**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** **JUNE
      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 August 22, 2005, 5,914,794 shares of the issuer’s
      common stock were outstanding.























**Q
      COMM INTERNATIONAL, INC.**


**QUARTERLY
      REPORT ON FORM 10-Q**





June
      30,
      2005





**TABLE
      OF CONTENTS**








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














2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




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


**UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETS**





June
                30,
              2005
            
            December
                31,
              2004
              (as
                restated)**ASSETS****Current
                Assets:**Cash
            
            $
            1,459,121
            
            $
            773,052Trade
                accounts receivable, net
            
            
            1,030,229
            
            
            895,388Other
                receivables, net
            
            
            -
            
            
            61,434Inventory,
                net
            
            
            1,621,321
            
            
            1,081,637Deposit
                on handsets, net
            
            
            639,995
            
            
            925,000Prepaid
                expenses
            
            
            38,799
            
            
            156,375Total
                Current Assets
            
            
            4,789,465
            
            
            3,892,886**Property
                and Equipment, net**
            
            
            3,429,266
            
            
            4,382,953**Other
                Assets:**Restricted
                cash
            
            
            547,662
            
            
            510,692Capitalized
                software development costs, net
            
            
            679,193
            
            
            1,052,344Goodwill
            
            
            144,580
            
            
            144,580Deposits
            
            
            146,980
            
            
            149,719Definite-lived
                intangible assets, net
            
            
            131,496
            
            
            166,667Total
                Other Assets
            
            
            1,649,911
            
            
            2,024,002Total
                Assets
            
            $
            9,868,642
            
            $
            10,299,841**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                Liabilities:**Accounts
                payable
            
            $
            816,663
            
            $
            1,525,634Accrued
                expenses
            
            
            677,024
            
            
            281,302Capital
                lease obligations - current portion
            
            
            494,130
            
            
            490,374Total
                Current Liabilities
            
            
            1,987,817
            
            
            2,297,310**Long Term
              Liabilities:**Note payable - related
              party, net
              of discounts of $582,000, $0, respectively
            
            
            32,000
            
            
            -Capital
                Lease Obligations, net of current portion
            
            
            136,948
            
            
            382,745Total
              Long Term Liabilities
            
            
            168,948
            
            
            382,745Total
                Liabilities
            
            
            2,156,765
            
            
            2,680,055**Commitments
                and Contingencies (Notes 6, 7, 11, and 13)****Stockholders'
                Equity:**Common
                stock, $.001 par value 50,000,000 shares authorized, 5,914,794 and
                4,859,044 shares outstanding, respectively
            
            
            5,915
            
            
            4,859Additional
                paid-in capital
            
            
            32,322,376
            
            
            27,333,779Accumulated
                deficit
            
            
            (24,653,809
            )
            
            (19,775,223
            )Accumulated
                other comprehensive income
            
            
            48,163
            
            
            67,139Stock
                subscription receivable
            
            
            (10,768
            )
            
            (10,768
            )Total
                Stockholders' Equity
            
            
            7,711,877
            
            
            7,619,786Total
                Liabilities and Stockholders' Equity
            
            $
            9,868,642
            
            $
            10,299,841




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




3








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


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





For
                the Three Months Ended
            
            For
                the Six Months EndedJune
                30,
            
            June
                30,2005
            
            2004
              (as
                restated)
            
            2005
            
            2004
              (as
                restated)**Revenues**
            
            $
            13,322,692
            
            $
            2,950,937
            
            $
            21,799,952
            
            $
            5,668,171**Operating
                Expenses:**Cost
                of goods sold (exclusive of items shown separately below
                (1))
            
