  the Three Months Ended
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
                (as
                  restated)
              
              2005
              
              2004
                (as
                  restated)**Revenues**
              
              $
              12,782,094
              
              $
              4,684,257
              
              $
              34,582,047
              
              $
              10,352,428**Operating
                  Expenses:**Cost
                  of goods sold (exclusive of items shown separately below
                  (1))
              
              
              10,571,166
              
              
              3,014,659
              
              
              29,134,446
              
              
              6,155,987Commissions
                  and fees
              
              
              1,565,298
              
              
              1,219,646
              
              
              5,732,602
              
              
              3,093,619Selling
              
              
              197,027
              
              
              228,272
              
              
              657,018
              
              
              527,720General
                  and administrative
              
              
              1,018,353
              
              
              652,055
              
              
              3,522,559
              
              
              2,077,681Depreciation
                  and amortization
              
              
              458,908
              
              
              455,036
              
              
              1,411,156
              
              
              1,271,785Total
                  Operating Expenses
              
              
              13,810,752
              
              
              5,569,668
              
              
              40,457,781
              
              
              13,126,792**Loss
                  from Operations**
              
              
              (1,028,658
              )
              
              (885,411
              )
              
              (5,875,734
              )
              
              (2,774,364
              )**Other
                  Income Expense:**Interest
                  income
              
              
              2,777
              
              
              10,343
              
              
              13,702
              
              
              27,328Interest
                  and other expense
              
              
              (
                  25,100
              )
              
              (15,519
              )
              
              (67,565
              )
              
              (349,943
              )Interest
                  expense - related party
                Loss
                  on disposal of property and equipment
              
              
              (68,552)
                -
              
              
              -
                -
              
              
              (68,522
                -
              )
              
              -
                (23,046
              )Total
                  Other Expense, net
              
              
              (90,875
              )
              
              (5,176
              )
              
              (122,385
              )
              
              (345,661
              )**Net
                  Loss**
              
              $
              (1,119,533
              )
              $
              (890,587
              )
              $
              (5,998,119
              )
              $
              (3,120,025
              )**Basic
                  and Diluted Loss per Common Share**
              
              $
              (.19
              )
              $
              (.19
              )
              $
              (1.10
              )
              $
              (.74
              )**Basic
                  and Diluted Weighted Average Common Shares
                  Outstanding**
              
              
              5,914,794
              
              
              4,622,672
              
              
              5,450,703
              
              
              4,204,391**Comprehensive
                  Loss:**Net
                  loss
              
              $
              (1,119,533
              )
              $
              (890,587
              )
              $
              (5,998,119
              )
              $
              (3,120,025
              )Foreign
                  currency translation adjustment
              
              
              10,243
              
              
              23,033
              
              
              37,920
              
              
              23,033**Comprehensive
                  Loss**
              
              $
              (1,109,290
              )
              $
              (867,554
              )
              $
              (5,960,199
              )
              $
              (3,096,992
              )
  (1)
              Excludes
                  $412,358 and $420,988 of depreciation on terminals and amortization
                  of
                  capitalized software development costs applicable to cost of goods
                  sold
                  for the three months ended September 30, 2005 and September 30,
                  2004,
                  respectively.  Excludes $1,279,340 and $1,202,157 of depreciation
                  on
                  terminals and amortization of capitalized software development
                  costs
                  applicable to cost of goods sold for the nine months ended September
                  30,
                  2005 and September 30, 2004,
                  respectively.
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.
 
  4
 Table
            of Contents
 **Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **UNAUDITED
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
 
 For
                  the Nine Months Ended
                September
                  30,2005
              
              2004
                (as
                  restated)**Cash
                  Flows from Operating Activities:**Net
                  loss
              
              $
              (5,998,119
              )
              $
              (3,120,025
              )Adjustments
                  to reconcile net loss to net cash used by operating
                  activities:Loss
                  on disposal of property and equipment
              
              
              6,444
              
              
              23,046Provision
                  for doubtful accounts
              
              
              103,847
              
              
              30,000Depreciation
                  and amortization
              
              
              1,411,156
              
              
              1,271,786Amortization
                  of discount on related party note
              
              
              100,553
              
              
              -Handset
                  inventory adjustment
              
              
              925,000
              
              
              -Impairment
                  and write-off of terminals
              
              
              1,266,704
              
              
              -Amortization
                  of discount on debentures and notes
              
              
              -
              
              
              300,947Recognition
                  of unearned revenue
              
              
              -
              
              
              (80,000
              )Loss
                  from PIN and handset inventory adjustments
              
              
              18,454
              
              
              -Change
                  in assets and liabilities:Receivables
              
              
              (374,160
              )
              
              (548,487
              )Inventory
              
              
              (99,946
              )
              
              (1,174,588
              )Deposit
                  on handsets
              
              
              -
              
              
              -Prepaid
                  expenses
              
              
              141,595
              
              
              (19,220
              )Other
                  assets
              
              
              2,739
              
              
              (65,265
              )Accounts
                  payable
              
              
              (740,064
              )
              
              72,465Accrued
                  expenses
              
              
              125,465
              
              
              105,679Contingent
                  liabilities
              
              
              -
              
              
              (70,000
              )Net
                  Cash Used by Operating Activities
              
              
              (3,110,332
              )
              
              (3,273,662
              )**Cash
                  Flows from Investing Activities:**Changes
                  in restricted cash
              
              
              (25,295
              )
              
              1,450,583Purchase
                  of property and equipment
              
              
              (847,689
              )
              
              (1,578,767
              )Proceeds
                  from note receivable
              
              
              -
              
              
              150,000Proceeds from the sale
                of
                property and equipment
              
              
              -
              
              
              55,680Increase in long-term
                investments
              
              
              -
              
              
              (195,256
              )Capitalized
                  software development costs
              
              
              (128,571
              )
              
              (322,124
              )Purchase
                  of intangible assets
              
              
              56,003
              
              
              -Net
                  Cash (Used in) Provided by Investing Activities
              
              
              (945,552
              )
              
              439,884**Cash
                  Flows from Financing Activities:**Issuance
                  of common stock
              
              
              4,375,653
              
              
              3,000,000Cash received from subscription
                receivable
              
              
              -
              
              
              37,689Proceeds
                  from issuance of related party notes payable
              
              
              614,000
              
              
              -Payment of stock offering
                cost
              
              
              -
              
              
              (10,425
              )Payments
                  on related party notes payable
              
              
              -
              
              
              (49,328
              )Payments
                  on convertible notes payable
              
              
              -
              
              
              (1,230,000
              )Principal
                  payments on capital lease obligations
              
              
              (367,169
              )
              
              (23,887
              )Net
                  Cash Provided by (Used in) Financing Activities
              
              
              4,422,484
              
              
              1,724,049**Net
                  Increase (Decrease) in Cash**
              
              
              566,600
              
              
              (1,989,497
              )**Effect
                  of Foreign Exchange Rates on Cash**
              
              
              (29,219
              )
              
              23,033**Cash,
                  Beginning of Period**
              
              
              773,052
              
              
              5,524,774**Cash,
                  End of Period**
              
              $
              1,310,433
              
              $
              3,558,310**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  paid during the period for:Interest
              
              $
              (67,534
              )
              $
              164,101Income
                  taxes
              
              
              -
              
              
              200**Supplemental
                  Schedule of Non cash Financing Activities:**Discount
                  to notes payable-related party as a result of issuing
                  warrants
              
              $
              513,447
              
              
              -
  The
        accompanying notes are an integral part of these unaudited condensed
        consolidated financial statements.
 5
 Table
            of Contents
  
 **Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  **Nature
        of Business** - The
        Company's business involves purchasing and reselling prepaid telecommunication
        and other products through a proprietary electronic point-of-sale activation
        system known as Qxpress. The Company provides its products to end users
        throughout the United States, Canada, France, and the Bahamas. 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 93% of the Company’s revenues are generated in the
        United States.
 
 **Restatement
        of 2004 Financial Information** - The
        Company has restated the accompanying nine month periods ended September
        30,
        2004, for the following reasons: (1) to bring revenue recognition accounting
        related to the sale of consigned personal identification numbers (PINs) into
        conformity with Emerging Issues Task Force Issue No. 99-19, (2) to separately
        identify the amounts of terminal depreciation and capitalized software
        development costs amortization that related to “Cost of Goods Sold” in the
        statements of operations and comprehensive loss, and (3) to correct various
        balance sheet accounts as a result of the facts described in the Company’s Form
        8-K filed on September 22, 2005.
 