            
            12,107,343
            
            
            1,622,821
            
            
            18,563,280
            
            
            3,141,328Commissions
                and fees
            
            
            2,335,209
            
            
            963,640
            
            
            4,167,303
            
            
            1,873,972Selling
            
            
            232,626
            
            
            156,751
            
            
            459,991
            
            
            299,448General
                and administrative
            
            
            1,457,948
            
            
            642,987
            
            
            2,540,206
            
            
            1,425,626Depreciation
                and amortization
            
            
            468,713
            
            
            417,559
            
            
            952,248
            
            
            816,750Total
                Operating Expenses
            
            
            16,601,839
            
            
            3,803,758
            
            
            26,647,028
            
            
            7,557,124**Loss
                from Operations**
            
            
            (3,279,147
            )
            
            (852,821
            )
            
            (4,847,076
            )
            
            (1,888,953
            )**Other
                Income (Expense):**Interest
                income
            
            
            4,184
            
            
            3,037
            
            
            10,924
            
            
            16,985Interest
                and other expense
            
            
            (22,035
            )
            
            (10,109
            )
            
            (42,434
            )
            
            (334,424
            )Loss
                on disposal of property and equipment
            
            
            -
            
            
            (23,046
            )
            
            -
            
            
            (23,046
            )Total
                Other (Expense), net
            
            
            (17,851
            )
            
            (30,118
            )
            
            (31,510
            )
            
            (340,485
            )**Loss
                Before Income Tax Provision (Benefit)**
            
            
            (3,296,998
            )
            
            (882,939
            )
            
            (4,878,586
            )
            
            (2,229,438
            )**Income
                Tax Provision (Benefit)**
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                Loss**
            
            $
            (3,296,998
            )
            $
            (882,939
            )
            $
            (4,878,586
            )
            $
            (2,229,438
            )**Basic
                and Diluted Net Loss per Common Share**
            
            $
            (0.61
            )
            $
            (0.22
            )
            $
            (0.94
            )
            $
            (0.56
            )**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            
            5,448,827
            
            
            3,995,250
            
            
            5,214,812
            
            
            3,995,250**Other
                Comprehensive Loss:**Net
                loss
            
            $
            (3,296,998
            )
            $
            (882,939
            )
            $
            (4,878,586
            )
            $
            (2,229,438
            )Foreign
                currency translation adjustment
            
            
            (48,164
            )
            
            -
            
            
            (67,141
            )
            
            -**Other
                Comprehensive Loss**
            
            $
            (3,345,162
            )
            $
            (882,939
            )
            $
            (4,945,727
            )
            $
            (2,229,438
            )




(1)
            Excludes
                $429,156 and $398,344 of depreciation on terminals and amortization
                of
                capitalized software development costs applicable to cost of goods
                sold
                for the three months ended June 30, 2005 and June 30, 2004,
                respectively.  Excludes $866,982 and $781,159 of depreciation
                on
                terminals and amortization of capitalized software development costs
                applicable to cost of goods sold for the six months ended June 30,
                2005
                and June 30, 2004, respectively.




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





4




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


**UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**





For
                the Six Months Ended
              June
                30,2005
            
            2004
              (as
                restated)**Cash
                Flows from Operating Activities:**Net
                loss
            
            $
            (4,878,586
            )
            $
            (2,229,438
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Loss
                on disposal of property and equipment
            
            
            -
            
            
            23,046Provision
                for doubtful accounts
            
            
            159,108
            
            
            30,000Depreciation
                and amortization
            
            
            952,237
            
            
            816,750Impairment
                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
            
            
            535,005
            
            
            -Change
                in assets and liabilities:Receivables
            
            
            (232,515
            )
            
            (135,711
            )Inventory
            
            
            (1,074,689
            )
            
            (1,023,614
            )Deposit
                on handsets
            
            
            285,005
            
            
            -Prepaid
                expenses
            
            
            117,576
            
            
            -Other
                assets
            
            
            2,739
            
            
            (36,821
            )Accounts
                payable
            
            
            (708,971
            )
            
            358,719Accrued
                expenses
            
            
            395,722
            
            
            140,692Contingent
                liabilities
            
            
            -
            
            
            (70,000
            )Net
                Cash Used by Operating Activities
            
            
            (3,180,665
            )
            
            (1,905,430
            )**Cash
                Flows from Investing Activities:**Changes
                in restricted cash
            
            
            (36,970
            )
            
            1,450,583Purchase
                of property and equipment
            
            
            (799,064
            )
            
            (1,322,397
            )Proceeds
                from note receivable
            
            
            -
            
            
            150,000Capitalized
                software development costs
            
            
            (51,374
            )
            
            (251,162
            )Purchase
                of intangible assets
            
            
            (6,494
            )
            
            -Net
                Cash (Used in) Provided by Investing Activities
            
            
            (893,902
            )
            
            27,024**Cash
                Flows from Financing Activities:**Issuance
                of common stock
            
            
            4,407,653
            
            
            -Cash
                received from subscription receivable
            
            
            -
            
            
            26,920Proceeds
                from issuance of related party notes payable
            
            
            614,000
            
            
            -Payments
                on related party notes payable
            
            
            -
            
            
            (33,569
            )Payments
                on convertible notes payable
            
            
            -
            
            
            (1,230,000
            )Principal
                payments on capital lease obligations
            
            
            (242,041
            )
            
            (12,466
            )Net
                Cash Provided by (Used in) Financing Activities
            
            
            4,779,612
            
            
            (1,249,115
            )**Net
                Increase (Decrease) in Cash**
            
            
            705,045
            
            
            (3,127,521
            )**Effect
                of Foreign Exchange Rates on Cash**
            
            
            (18,976
            )
            
            -**Cash,
                Beginning of Period**
            
            
            773,052
            
            
            5,524,774**Cash,
                End of Period**
            
            $
            1,459,121
            
            $
            2,397,253**Supplemental
                Disclosures of Cash Flow Information:**Cash
                paid during the period for:Interest
            
            $
            19,106
            
            $
            92,047**Supplemental
                Schedule of Non cash Financing Activities:**Discount
                to notes payable-related party as a result of issuing
                warrants
            
            $
            582,000
            
            
            -




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




5








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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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




**Nature
      of Business** - The
      Company's business involves purchasing and reselling prepaid telecommunication
      and other products through a proprietary electronic point-of-sale activation
      system known as Qxpress. The Company provides its products to end users
      throughout the United States as well as Canada, France, Australia and the
      Bahamas. The Company is headquartered in Orem, Utah. In July 2004, the Company
      acquired Point de Vente (PDV), a company located in Quebec, Canada, through
      the
      acquisition of 100% of its stock. Approximately 95% of the Company’s revenues
      are generated in the United States.


**Restatement
        of 2004 Financial Information** - The
        Company has restated the accompanying three and six month periods ended June
        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 June 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 $2,979,899 from
        $5,930,836 to $2,950,937 for the three months ended June 30, 2004 and revenue
        was reduced by $11,690,117 from $17,358,288 to $5,668,171 for the six months
        ended June 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 12,950 handsets at $31 per headset and has
          firm
          commitments to sell the remaining 7,700 handsets at $31 per headset by
          September, 2005. 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:


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
              )


**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 six month periods presented, have been made. The results of operations
        for the periods ending June 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 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 June 30, 2005 and December 31, 2004,
      the Company
      established an allowance for doubtful accounts of approximately $425,000 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 June 30, 2005 and December 31, 2004, respectively. During
        the
        three months ended June 30, 2005, the Company completed a detailed analysis
        of
        the status of electronic PIN inventory and determined that factors occurring
        during the second quarter resulted in an inventory write-down of approximately
        $250,000 for the three months ended June 30, 2005.


**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 consist of a $225,000 Dial Thru International litigation settlement
        liability, and payroll, bonus, commission, and vacation liabilities as of
        June
        30, 2005.