 The
        Company has restated its 2004 periods to recognize revenue for all consigned
        PIN-based products from a “gross” to a “net” basis in accordance with SAB No.
        104, “Revenue Recognition in Financial Statements,” and Emerging Issues Task
        Force Issue No. 99-19. As a result, revenue was reduced by $6,294,679 from
        $10,978,936 to $4,684,257 for the three months ended September 30, 2004 and
        revenue was reduced by $17,984,796 from $28,337,224 to $10,352,428 for the
        nine
        months ended September 30, 2004. These reductions in reported revenues had
        no
        impact on the Company’s net loss, net loss per common share, or shareholders’
        equity in the periods presented because there was a corresponding reduction
        in
        expenses as reflected in the captions “Cost of Goods Sold” and “Commissions and
        Fees” for the same periods.
 
 The
        Company has separately identified the terminal depreciation expense and the
        capitalized software development cost amortization expense attributable to
        Cost
        of Goods Sold in its statements of operations and comprehensive loss. These
        costs are set forth in a footnote to the statements of operations and
        comprehensive loss. This clarification provides additional information only
        and
        had no impact on net loss, net loss per common share, or shareholders’ equity in
        the restated periods.
  During
        2004, the Company’s former CFO entered into a transaction without authorization
        and acted to hide the transaction from the Company’s CEO and other members of
        management, the Board of Directors, and the Company’s auditors by knowingly
        making false statements and intentionally altering documents. This transaction
        included using Company funds to make a $1,525,000 deposit with a third-party
        vendor for the purchase of 30,000 Nokia 3300 handsets. Company records were
        falsified to present $925,000 of this deposit as cash and $600,000 as a
        receivable. The $600,000 receivable was reserved for at year-end 2004, as
        the
        Company believed that it would not be recovered. The consolidated balance
        sheet
        at December 31, 2004 has been restated to reclassify $925,000 of cash as
        a
        deposit to the vendor. Only 20,650 of the handsets were actually received
        by the
        Company and the corresponding loss of $600,000 has been reclassified from
        General and Administrative Expense to Cost of Goods Sold in the restated
        consolidated financial statements for the year ended December 31,
        2004.
 With
        respect to this unauthorized transaction, the $1,525,000 deposit was never
        repaid. On July 1, 2005, the Company formally took ownership of the 20,650
        handsets. During the first quarter of 2005, the vendor to whom the deposit
        was
        made sold or took possession of approximately 9,000 of the handsets without
        reimbursing the Company. The Company is taking legal action to recover the
        value
        of these handsets and all losses sustained by the Company in this transaction.
        There can be no assurance the Company will successfully recover these losses
        from either the vendor or the former CFO. Subsequent to taking possession
        of the
        handsets, the Company has sold all 20,640 handsets for $31 per headset. No
        additional losses are expected from this transaction. The Company’s Audit
        Committee, after consultation with legal counsel, hired a forensic investigator
        to inquire into all of these matters. The Company’s Audit Committee believes a
        thorough and complete investigation has been undertaken.
 
 These
        restatements, at December 31, 2004, had no effect on total assets, net loss,
        net
        loss per common share, and stockholders’ equity.  As of March 31, 2005
        and for the three months then ended, the impact of these restatements was
        to
        reduce total assets by $285,005, due handsets which were taken by the vendor,
        and to generate an equivalent net loss and reduction in stockholders’ equity.
        The $285,005 net loss increased the net loss per common share by ($0.06).
        These
        restatements had the following impact on total assets, revenue and net loss:
  6
 Table
            of Contents
 **Q
            COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
 As
                  Previously Reported
                March
                  31,
                2005
              
              Restated
                March
                  31,
                2005
              
              As
                  Previously Reported
                March
                  31,
                2004
              
              Restated
                March
                  31,
                2004
              
              As
                  Previously Reported
                December
                  31,
                2004
              
              Restated
                December
                  31,
                2004Total
                  Assets
              
              $
              10,305,224
              
              $
              10,020,219
              
              
              N/A
              
              
              N/A
              
              $
              10,288,841
              
              $
              10,288,841Revenues
              
              $
              15,303,892
              
              $
              8,477,260
              
              $
              8,487,830
              
              $
              2,717,234
              
              $
              40,801,841
              
              $
              16,576,323Net
                  Loss
              
              
              ($1,296,583
              )
              
              ($1,581,588
              )
              
              ($1,346,499
              )
              
              ($1,346,499
              )
              
              ($6,832,808
              )
              
              ($6,832,808
              )Net
                  Loss Per Common Share
              
              $
              (.26
              )
              $
              (.32
              )
              $
              (.34
              )
              $
              (.34
              )
              $
              (1.51
              )
              $
              (2.12
              )
 
 **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
        the
        three and nine month periods presented, have been made. The results of
        operations for the periods ending September 30, 2005 are not necessarily
        indicative of the full year.
  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 consolidated financial statements and notes
        thereto
        included in the Company's December 31, 2004 Form 10-KSB/A.
  **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 the 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, allowances for deferred income
        tax
        assets, and accruals for litigation and contingencies.
 
 **Receivables** -
        Accounts receivable consist of trade receivables arising in the normal course
        of
        business.  As of September 30, 2005 and December 31,
        2004, the
        Company established an allowance for doubtful accounts of approximately $432,178
        and $317,000, 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.
  **Inventory** -
        Inventory consists of prepaid  telecommunication 
        products
        sold by the  Company  and is carried at the lower of cost or
        market  value using the  first-in,  first-out 
        method. 
        Inventory is carried net of an allowance for obsolescence of $361,781 and
        $377,000 as of September 30, 2005 and December 31, 2004, respectively.
 
  **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.
  **Deposit
        on Handsets** -
        Deposits on handsets consist of advanced payments made for Nokia 3300 handsets.
 
 **Accrued
        Expenses -** Accrued
        expenses totaled $406,767 and consist of payroll, bonus, commission, and
        vacation liabilities as of September 30, 2005.
 
  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)**
  **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.
 
 **Capitalized
        Software Develop Assets** -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 this asset over its three-year estimated
        useful life.
  **Impairment
        of Long-lived Assets** **-** In
        accordance with SFAS No. 144, ** “Accounting
        for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as
        property and equipment, and purchased intangibles subject to amortization,
        are
        reviewed for impairment whenever events or changes in circumstances indicate
        that the carrying amount of an asset may not be recoverable. Recoverability
        of
        assets to be held and used is measured by a comparison of the carrying amount
        of
        an asset or asset group to undiscounted future cash flows expected to be
        generated by the asset. If the carrying amount of an asset or asset group
        exceeds its estimated future undiscounted cash flows, an impairment charge
        is
        recognized for the amount by which the carrying amount of the asset exceeds
        the
        fair value of the asset.
  **Fair
        Value of Financial Instruments** **-** The
        carrying values reported in the accompanying condensed consolidated financial
        statements for accounts receivable, other receivables, and accounts payable
        approximate fair values because of the immediate or short-term maturities
        of
        these financial instruments. The carrying values of capital lease and notes
        payable obligations also approximate their fair values based on current interest
        rates and the length of time of repayment of the obligations.
  **Revenue
        Recognition** - The
        Company uses two models to generate revenues: the broker model and the service
        bureau model. Under the broker model, which has been and continues to be
        the
        dominant alternative, the Company sells its prepaid products through third-party
        retail locations. Revenue is recognized at the time products are sold. Sales
        of
        the Company's products are generally made directly to end-users. There is
        no
        right of return for products sold and the Company is not obligated for further
        performance after the sale. These sales transactions are accounted for at
        "gross" since the Company meets the requirements specified by Securities
        and
        Exchange Commission Staff Accounting Bulletin No. 104 (SAB 104) and Emerging
        Issues Task Force Issue No. 99-19 (EITF 99-19). In cases where the Company
        does
        not own the product sold and another entity retains such risk and reward
        of
        product ownership or where certain other requirements of SAB 104 or EITF
        99-19
        are not met, the Company records revenues on a "net" basis.
 
 The
        Company uses the service bureau model primarily with international
        customers.  In this model, the Company licenses
        its proprietary software and sells its point-of-sale terminals.
        The customer is responsible for operation of the system and
        providing services to its retail stores. The Company receives an ongoing
        transaction fee for all sales through the system, which is recorded on a
        "net"
        basis.
  **Cost
        of Goods Sold** - Cost
        of goods sold consists primarily of the costs of the prepaid telecommunication
        and other miscellaneous products sold at retail, terminals and handsets sold
        to
        customers. The full cost of the product, as well as all direct costs associated
        with the sale of the product, is recorded at the time of sale. Cost of goods
        sold does not include commissions and fees paid to brokers and other
        intermediaries, transaction processing fees paid to a third party,
        depreciation on terminals in use, and amortization expense on capitalized
        software development costs. Those costs are recorded separately in operating
        expenses. For the three months ended September 30, 2005 and 2004 there was
        $412,358 and $420,988 of depreciation on terminals and amortization of
        capitalized software development costs, respectively, applicable to cost
        of
        goods sold.  For the nine months ended September 30, 2005 and 2004
        there
        was $1,279,340 and $1,202,157 of depreciation on terminals and amortization
        of
        capitalized software development costs, respectively, applicable to cost
        of
        goods sold. These amounts are included in depreciation and amortization expense
        in the accompanying condensed consolidated statements of operations and
        comprehensive loss.
 