6








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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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




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


The
        Company capitalizes software development costs incurred to develop certain
        of
        the Company's products and services in accordance with Statement of Position
        98-1, "Accounting for the Costs of Computer Software Developed or Obtained
        for
        Internal Use" (SOP 98-1). Costs are capitalized only after the technological
        feasibility of the project has been established. In accordance with SFAS
        No.
        142, the Company has recorded its software development costs as a definite-lived
        intangible asset and is amortizing 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 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 development costs. Those costs are recorded separately in operating
      expenses. For the three months ended June 30, 2005 and 2004 there was $429,156
      and $398,344 of depreciation on terminals and amortization of capitalized
      software development costs, respectively, applicable to cost of goods sold.
       For the six months ended June 30, 2005 and 2004 there was $866,982
      and
      $781,159 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.




7








**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 2,523,243 and 2,721,160 equivalent common
        shares
        for the three and six months ended June 30, 2005 and 2004, respectively,
        has
        been excluded from the net loss per common share computation since its impact
        would be anti-dilutive. Subsequent to June 30, 2005, the Company issued 427,000
        common shares for cash at $3.07 per share and warrants to purchase 230,000
        common shares (see Note 8).




**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 June 30, 2005, net operating loss carry
      forwards of approximately $21,550,000, which may be applied against future
      taxable income, if any, and which expire in various years through
      2024.




**Restricted
        Cash** -
        Restricted cash of $547,662 as of June 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 $71,232 and $105,020
        as
        of June 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 has stock option plans that provide for stock-based employee
      compensation, including the granting of stock options, to certain key employees.
      The plans are more fully described in Note 9. The Company accounts for grants
      to
      employees and directors under its stock option plans in accordance with the
      recognition and measurement principles of APB Opinion No. 25, "Accounting for
      Stock Issued to Employees", and related Interpretations. Under this method,
      compensation expense is recorded on the date of grant only if the current market
      price of the underlying stock exceeded the exercise price.




During
      the periods presented in the accompanying financial statements, the Company
      has
      granted options under its 2000, 2003 and 2004 defined stock options plans.
      The
      Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly,
      no compensation cost has been recognized for grants of options to employees
      and
      directors in the accompanying statements of operations and comprehensive 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:




8








**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 Six Months EndedJune
                30,
            
            June
                30,2005
            
            2004
              (as
                restated)
            
            2005
            
            2004
              (as
                restated)Net
                loss, as reported
            
            $
            (3,296,998
            )
            $
            (882,939
            )
            $
            (4,878,586
            )
            $
            (2,229,438
            )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
            
            
            (166,888
            )
            
            (517,117
            )
            
            (350,331
            )
            
            (678,902
            )Pro
                forma net loss
            
            $
            (
                3,463,886
            )
            $
            (
                1,400,056
            )
            $
            (
                5,228,917
            )
            $
            (
                2,908,340
            )Basic
                and diluted net loss per common share, as reported
            
            $
            (0.61
            )
            $
            (0.22
            )
            $
            (0.94
            )
            $
            (0.56
            )Pro
                forma basic and diluted net loss per common share
            
            $
            (0.64
            )
            $
            (0.35
            )
            $
            (0.96
            )
            $
            (
                0.73
            )**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            
            5,448,827
            
            
            3,995,250
            
            
            5,214,812
            
            
            3,995,250







**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.




**NOTE
      2 - PROPERTY AND EQUIPMENT**




The
      following is a summary of property and equipment:





June
                30,
            
            December
                31,2005
            
            2004Point
                of sale terminals and related items - in service
            
            $
            2,676,651
            
            $
            2,987,184Office
                and computer equipment
            
            
            387,824
            
            
            341,140Total
                cost of depreciable equipment
            
            
            3,064,475
            
            
            3,328,324Accumulated
                depreciation and amortization
            
            
            (1,380,814
            )
            
            (1,280,770
            )Property
                and equipment in service, net
            
            
            1,683,661
            
            
            2,047,554Point
                of sale terminals and related items - not placed in
                service
            
            
            1,474,319
            
            
            2,054,643Parts
                deposits held by manufacturers
            
            
            271,286
            
            
            280,756Total
            
            $
            3,429,266
            
            $
            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 June
        30,
        2005 and 2004 was $216,741 and $181,080, respectively, and for the six months
        ended June 30, 2005 and 2004 was $442,457 and $346,631, 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.





9





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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




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




Goodwill
      consisted of the following as of both June 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
        the
        three months ended June 30, 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 June 30, 2005 and December 31, 2004 is as
        follows:




June
                30,
              2005
            
            December
                31,
              2004Purchase
                price of customer accounts
            
            $
            206,494
            
            $
            200,000Less
                accumulated amortization
            
            
            (74,998
            )
            
            (33,333
            )Net
                intangible assets
            
            $
            131,496
            
            $
            166,667







**NOTE
      4 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS**




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




As
                of
              June
                30,
              2005
            
            As
                of
              December
                31,
              2004Capitalized
                software development costs, beginning of period
            
            $
            2,548,986
            
            $
            2,262,249Additional
                costs capitalized during the six month and one year period,
                respectively
            
            
            51,374
            
            
            286,737Capitalized
                software development costs, end of period
            
            
            2,600,360
            
            
            2,548,986Accumulated
                amortization
            
            
            (1,921,167
            )
            
            (1,496,642
            )Capitalized
                software development costs, net
            
            $
            679,193
            
            $
            1,052,344




Included
      within capitalized software development costs as of June 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 June 30, 2005 and 2004, the Company recorded
        amortization expense of $212,415 and $217,264, respectively, and for the
        six
        months ended June 30, 2005 and 2004, the Company recorded amortization expense
        of $424,525 and $434,528, respectively.




10







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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      5 - RELATED PARTY OBLIGATIONS**


The
        Company received $500,000 in cash on March 25, 2005 in exchange for
        the
        issuance of a note payable to the chairman of the board of directors. The
        unsecured loan was scheduled to mature on June 24, 2005 and carried an annual
        interest rate of 5%. In April 2005, the note was repaid and $972 in interest
        expense was recorded.
 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. In connection with this debt financing,
          the
          Company issued 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 $614,000 note payable is recorded net of a $582,000
          discount which results from accounting for the fair value of certain warrants
          issued in connection with the debt financing. Additional paid-in capital
          was
          increased by $582,000 as a result of the Company issuing to the chairman
          of the
          board of directors warrants to purchase 230,000 shares of common
          stock
          exercisable for a period of five years at a price of $3.51 per share.


**NOTE
      6 - LEASE OBLIGATIONS**




Certain
      computer equipment and point of sale terminals are leased under capital lease
      arrangements and are presented in the accompanying condensed consolidated
      balance sheets as property and equipment. As of June 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
            
            $
            272,9392006
            
            
            397,502Total
            
            
            670,441Less
                interest and other costs
            
            
            (39,363
            )Present
                value of future minimum lease payments
            
            
            631,078Less
                current portion
            
            
            (494,130
            )Long-term
                portion
            
            $
            136,948




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 June 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 June 30, 2005
      and
      2004 was $31,589 and $15,495, respectively. Rent expense paid for the six months
      ended June 30, 2005 and 2004 was $56,730 and $24,734, respectively. The
      Company's future minimum rental payments under operating leases amount to
      approximately $90,000 annually through 2008.




**NOTE
      7 - LITIGATION AND CONTINGENCIES**




On
        January 23, 2004, Dial-Thru 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.




11








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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      8 - CAPITAL STOCK**




A
      summary
      of common stock transactions subsequent to June 30, 2005 and during the
      three-month periods ended 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 June 30, 2005**




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





**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 as of June 30, 2005 and December 31, 2004, and changes
        during
        the periods then ended are as follows:


For
                the Six Months Ended
              June
                30, 2005
            
            For
                the Year Ended
              December
                31, 2004Shares
            
            Weighted
              Average
              Exercise
                Price
            
            Shares
            
            Weighted
              Average
              Exercise
                PriceOutstanding
                at beginning of period
            
            
            532,667
            
            $
            5.95
            
            
            304,250
            
            $
            10.00Granted
            
            
            231,000
            
            
            3.92
            
            
            502,500
            
            
            4.65Exercised
            
            
            (128,750
            )
            