  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)**
 
 **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 common share and dilutive earnings
        per
        common share when the effect of options/warrants and convertible notes is
        dilutive. Because the Company incurred losses for the periods presented in
        the
        accompanying consolidated financial statements, the effect of options/warrants
        and convertible notes totaling 2,824,993 and 2,399,160 equivalent common
        shares
        for the three and nine months ended September 30, 2005 and 2004, respectively,
        has been excluded from the net loss per common share computation since its
        impact would be anti-dilutive.
  **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 as of September 30, 2005, net operating loss
        carry
        forwards of approximately $22,600,000, which may be applied against future
        taxable income, if any, and which expire in various years through
        2024.
  **Restricted
        Cash** -
        Restricted cash of $535,987 as of September 30, 2005 and $510,692 as of 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, which balance amounted to $94,495 and $71,232
        as
        of September 30, 2005 and December 31, 2004, respectively.
  **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 stock option plans that provide for stock-based employee compensation,
        including the granting of stock options, to certain key employees. The plans
        are
        more fully described in Note 9. The Company accounts for grants to employees
        and
        directors under its stock option plans in accordance with the recognition
        and
        measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
        to
        Employees", and related Interpretations. Under this method, compensation
        expense
        is recorded on the date of grant only if the current market price of the
        underlying stock exceeded the exercise price.
  During
        the periods presented in the accompanying financial statements, the Company
        has
        granted options under its 2000, 2003, and 2004 defined stock options plans.
        The
        Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly,
        no compensation cost has been recognized for grants of options to employees
        and
        directors in the accompanying statements of operations and comprehensive
        loss.
        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
        and diluted net loss per common share would have been increased to the pro
        forma
        amounts indicated below:
  
  9
 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
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
                (as
                  restated)
              
              2005
              
              2004
                (as
                  restated)Net
                  loss, as reported
              
              $
              (1,119,533
              )
              $
              (890,587
              )
              $
              (5,998,119
              )
              $
              (3,120,025
              )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
              
              
              (443,558
              )
              
              (352,462
              )
              
              (793,889
              )
              
              (869,579
              )Pro
                  forma net loss
              
              $
              (1,563,091
              )
              $
              (1,243,049
              )
              $
              (6,792,008
              )
              $
              (3,989,604
              )Basic
                  and diluted net loss per common share, as reported
              
              $
              (.19
              )
              $
              (.19
              )
              $
              (1.10
              )
              $
              (.74
              )Pro
                  forma basic and diluted net loss per common share
              
              $
              (.26
              )
              $
              (.27
              )
              $
              (1.25
              )
              $
              (
                  94
              )**Basic
                  and Diluted Weighted Average**
                **Common
                  Shares Outstanding**
              
              
              5,914,794
              
              
              4,622,672
              
              
              5,450,703
              
              
              4,204,391







**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 into 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 (loss), which is a component of stockholders’
      equity.




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




In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      153, “Exchanges of Nonmonetary Assets an amendment to APB Opinion No. 29.” This
      statement requires exchanges of similar productive assets to now be accounted
      for at fair value, as 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
      that 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 December 15, 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.






10
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          of Contents






**Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
        TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**




**NOTE
      2 - PROPERTY AND EQUIPMENT**




The
      following is a summary of property and equipment:





September
                30,
            
            December
                31,2005
            
            2004Point
                of sale terminals and related items - in service
            
            $
            3,008,294
            
            $
            2,987,184Office
                and computer equipment
            
            
            413,668
            
            
            341,140Total
                cost of depreciable equipment
            
            
            3,421,962
            
            
            3,328,324Accumulated
                depreciation and amortization
            
            
            (1,569,496
            )
            
            (1,280,770
            )Property
                and equipment in service, net
            
            
            1,852,466
            
            
            2,047,554Point
                of sale terminals and related items - not placed in
                service
            
            
            1,393,310
            
            
            2,054,643Parts
                deposits held by manufacturers
            
            
            -
            
            
            280,756Total
            
            $
            3,245,776
            
            $
            4,382,953





Point
      of
      sale terminals held by the Company in property and equipment will either be
      sold
      to customers or placed in service with the Company retaining ownership. The
      Company begins depreciating terminals it owns at the time they are shipped
      to
      the broker or retailer. Depreciation expense for the three months ended
      September 30, 2005 and 2004 was $199,943 and $203,734, respectively, and for
      the
      nine months ended September 30, 2005 and 2004 was $412,358 and $420,998,
      respectively. During the three months ended June 30, 2005, the Company
      determined that certain terminals were not likely to be used in the future
      due
      to obsolescence. Based on the Company’s analysis, the Company recorded a
      terminal impairment and fixed asset write-down charge of $1,266,704 to reduce
      these terminals to their estimated net realizable value. This impairment charge
      is included in cost of goods sold in the accompanying 2005 condensed
      consolidated statements of operations and comprehensive loss.




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




Goodwill
      consisted of the following as of both September 30, 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 for
      $200,000, which purchase price was subsequently increased to $206,494 during
      2005 based on meeting specified earn-out provisions set forth in the agreement
      with the seller. The cost of the accounts acquired is categorized as a
      definite-lived intangible asset and is being amortized over two years using
      the
      straight-line method. Information related to purchased intangible assets as
      of
      September 30, 2005 and December 31, 2004 is as follows:




September
                30,
              2005
            
            December
                31,
              2004Purchase
                price of customer accounts
            
            $
            206,494
            
            $
            200,000Less
                accumulated amortization
            
            
            (95,830
            )
            
            (33,333
            )Net
                intangible assets
            
            $
            110,664
            
            $
            166,667







11
 Table
          of Contents






**Q
          COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**




**NOTE
      4 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS**




Information
      related to capitalized software development costs as of September 30, 2005
      and
      December 31, 2004 is as follows:




As
                of
              September
                30,
              2005
            
            As
                of
              December
                31,
              2004Capitalized
                software development costs, beginning of period
            
            $
            2,548,986
            
            $
            2,262,249Additional
                costs capitalized during the nine month and one year period,
                respectively
            
            
            66,074
            
            
            286,737Capitalized
                software development costs, end of period
            
            
            2,615,060
            
            
            2,548,986Accumulated
                amortization
            
            
            (2,133,583
            )
            
            (1,496,642
            )Capitalized
                software development costs, net
            
            $
            481,477
            
            $
            1,052,344




Included
      within capitalized software development costs as of September 30, 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 as of
      the
      dates presented has determined that these costs were not impaired. The Company
      amortizes capitalized software development costs over a three-year period.
      During the three months ended September 30, 2005 and 2004, the Company recorded
      amortization expense of $212,415 and $217,264, respectively, and for the nine
      months ended September 30, 2005 and 2004, the Company recorded amortization
      expense of $636,940 and $651,792, respectively.




**NOTE
      5 - NOTE PAYABLE RELATED PARTY**





In
      June
      2005, the Company received $614,000 in cash from the Company’s chairman of the
      board of directors and entered in to a written agreement dated July 11, 2005,
      setting forth the terms of the debt financing. This debt arrangement is
      evidenced by a note bearing interest at an annual rate of 5% and is payable
      in
      full on or before July 7, 2007. The note called for the company to issue to
      the
      chairman of the board of directors, a warrant to purchase 230,000 shares of
      common stock exercisable for a period of five years at a price of $3.51 per
      share. The $582,000 fair value of the warrant was recorded as a discount against
      the note. For the three months ended September 30, 2005 the Company recorded
      related party interest expense of $78,715 on the note which includes $68,552
      related to the amortization of the discount and $10,127 in accrued interest
      expense.




**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. As of September 30, 2005 and December
      31, 2004, the total carrying amount of equipment held under capital lease
      agreements was $970,000, and the related accumulated amortization was
      approximately $50,000 and $40,000, respectively.




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




2005
            
            $
            134,4722006
            
            
            397,502Total
            
            
            531,974Less
                interest and other costs
            
            
            (25,203
            )Present
                value of future minimum lease payments
            
            
            506,771Less
                current portion
            
            
            (468,878
            )Long-term
                portion
            
            $
            37,893




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 respective
      lease. The Company secures the letters of credit with a restricted cash account
      at a financial institution totaling approximately $440,000 at September 30,
      2005
      and December 31, 2004.




The
      Company is committed under non-cancelable operating leases for office space
      and
      office equipment. Rent expense paid for the three months ended September 30,
      2005 and 2004 was $34,348 and $23,320, respectively. Rent expense paid for
      the
      nine months ended September 30, 2005 and 2004 was $91,079 and $42,471,
      respectively. The Company's future minimum rental payments under operating
      leases amount to approximately $90,000 annually through 2008.








12
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          of Contents






**Q
          COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**




**NOTE
      7 - LITIGATION AND CONTINGENCIES**




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





In
      March 2005, the Company filed an action against a PIN provider, The Phone Store
      of Missouri, LLC and its principal, Kevin Montgomery, to seek repayment of
      funds
      paid for PINs that were not received or not viable. An Amended Complaint in
      the
      action was recently filed to incorporate additional claims relating to telephone
      handsets that were purchased but not delivered. The Company is seeking to
      recover a minimum of $1,525,000 from The Phone Store and Mr. Montgomery.
      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.




**NOTE
      8 - CAPITAL STOCK**




A
      summary
      of common stock transactions subsequent to September 30, 2005 and during the
      three-month periods ended September 30, 2005, June 30, 2005, and March 31,
      2005
      (net of stock issuance expense of approximately $18,000) is as follows (see
      Notes 5 and 13):





**Subsequent
      to September 30, 2005**





None





**Three
      Months Ended September 30, 2005**





None





**Three
      Months Ended June 30, 2005**




The
      Company issued 427,000 restricted common shares at $3.07 per share for an
      aggregate of $1,311,000 in cash.




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





**Three
      Months Ended March 31, 2005**





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




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





**NOTE
      9 - STOCK OPTIONS AND WARRANTS**





The
      Company is authorized to issue stock options under three existing stock option
      plans approved by stockholders. The 2000 plan (133,333 shares), the 2003 plan
      (100,000 shares) and the 2004 plan (500,000 shares) allow for up to 733,333
      shares to be issued under substantially similar terms. A summary of the status
      of options granted at September 30, 2005, and changes during the period then
      ended are as follows:




For
                    the Nine Months Ended
                  September
                    30, 2005Shares
                
                Weighted
                    Average
                  Exercise
                    PriceOutstanding
                    at beginning of period
                
                
                532,667
                
                $
                5.95Granted
                
                
                390,000
                
                
                3.66Exercised
                
                
                (128,750
                )
                
                4.58Forfeited
                
                
                (79,834
                )
                
                6.16Expired
                
                
                (39,749
                )
                
                9.05Outstanding
                    at end of period
                
                
                674,334
                
                
                4.68Exercisable
                    at end of period
                
                
                115,331
                
                
                7.53Weighted
                    average fair value of options granted
                
                
                390,000
                
                
                3.20


13
 Table
          of Contents







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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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




During
        2005, the Company changed its’ policy for recording the effect of forfeited
        stock options from reducing compensation expense as the forfeitures occur
        to
        estimating the rate of expected forfeitures and reducing compensation expense
        on
        the date the options are granted.




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 nine months ended September 30, 2005
      and
      2004: expected dividend yields of zero, expected life of 9.62 years and 10
      years, expected volatility of 85% and 124%, respectively, and risk-free interest
      rates of 3.9% and 4.3%, respectfully.




A
      summary
      of the status of stock options outstanding at September 30, 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$
                3.38 - $ 4.92
            
            
            575,500
            
            
            8.00
                years
            
            $
            3.95
            
            
            52,331
            
            $
            4.236.50
            
            
            70,000
            
            
            8.00
                years
            
            
            6.50
            
            
            35,000
            
            
            6.5015.00
            
            
            28,834
            
            
            0.92
                years
            
            
            15.00
            
            
            28,834
            
            
            15.00$
                3.59 - $ 15.00
            
            
            674,334
            
            
            8.45
                years
            
            
            4.68
            
            
            116,165
            
            
            7.53





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




The
      Company is authorized to issue warrants to non-employees under various
      agreements expiring through November 2008. The warrants granted in 2005 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,
      $3.50 underlying stock price, 109% volatility, 3.6 year expected life, 3.9%
      risk
      free interest rate and expected dividend yield of zero. A summary of the status
      of warrants granted at September 30, 2005, and changes during the period then
      ended is as follows:




For
                    the Nine Months Ended
                  September
                    30, 2005Shares
                
                Weighted
                    Average
                  Exercise
                    PriceOutstanding
                    at beginning of period
                
                
                2,044,493
                
                $
                9.14Granted
                
                
                230,000
                
                
                3.51Exercised
                
                
                (100,000
                )
                
                5.25Forfeited
                
                
                -
                
                
                -Expired
                
                
                (23,834
                )
                
                18.51Outstanding
                    at end of period
                
                
                2,150,659
                
                
                8.62Exercisable
                    at end of period
                
                
                2,150,659
                
                
                8.62


A
      summary
      of the status of warrants outstanding at September 30, 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$3.51
            
            
            230,000
            
            
            4.75
                years
            
            
            3.51
            
            
            230,000
            
            
            3.51$
                5.25 - $ 7.80
            
            
            359,095
            
            
            2.25
                years
            
            $
            6.81
            
            
            359,095
            
            $
            6.81$
                9.75
            
            
            1,544,231
            
            
            2.65
                years
            
            
            9.75
            
            
            1,544,231
            
            
            9.75$
                13.50 - $ 22.50
            
            
            7,333
            
            
            0.9
                years
            
            
            15.95
            
            
            7,333
            
            
            15.95$5.25
                - $ 13.5
            
            
            2,140,659
            
            
            
            
            
            8.62
            
            
            2,140,659
            
            
            8.62





At
      September 30, 2005, the Company had 1,265,000 outstanding warrants to purchase
      shares of common stock at $9.75 per share that were publicly
      traded.






14
 Table
          of Contents




**Q
          COMM INTERNATIONAL, INC. AND SUBSIDIARIES**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**




A
      summary
      of all stock options and warrants outstanding at September 30, 2005 is presented
      below:




Compensatory
            
            Non-Compensatory
            
            TotalStock
                options issued to employees and board members under stock option
                plans
            
            
            631,000
            
            
            -
            
            
            631,000Stock
                options issued to employees outside stock option plans
            
            
            43,334
            
            
            -
            
            
            43,334Total
            
            
            674,334
            
            
            -
            
            
            674,334Warrants
                issued to non-employees
            
            
            359,649
            
            
            1,791,010
            
            
            2,150,659Total
                options and warrants outstanding
            
            
            1,033,983
            
            
            1,791,010
            
            
            2,824,993






**NOTE
      10 - CONCENTRATION OF REVENUES**





The
      Company’s prepaid wireless products accounted for 90.6% and 82.3% of total
      revenues for the three months ended September 30, 2005 and 2004, respectively.
      The Company’s prepaid wireless products accounted for 92.9% and 76.6% of total
      revenues for the nine months ended September 30, 2005 and 2004, respectively.





The
      company’s concentration by customer for the three and nine months ended
      September 30, 2005 and 2004 included:





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,Percent
                  ofRevenue
            
            2005
            
            2004
            
            2005
            
            2004Broker
            
            
            12.9
            %
            
            33.2
            %
            
            11.2
            %
            
            42.0
            %Brokers
            
            
            27.4
            %
            
            59.3
            %
            
            28.6
            %
            
            60.7
            %Brokers
            
            
            59.7
            %
            
            78.3
            %
            
            56.3
            %
            
            85.1
            %





**NOTE
      11 - EMPLOYMENT AGREEMENTS**




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




The
      Company has an employment agreement with its President/CEO, which expires on
      December 31, 2006. The agreement may be extended for successive one-year
      periods. If the Company terminates the agreement without cause, or if the
      President/CEO terminates the agreement for good reason, the President/CEO is
      entitled to receive the greater of one year’s salary plus any target cash bonus
      he would be eligible to receive during that year or payment through the
      expiration date of the agreement. In addition, any stock options would vest
      immediately. The President/CEO was also granted an option to purchase 150,000
      shares of common stock at the $3.59 market price per share on the date of grant
      in January 2005. Subsequent to the employment agreement, the President/CEO
      was
      granted an option to purchase and additional 20,000 shares of common stock
      at
      the $3.30 market price per share on the date of grant in August 2005.





The
      Company hired a new Chief Financial Officer on May 31, 2005. On August 18,
      2005,
      the Company entered into an employment agreement with its Chief Financial
      Officer, which expires on December 6, 2006. The agreement may be extended for
      successive one-year periods. If the Company terminates the agreement without
      cause, or if the CFO terminates the agreement for good reason, the CFO 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 CFO was granted an option to purchase 60,000 shares of common
      stock at the $3.30 market price per share on the date of grant in August 2005.




15
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          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 or loss per common
      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 annual and interim
      financial statements and the notes to those statements, before you purchase
      any
      of our securities.




**The
      Securities and Exchange Commission (“SEC”) recently reviewed the Company’s
      2004 Form 10-KSB/A filing.**





We
      received a comment letter from the SEC on May 5, 2005 requesting clarification
      on several matters including the rationale for reporting revenue on a gross
      versus net basis for certain consigned inventory we sell. The Company has
      responded to the SEC and filed amended Forms 10-KSB/A and 10-Q/A for the year
      ended December 31, 2004 and the three months ended March 31, 2005, respectively.
      The Company received a response from the SEC on August 23, 2005 which stated
      the
      SEC Staff completed their review of the Company’s Form 10-KSB and related
      filings.




**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 September 30, 2005,
      we
      incurred cumulative losses of $(25,773,341). For the three-month periods ended
      September 30, 2005 and 2004, net losses were $(1,119,533) and $(890,587),
      respectively. For the nine-month periods ended September 30, 2005 and 2004,
      net
      losses were $($5,998,119) and $(3,120,025), respectively. Unless we can
      significantly increase the number of terminals in use, we will continue to
      incur
      losses for the foreseeable future. Our working capital, which totaled $2,029,009
      as of September 30, 2005, 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.




On
      June
      16, 2005, we raised $1,311,000 through the issuance of 427,000 shares of
      restricted common stock at $3.07 per share and the Company issued a note payable
      in the amount of $614,000 to our chairman of the board of directors. The note
      bears interest at an annual rate of 5% and is payable in full on or before
      July
      7, 2007. In connection with the issuance of the note payable, the Company issued
      a warrant to purchase 230,000 shares of common stock exercisable for a period
      of
      five years at a price of $3.51 per share to the chairman of the board of
      directors. We also have a guaranteed commitment for up to $1.5 million
      of
      additional debt or equity investment from our largest investor, 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.










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 Table
          of Contents







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





We
      incurred 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 depreciation on terminals and software amortization
      costs of approximately 1.8% in the third quarter 2005 and 0.6% for the
      comparable period in 2004. For the nine month periods ended September 30, 2005
      and 2004, we incurred margins, after taking into account the cost of the
      products sold through the Qxpress system and the fees and commissions payable
      to
      distributors, brokers and retailers, depreciation on terminals and software
      amortization costs of approximately (4.5) % in the first half of 2005 and (1.0)
      % for the comparable period in 2004. During the second quarter of 2005 we
      incurred approximately $1.6 million in terminal obsolescence and PIN inventory
      reserves. The margin for the nine month period ended September 30, 2005
      excluding the $1.6 million in reserves was approximately $58,000 or 0.2%





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 5.1% in the second quarter 2005 and 9.6%
      for the comparable period in 2004. For the nine month periods ended September
      30, 2005 and 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 capitalized software development costs amortization were
      approximately (0.8) % in the second quarter 2005 and 10.6% for the comparable
      period in 2004.





**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, prepaid wireless products
      totaled 90.6% and 82.3% of revenues for the three months ended September 30,
      2005 and 2004, respectively. The Company’s prepaid wireless products accounted
      for 92.9% and 76.6% of total revenues for the nine months ended September 30,
      2005 and 2004, respectively.  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.**




As
      shown
      below 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. We cannot assure you that the level of sales to these
      brokers will be sustained from year to year and there is a risk that these
      principal brokers may not continue to sell our products in the future. To the
      extent that any significant broker reduces its reliance on us, terminates its
      relationship with us, or defaults on payments, our revenues in the relevant
      fiscal period could decline substantially, which would result in increased
      net
      losses.




For
                  the Three Months Ended
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              September
                  30,Percent
                    ofRevenue
              
              2005
              
              2004
              
              2005
              
              2004One
                  broker
              
              
              12.9
              %
              
              33.2
              %
              
              11.2
              %
              
              42.0
              %Top
                  three brokers
              
              
              27.4
              %
              
              59.3
              %
              
              28.6
              %
              
              60.7
              %Top
                  nine brokers
              
              
              59.7
              %
              
              78.3
              %
              
              56.3
              %
              
              85.1
              %




**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 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.**




17
 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 95 brokers. Until now, our relationships
      with our brokers have generally been on a 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 to our brokers. Rather,
      we
      rely on the quality of our Qxpress system, superior customer service, and a
      wide
      variety of products and services to induce brokers to contract with us. If
      we do
      not continue to offer performance and service advantages, our brokers may not
      aggressively market our system to their retail networks or may terminate their
      relationship with us. We cannot assure you that we will continue to derive
      revenue, at current levels, or at all, from our existing brokers, or that we
      will be able to successfully establish relationships with new
      brokers.




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




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




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




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




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




**Significant
      rapid growth could strain our internal resources, which could lead to 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 upgrading its accounting systems. The full integration with internal
      operating systems is scheduled to be completed by mid-2006. 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
      to eliminate the material weaknesses that currently exist in our internal
      controls. Any failure to do so may lead to inefficiencies and/or redundancies
      and may impair our ability to provide accurate and timely information and
      reports to our stockholders.




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




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




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






18
 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
      September 30, 2005, there were approximately 320 stockholders of record and
      our
      average daily share volume for the three months ended September 30, 2005 was
      approximately 5,800 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 Company also uses VeriFone terminals, and in the future, also plans to
      use
      terminals from Ingenico, Lipman, and Hypercom for merchant processing. The
      key
      components of the Qxpress system include the Qxpress 200 terminals, our data
      center, Q Control 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 services to provide transaction processing
      and information management services to other vendors of prepaid products, both
      in the United States and internationally.




Historically,
      revenues from international operations have accounted for less then 8% of annual
      revenues. In 2003, we began generating revenues from customers in Canada,
      France, the Bahamas and Australia. Given prepaid wireless is much more common
      and accepted in Europe, Asia and Latin America than it is in North America,
      we
      will continue to explore new international opportunities.




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 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, make 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
      Qxpress 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.










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During
      2004, we announced that we 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.




**Sources
      of Revenue**




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




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





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




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
              September
                30,
            
            For
                the Three Months Ended
              September
                30,2005
            
            2004Amount
            
            Percentage
            
            Amount
            
            PercentageWireless
            
            $11,575,939
            
            90.6%
            
            $3,856,503
            
            82.3%Terminals and Handset Sales
            
            
            659,626
            
            
            5.2%
            
            
            -
            
            
            0.0%Long
                Distance
            
            
            219,528
            
            
            1.7%
            
            
            122,661
            
            
            2.6%Fees
            
            
            139,827
            
            
            1.1%
            
            
            121,385
            
            
            2.6%Service
                Bureau
            
            
            67,287
            
            
            0.5%
            
            
            47,819
            
            
            1.0%Debit
                Card
            
            
            28,701
            
            
            0.2%
            
            
            33,608
            
            
            0.7%Bill
                Pay
            
            
            18,357
            
            
            0.1%
            
            
            -
            
            
            0.0%Gift
                and Loyalty Card, and Other
            
            
            72,829
            
            
            0.6%
            
            
            502,902
            
            
            10.7%Total
            
            $
            12,782,094
            
            
            100.0%
            
            $
            4,684,257
            
            
            100.0%




For
                the Nine Months Ended
              September
                30,
            
            For
                the Nine Months Ended
              September
                30,2005
            
            2004Amount
            
            Percentage
            
            Amount
            
            PercentageWireless
            
            $
            32,154,545
            
            
            92.9%
            
            $
            7,946,389
            
            
            76.8%Terminal and Handset
              Sales
            
            
            686,006
            
            
            2.0%
            
            
            1,700
            
            
            0.0%Long
                Distance
            
            
            473,113
            
            
            1.4%
            
            
            314,004
            
            
            3.0%Fees
            
            
            408,567
            
            
            1.2%
            
            
            412,669
            
            
            4.0%Service
                Bureau
            
            
            204,642
            
            
            0.6%
            
            
            316,681
            
            
            3.1%Debit
                Card
            
            
            137,867
            
            
            0.4%
            
            
            135,926
            
            
            1.3%Bill
                Pay
            
            
            33,306
            
            
            0.1%
            
            
            -
            
            
            0.0%Gift
                and Loyalty Card, and Other
            
            
            484,001
            
            
            1.4%
            
            
            1,225,023
            
            
            11.8%Total
            
            $
            34,582,047
            
            
            100.0%
            
            $
            10,352,428
            
            
            100.0%




Prepaid
      wireless continues to be our largest source of revenue. Although the Company
      has
      seen some near term leveling in prepaid wireless demand for its products, 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.





Terminal
      and Handset sales were primarily driven by the sale of 20,650 Nokia handsets
      between July and September, 2005 for a total of approximately $641,000 in
      revenue. The handset sales were a one time event and was a result of the
      purchase of handsets described in Note 1 section titled “Restatement of 2004
      Financial Information”.





Long
      distance revenue continued to see growth in absolute dollar revenue but has
      been
      outpaced by the growth in prepaid wireless and has fallen as a percent of
      revenue for the three and nine months ended September 30, 2005 and 2004.











20
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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 due to competitive factors. We
      anticipate competition will continue to force lower fee revenue as a percent
      of
      revenue in the future.





We
      first
      began setting up service bureau customers in 2003. This revenue model is
      diminishing as a percent of total revenue, but provides higher margins than
      our
      traditional broker model since there are few direct costs to offset against
      the
      fee revenues. We acquired our service bureau customer in Canada in July 2004,
      which contributed to the decline in service bureau revenues.





Prepaid
      debit card is a relatively new product for the prepaid industry and it
      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.





Bill
      Pay,
      or “Walk-in payment services”, is a new product category for the Company and
      represents a growing segment of our business. Q Comm receives a transaction
      fee
      for each walk-in bill payment processed through its system.  By offering
      walk-in bill pay services through our network, we provide retailers with a
      growing revenue source and a means of attracting more store traffic, repeat
      customers and increasing customer loyalty.




Other
      revenue includes wholesale products, home dial tone, prepaid internet and gift
      card.




Historically,
      our results of operations have been characterized by relatively high revenues
      but relatively low margins. Under our broker model, we book the entire value
      of
      the transaction as revenues. Our cost of goods sold includes the amount we
      pay
      for the product. Cost of goods sold 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 amortization of capitalized software development
      costs, we incurred margins of approximately 17.3% for the three months ended
      September 30, 2005 and 35.6% for the comparable period in 2004. The margin
      including cost of sales and commissions and fees but excluding depreciation
      on
      terminals and amortization of capitalized software development costs was
      approximately 5.1% for the three months ended September 30, 2005 and 9.6% for
      the comparable period in 2004.





After
      subtracting the commissions and fees paid to the brokers and retailers (which
      vary directly with revenues in our historical sales model) and depreciation
      on
      terminals and amortization of capitalized software development costs, we
      incurred negative margins of approximately (4.5)% for the nine months ended
      September 30, 2005 and (1.0)% for the comparable period in 2004. The
      contribution margin excluding depreciation on terminals and amortization of
      capitalized software development costs was approximately 9.6% for the nine
      months ended September 30, 2005 and 10.6% for the comparable period in
      2004.





The
      change in margins is primarily driven by the increase in lower margin wireless
      products and lower fees. For the three months ended March 31, 2005, we recorded
      a $285,000 loss in deposit on handset inventory (increasing cost of goods sold
      by that amount), which reduced the margin by 0.8% for the nine month period
      ended September 2005. In addition, because of these thin margins, a minor change
      in the price that we pay for products would have a substantial effect on our
      net
      income or loss if we were not able to (or, in the case of price decreases,
      were
      not required to) pass the difference on to our customers.




The
      resale of prepaid telecommunication products has historically been a commodity
      market with most price increases or decreases being passed through the
      distribution chain to the end user. However, the amount of margin available
      to
      each participant in the distribution chain can be affected by various factors,
      such as the service provided and risk assumed by the participant and the volume
      and payment terms on which the participant can purchase product. In those cases,
      we have purchased product from a reseller at a markup from the supplier price.
      We believe that, if our business expands 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.










21
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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. 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.





For
                the Three
            
            For
                the Three
            
            For
                the Three
            
            For
                the Three
            
            For
                the ThreeMonths
                Ended
            
            Months
                Ended
            
            Months
                Ended
            
            Months
                Ended
            
            Months
                EndedSeptember
                30,
            
            June
                30,
            
            March
                31,
            
            December
                31,
            
            September
                30,Broker
                Model
            
            2005
            
            2005
            
            2005
            
            2004
            
            2004Net
                terminal activations (1)
            
            
            536
            
            
            621
            
            
            396
            
            
            450
            
            
            288Terminals
                acquired (2)
            
            
            
            
            
            
            
            
            
            
            
            200Total
                activated terminals
            
            
            3,878
            
            
            3,342
            
            
            2,721
            
            
            2,325
            
            
            1,675Average
                activated terminals (3)
            
            
            3,610
            
            
            3,032
            
            
            2,523
            
            
            2,000
            
            
            1,531Average
                monthly revenue perunit
                (ARPU) calculation:Revenue
            
            
            12,782,094
            
            
            13,322,692
            
            
            8,477,260
            
            
            6,223,895
            
            
            4,684,257Less
                Service Bureau revenue
            
            
            67,287
            
            
            81,272
            
            
            51,286
            
            
            30,592
            
            
            47,819Total
                adjusted revenue
            
            
            12,714,807
            
            
            13,241,420
            
            
            8,425,974
            
            
            6,193,303
            
            
            4,636,438Less
                cost of goods sold andCommission
                (4)
            
            
            12,136,464
            
            
            14,442,552
            
            
            8,288,031
            
            
            6,502,599
            
            
            4,234,306Total
                contribution margin
            
            
            578,343
            
            
            (1,201,132
            )
            
            137,943
            
            
            (309,296
            )
            
            402,132Average
                activated terminals
            
            
            3,610
            
            
            3,032
            
            
            2,523
            
            
            2,000
            
            
            1,531**Average
                monthly****revenue
                per activated terminal (5)**
            
            
            **53**
            
            
            **(132**
            **)**
            
            **18**
            
            
            **(52**
            **)**
            
            **88**Total
                adjustment forperiod
                specific costs (6)
            
            
            -
            
            
            1,623,163
            
            
            285,005
            
            
            600,000
            
            
            -Total
                adjusted contributionmargin
                per activated terminal
            
            
            578,343
            
            
            422,031
            
            
            422,948
            
            
            290,704
            
            
            402,132**Adjusted
                average monthly****revenue
                per activated terminal**
            
            
            **53**
            
            
            **46**
            
            
            **56**
            
            
            **48**
            
            
            **88**




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


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


(3)
            Average
                activated terminals include the weighted average of the total activated
                terminals at the end of the current and prior quarter.


(4)
            Includes
                cost of good sold and commissions paid to brokers and retailers,
                and
                excludes depreciation and amortization allocable to cost of goods
                sold.


(5)
            Average
                monthly revenue per activated terminal equals the total contribution
                margin for the quarter, divided by the average activated terminals,
                divided by 3 (months).


(6)
            The
                period specific costs for the three-month period June 30, 2005 includes
                approximately $1,270,000 in terminal write-down and obsolescence
                reverses,
                and approximately $356,000 in PIN inventory adjustments. The extraordinary
                expenses in the first quarter 2005 and forth quarter 2004 include
                a
                write-down of $285,000 and $600,000 in value of Nokia 3300 handsets,
                respectively.




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 service bureau terminals. Based on our current sales
      organization growth plans, we believe our cash flow break even point will likely
      be at approximately 7,000 broker units. There is no assurance that this break
      even point will be realized as forecasted given changes in economic and
      competitive factors.




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






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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 and Kiosk’s), 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.




**Critical
      Accounting Policies and Estimates**




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




*Revenue
      recognition*




We
      use
      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, we sell our prepaid products through third-party retail locations.
      Revenue is recognized at the time products are sold. Sales of products are
      generally made directly to end-users. There is no right of return for products
      sold and the Company is not obligated for further performance after the sale.
      These sales transactions are accounted for at "gross" since the Company meets
      the requirements specified by Securities and Exchange Commission Staff
      Accounting Bulletin No. 104 (SAB 104) and Emerging Issues Task Force Issue
      No.
      99-19 (EITF 99-19). In cases where the Company does not own the product sold
      and
      another entity retains such risk and reward of product ownership or where
      certain other requirements of SAB 104 or EITF 99-19 are not met, the Company
      records revenues on a "net" basis.




We
      use
      the service bureau model primarily with international customers and
      is a
      diminishing part of our business. 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. We receive an ongoing transaction
      fee for all sales through the system, which is recorded on a "net"
      basis.




*Cost
      of goods sold*




Cost
      of
      goods sold consists primarily of the costs of the prepaid telecommunication
      and
      other miscellaneous products sold at retail and terminals sold to customers.
      The
      full cost of the product, as well as all direct costs associated with the sale
      of the product, is recorded at the time of sale. Cost of goods sold does not
      include commissions and fees paid to brokers and other
      intermediaries, transaction processing fees paid to a third party,
      depreciation on terminals in use, and amortization expense on capitalized
      software. Those costs are recorded separately in operating expenses. For the
      three months ended September 30, 2005 and 2004 there was $412,358 and $420,988
      of depreciation on terminals and amortization of capitalized software
      development costs, respectively, applicable to cost of goods sold. 
      For the
      nine months ended September 30, 2005 and 2004 there was $1,279,340 and
      $1,202,157 of depreciation on terminals and amortization of capitalized software
      development costs, respectively, applicable to cost of goods sold. These amounts
      are included in depreciation and amortization expense in the accompanying
      unaudited condensed consolidated statements of operations and comprehensive
      loss.





In
      January 2005, a vendor sold or took possession of approximately 9,000 handsets
      without reimbursing the Company.  We expensed these missing handsets
      in the first quarter of 2005 and recorded a receivable from the vendor, against
      which it has provided a 100% reserve totaling $285,005 during the period ending
      March 31, 2005.  We are pursuing litigation against this vendor
      (see Part II, Item 1).








23
 Table
          of Contents








*Software
      development costs*





We
      capitalize 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 this asset over its three-year estimated
      useful life.




*Impairment
      of long-lived assets*




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





*Stock
      options and warrants*




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. 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.




Our
      stock
      option plans provide for stock-based employee compensation, including the
      granting of stock options, to certain key employees. 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.




**Results
      of Operations**




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














24
 Table
          of Contents




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




For
                the Three Months Ended
            
            Increase
            
            For
                the Nine Months Ended
            
            IncreaseSeptember
                30,
            
            (Decrease)
            
            September
                30,
            
            (Decrease)2005
            
            2004
              (as
                restated)
            
            %
            
            2005
            
            2004
              (as
                restated)
            
            %Revenues
            
            $
            12,782,094
            
            $
            4,684,257
            
            
            172.9%
            
            $
            34,582,047
            
            $
            10,352,428
            
            
            234.0%Operating
                Expenses:Cost
                of goods sold (exclusive of amount shown separately below,
                see(1))
            
            
            10,571,166
            
            
            3,014,659
            
            
            250.7%
            
            
            29,134,446
            
            
            6,155,987
            
            
            373.3%Commissions
                and fees
            
            
            1,565,298
            
            
            1,219,646
            
            
            28.3%
            
            
            5,732,601
            
            
            3,093,619
            
            
            85.3%Selling
                expenses
            
            
            197,027
            
            
            228,272
            
            
            (13.7)%
            
            
            657,018
            
            
            527,720
            
            
            24.5%General
                and administrative expenses
            
            
            1,018,353
            
            
            652,055
            
            
            56,2%
            
            
            3,522,559
            
            
            2,077,681
            
            
            69.5%Depreciation
                and amortization
            
            
            458,908
            
            
            455,036
            
            
            0.9%
            
            
            1,411,156
            
            
            1,271,785
            
            
            11.0%Total
                Operating Expenses
            
            
            13,810,752
            
            
            5,569,668
            
            
            148.0%
            
            
            40,457,780
            
            
            13,126,792
            
            
            208.2%Loss
                from Operations
            
            
            (1,028,658
            )
            
            (885,411
            )
            
            16.2%
            
            
            (5,875,734
            )
            
            (2,774,364
            )
            
            111.8%Total
                Other Expense - net
            
            
            (90,875
            )
            
            (5,176
            )
            
            (1,655.7)%
            
            
            (122,385
            )
            
            (345,661
            )
            
            (64.6)%Net
                Loss
            
            
            (1,119,533
            )
            
            (890,587
            )
            
            25.7%
            
            
            (5,998,119
            )
            
            (3,120,025
            )
            
            92.2%




(1)
            Excludes
                $412,358 and $420,988 of depreciation on terminals and amortization
                of
                capitalized software development costs applicable to cost of goods
                sold
                for the three months ended September 30, 2005 and 2004,
                respectively. For the nine months ended September 30, 2005
                and 2004,
                depreciation on terminals and amortization of capitalized software
                development costs applicable to cost of goods sold totaled $1,279,340
                and
                $1,202,157, respectively.




*Revenues.* Our
      revenues increase for the three and nine months ended September 30, 2005, over
      the comparable periods 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 ($10.3 million and $16.5 million,
      respectively). 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* .
      The
      table below outlines our cost of goods sold as presented (1) with the inclusion
      of terminal depreciation expense and capitalized software development costs
      amortization expense and (2) with the exclusion of these same expenses.





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,Cost
                of goods sold as a percent of revenue:
            
            2005
            
            2004
            
            2005
            
            2004Including
                terminal depreciation capitalized software development costs and
                amortization
            
            
            98.2
            %
            
            99.4
            %
            
            104.5
            %
            
            101.0
            %Excluding
                terminal depreciation capitalized software development costs 
                and
                amortization
            
            
            82.7
            %
            
            64.4
            %
            
            84.2
            %
            
            59.5
            %




The
      increase in cost of goods sold as a percentage of revenues, from 2005 over
      2004
      was a result of, i) an increase in the mix of lower margin wireless products;
      ii) a shift in product mix from consigned products, which have marginal cost
      of
      sales, to non-consigned products, with higher cost of sales iii) 1,266,704
      in terminal impairment and fixed asset write-down charges incurred during the
      period ending September 30, 2005, iv) a $280,005 charges incurred in the period
      ending March 31, 2005 for 9,000 handsets a vendor took possession of or sold
      and
      did not reimburse the company v) A PIN inventory write-down of approximately
      $250,000 incurred for period ended September 30, 2005 and vi) lower fees. 
      In the future, we expect our cost of goods sold will fluctuate as a percentage
      of revenue as changes occur in our product mix, level of fees charged and
      discount rates offered by carriers.





*Commissions
      and fees.* These
      expenses are principally commissions paid to retailers and brokers for product
      sales through the Qxpress terminals and are a fixed percentage of the product
      sales price. Commissions and fees as a percentage of revenue for the three
      months ended September 30, 2005 and September 30, 2004 was 12.2% and 26.0%,
      respectively. Commissions and fees as a percentage of revenue for the nine
      months ended September 30, 2005 and 2004 was 16.6% and 29.9%, respectively.
      This
      percentage decrease was a result of a shift in product mix toward lower margin
      wireless products and correspondingly lower commission payments to brokers.
      Our
      contracts with brokers generally protect us from any price decreases from
      carriers. Historically, a component of commissions and fees is a transaction
      processing fee paid to LDC for transactions processed through the LDC terminals.
      Since we were able to transfer all remaining customers to our new Qxpress system
      during 2004, the Company had no LDC transactions fees for the three and nine
      months ended September 30, 2005.






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 Table
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*Selling* .
      Selling
      expenses for the three months ended September 30, 2005 decreased approximately
      $31,000 over the same periods ended September 30, 2004. Components of this
      decrease include decreased travels expenses of approximately $18,000, lower
      website development expenses of approximately $16,000 and lower advertising,
      print other expenses of approximately $19,000, offset in part by increase salary
      and commission based expenses of approximately $22,000. Selling expenses for
      the
      nine month period ending September 2005





Selling
      expenses for the nine months ended September 30, 2005 increased approximately
      $129,000 over the same periods ended September 30, 2004. Components of this
      increase are increased expenses for base salaries, commissions and benefits
      of
      approximately of $150,000. The increases resulted from adding nine additional
      sales and marketing personnel. Increased salary, commissions and benefit
      expenses were offset in part by a decrease in travel expense of $25,000 and
      advertising, website development expenses, advertising and other expenses of
      $21,000.




*General
      and administrative.* General
      and administrative expenses increased approximately $366,000 during the three
      months ended September 30, 2005, over the comparable period ended September
      30,
      2004, but decreased as a percentage of revenue. This absolute dollar
      increase is due to approximately $166,000 in incremental payroll and benefit
      costs, approximately $106,000 in accounting fees, approximately $33,000 in
      legal
      fees, approximately $32,000 in other professional and contractor fees, $29,000
      in Director and Officer insurance, rent, recruiting, and other
      expenses.





General
      and administrative expenses increased approximately $1,445,000 during the nine
      months ended September 30, 2005, over the comparable period ended September
      30,
      2004, but decreased as a percentage of revenue. The absolute dollar
      increase is due to an increase of approximately $568,000 in incremental payroll
      and benefit costs, approximately $313,000 in accounting fees, $175,000 in
      settlement costs related to the Dial-Thru litigation (see Note 7 - Litigation
      and contingencies), approximately $112,000 in bad debt expenses, approximately
      $106,000 in directors and officer insurance expense, and approximately $87,000
      in legal expenses. And $84,000 in other professional fees, contract labor,
      Board
      of Director fees, stock offering costs, bank charges and other
      expenses.





*Depreciation
      and amortization.* Depreciation and amortization expense for the three months ended September
      30,
      2005 decreased by approximately $8,000 over the comparable period in 2004.
      Depreciation and amortization expense for the nine months ended September 30,
      2005 increased by approximately $77,000 over the comparable period in 2004.This
      increase of these periods is attributable primarily to higher amortization
      of
      capitalized software development costs and to higher depreciation expense 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 expense to increase.




*Total
      other expense - net.* Other
      income and expense consists primarily of interest income and expense, and loss
      on disposal of property and equipment. Net other expense for the three months
      ended September 30, 2005 and 2004 was $90,875 and $5,176, respectively. This
      increase of $85,699 is primarily attributable to interest expense related to
      230,000 warrants issued to the Company’s chairman of the board of directors in
      conjunction with a $614,000 loan the chairman of the board of director made
      to
      the company on July 11, 2005. The warrants are treated as a discount on the
      note
      and amortized over the two-year term of the loan. Total other income and expense
      for the nine months ended September 30 2005 and 2004 was $122,385 and $345,661,
      respectively. This decrease of $223,276 is attributable primarily to a reduction
      in interest expense related to a note issued and debentures sold in
      2003.






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The
      Company is focusing on all elements of the business to reach profitability.
      In
      summary the Company’s plan to become profitable include:




1. Increased
      Activated Terminals: The Company will continue to increase the number of
      activated terminals at merchant locations. Over the last year the company has
      increased the total number of activated terminals from 1,675 to 3,878 or 132%.
      For the nine month period ending September 30, 2005 the Company increased
      revenue from $10,352,428 to $34,582,047 from the same period in 2004. This
      revenue growth was primarily attributable to low margin wireless products.
      For
      every $100 in wireless revenue, the company enjoys approximately $3 in
      contribution margin. As the Company increases its terminal footprint it will
      generate more margin dollars which will drive profitability.





2.
      Scalability of Organization: The Company is well positioned to leverage from
      its
      existing infrastructure to improve margins and drive profitability. Although
      the
      Company will continue to make the necessary investments in its infrastructure
      and core technology to be competitive, it will aggressively manage operating
      expense to ensure the growth in contribution margin outpaces the growth in
      sales, and general and administrative expenses.





3.
      New
      Products and Services: A core component of the company growth plans revolves
      around new products such as bill pay, money remittance and gift and loyalty
      programs. These products are transaction and load based fee products with little
      cost of sales. In contrast to prepaid wireless products, which earn roughly
      $3
      in contribution margin for every $100 in revenue, over 95% of all revenue earned
      from new fee based products will be recognized as contribution margin. The
      Company has recently launch two bill products and will be expanding its suite
      of
      new high margin products over the coming year.





4.
      Improving the Supply Chain and Distribution Channel: The Company is focused
      on
      purchasing its PIN based products through more direct sources with better
      margins. In addition to realizing better PIN pricing through more direct
      relationship with Carriers, the financial risk from purchasing through a more
      secure providers, versus PIN reseller’s, is reduced. The Company is also looking
      aggressively to tune it broker and distributor models where appropriate by
      working more directly with merchants.





5. Strategic
      Partnerships and Acquisitions: Although the Company is focused on organic growth
      it will, when appropriate, pursue acquisition and partnering opportunities
      that
      will produce long term improvements to profitability.




**Liquidity
      and Capital Resources**




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




As
      of
      September 30, 2005, we had working capital of $2,029,009 and a current ratio
      of
      2.2 to 1.




As
      of
      September 30, 2005, we own approximately 7,135 Qxpress terminals available
      for
      placement (including new terminals held by brokers and excluding new terminal
      determined to be obsolete). This inventory will provide us the means to grow
      substantially in the remainder of 2005 without the associated capital costs.
      We
      anticipate that our inventory of PINs, which was $920,000 as of September 30,
      2005, will grow as our business expands. Due to the short order time required
      for these products, we are able to keep our inventory in the range of 13 days’
      sales. Our future capital requirements will depend both on the rate of growth
      of
      our business and the mix of revenue models that we employ. Models that require
      us to maintain a large inventory of prepaid products or to continue to own
      terminals and/or to invest in transaction processing facilities will require
      relatively large amounts of capital. The capital requirements of our service
      bureau model, which has diminished as a percentage of our total business, are
      substantially less.





On
      June
      16, 2005, we sold 427,000 shares of restricted common stock at $3.07 per share
      through a private placement. On July 7, 2005, we issued a note in the amount
      of
      $614,000 to our chairman of the board of directors. The note bears interest
      at
      an annual rate of 5% and is payable in full on or before July 7, 2007. In
      connection with the issuance of the note payable, the Company issued a warrant
      to purchase 230,000 shares of common stock exercisable for a period of five
      years at a price of $3.51 per share. 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 $1,500,000 in additional funding from our
      largest investor 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.




**Off-Balance
      Sheet Items**





Excluding
      normal operating leases, we have no off-balance sheet obligations.





27
 Table
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**Item
      4. Controls and Procedures**




**Disclosure
      Controls and Procedures**




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




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




The
      significant deficiencies and material weakness in our internal controls relate
      to lack of segregation of incompatible duties, lack of timely reconciliation
      of
      general ledger accounts (including cash), lack of controls over inventory
      (including the potential for employees to purposefully or inadvertently delete
      PIN’s without authorization or systems control), inadequate monitoring of
      accounting for acquisitions, and inadequate review and accounting for impairment
      of intangible assets.  Additionally, there were significant deficiencies
      and material weaknesses in our internal control over the preparation of certain
      disclosures in the footnotes to the financial statements, including those
      related to the stock option disclosures required by SFAS No. 148 and income
      tax
      disclosures required by SFAS No. 109.  Subsequently, restatements were
      required as a result of improprieties and unauthorized transactions undertaken
      by the Company’s former CFO, which were not detected because of these material
      weaknesses. We have disclosed these significant deficiencies and material
      weaknesses to the Audit Committee of our Board of Directors.





We
      are
      improving our internal controls in an effort to remediate these significant
      deficiencies and material weaknesses and on July 5, 2005 we hired a new
      Controller. In addition, we are in the process of improving our internal
      controls through improved supervision and training of our accounting staff
      and
      the implementation of a new accounting system.  Additional effort is
      needed
      to fully remedy these significant deficiencies and material weaknesses and
      we
      are continuing our efforts to improve and strengthen our internal controls
      over
      financial reporting.  Our management and Audit Committee will continue
      to
      work with our outside advisors with the goal to implement internal controls
      over
      financial reporting that are adequate and effective.




Based
      on
      their review and evaluation as of September 30, 2005, and subject to the
      inherent limitations as described above, our Chief Executive Officer and Chief
      Financial have concluded that our disclosure controls and procedures (as defined
      in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
      are
      ineffective.










28
 Table
          of Contents







**Changes
      in Internal Control Over Financial Reporting**





During
      the three months ended September 30, 2005 the Company implemented enhanced
      internal controls with respect to its accounting for and monitoring of its
      PIN
      inventory. In particular, the Company modified the Company’s PIN management
      software to preclude the accidental deletion of PINs. The Company has further
      restricted employee access to the PIN control software. In the future, the
      Company intends to implement additional process improvements and software
      upgrades that will further strengthen controls and management of PIN inventory.




**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings**





As
      of
      September 30, 2005, we are not a party to any legal proceedings, except as
      set
      forth below.




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




In
      March
      2005, the Company filed an action against a PIN provider, The Phone Store of
      Missouri, LLC and its principal, Kevin Montgomery, to seek repayment of funds
      paid for PINs that were not viable. An Amended Complaint in the action was
      recently filed to incorporate additional claims relating to telephone handsets
      that were purchased but not delivered. The Company is seeking to recover a
      minimum of $1,525,000 from The Phone Store and Mr. Montgomery. However,
      there is no assurance of repayment, and management has recorded an allowance
      against the full amount of the receivable in the fourth quarter of 2004.






**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)10.11
            Employment
                Agreement between Q Comm International, Inc. and Michael D. Keough
                (4)10.12
            Employment
                Agreement between Q Comm International, Inc. and Mark W.
                Robinson(5)10.13
            Securities
                Purchase Agreement, dated May 20, 2003 (2)10.14
            Form
                of 12% Unsecured Promissory Note, due August 31, 2004, dated May
                20, 2003
                (2)10.15
            Form
                of Stock Purchase Warrant, dated May 20, 2003 (2)10.16
            Service
                Agreements between Q Comm International, Inc. and each of Cellcards
                of
                Illinois, Iowa Wireless and Hargray Wireless (2)10.17
            Agreement
                between Q Comm International, Inc. and PreCash Corporation
                (2)10.18
            WGR
                Ltd. Agreement (2)10.19
            Marceco
                Ltd. Agreement (2)10.20
            Success
                Concepts Enterprises Inc. Agreement (2)10.21
            510
                East Technology Avenue Lease (3)10.21#
            Agreement
                between Q Comm International, Inc. and Cricket Communications,
                Inc.14
            Code
                of Ethics (2)21
            Subsidiary
                schedule (3)











29
 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*


_____________________________________




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


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


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


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


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




(b)
      Reports on Form 8-K





On
      October 18, 2005, the Company filed a Current Report on Form 8-K under Items
      4.01 and 9.01 regarding the Company’s change in audit firms.





On
      October 11, 2005, the Company filed a Current Report on Form 8-K under Items
      4.01 and 9.01 regarding the Company’s change in audit firms.





On
      September 22, 2005, the Company filed a Current Report on Form 8-K under Item
      4.02 regarding the Company’s change in its revenue recognition policy and
      certain unauthorized actions of its ex-CFO.





On
      August
      26, 2005, the Company filed a Current Report on Form 8-K under Items 3.01 and
      9.01 regarding a warning letter sent from the American stock Exchange indicating
      the Company was not in compliance with Sections 134 and 1101 of the Amex Company
      Guide.





On
      August
      24, 2005, the company filed a Current report on Form 8-K under items 1.01,
      5.02
      and 9.01 regarding execution of an employee agreement for the Company’s chief
      financial officer.













30
 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:
            November
                14, 2005






























31