            4.58
            
            
            -
            
            
            -Forfeited
            
            
            (
                56,167
            )
            
            6.50
            
            
            (
                274,083
            )
            
            8.16Expired
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                at end of period
            
            
            578,750
            
            
            5.39
            
            
            532,667
            
            
            5.95Exercisable
                at end of period
            
            
            135,665
            
            
            8.39
            
            
            296,998
            
            
            6.68Weighted
                average fair value of options granted
            
            
            711,032
            
            
            3.08
            
            
            502,500
            
            
            4.65









12








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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





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




The
      fair
      value of each option granted is estimated on the date granted using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions used for grants during the three months ended June 30, 2005 and
      2004: expected dividend yields of zero, expected life of 10 years, expected
      volatility of 113% and 124%, respectively, and risk-free interest rates of
      4.3%.




A
      summary
      of the status of stock options outstanding at June 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$
                  3.59 - $ 4.92
              
              
              428,583
              
              
              9.25
                  years
              
              $
              4.21
              
              
              41,331
              
              $
              4.526.50
              
              
              110,000
              
              
              8.45
                  years
              
              
              6.50
              
              
              55,000
              
              
              6.5015.00
              
              
              40,167
              
              
              1.15
                  years
              
              
              15.00
              
              
              39,334
              
              
              15.00$
                  3.59 - $ 15.00
              
              
              578,750
              
              
              8.45
                  years
              
              
              5.39
              
              
              135,665
              
              
              8.39
  As
          of
          June 30, 2005, the Company had outstanding warrants to purchase 1,944,493
          shares
          of common stock (including 1,265,000 publicly traded warrants) that were
          issued
          to non-employees under various agreements with exercise prices ranging
          from
          $3.51 to $24.75 per share and a weighted average exercise price of $9.14
          per
          share, expiring between July 2005 and November 2008. The warrants were
          valued on
          the date of issue using the Black-Scholes pricing model and the following
          assumptions: exercise price of the warrant stated in the agreements, $6.00
          underlying stock price, 140% volatility, five year expected life, 2.9%
          risk free
          interest rate and expected dividend yield of zero.




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




Compensatory
            
            Non-Compensatory
            
            TotalStock
                options issued to employees and board members under stock option
                plans
            
            
            533,416
            
            
            -
            
            
            533,416Stock
                options issued to employees outside stock option plans
            
            
            45,334
            
            
            -
            
            
            45,334Total
            
            
            578,750
            
            
            -
            
            
            578,750Warrants
                issued to non-employees
            
            
            355,833
            
            
            1,588,660
            
            
            1,944,493Total
                options and warrants outstanding
            
            
            934,583
            
            
            1,588,660
            
            
            2,523,243




**NOTE
      10 - CONCENTRATION OF REVENUES**


For
        the
        three months ended June 30, 2005 and 2004, the Company had one customer that
        accounted for 13.7% and 39.1% of revenues, respectively. For the six months
        ended June 30, 2005 and 2004, the Company had one customer that accounted
        for
        10.7% and 43.2% of revenue, respectively. For the three months ended June
        30,
        2005, the Company’s three largest customers accounted for approximately 29% of
        revenues and its top ten customers accounted for 49% of revenues, respectively.
        For the six months ended June 30, 2005, the Company’s three largest customers
        accounted for approximately 23% of revenues and its top ten customers accounted
        for 47% of revenues, respectively. The Company’s prepaid wireless products
        accounted for 93.3% and 72.4% of total revenues for the three months ended
        June
        30, 2005 and 2004, respectively. The Company’s prepaid wireless products
        accounted for 94.4% and 72.2% of total revenues for the six months ended
        June
        30, 2005 and 2004, respectively.





13







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


**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**NOTE
      11 - EMPLOYMENT AGREEMENTS**




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


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.





**NOTE
      12 - RECENTLY ENACTED ACCOUNTING STANDARDS**




The
      Emerging Issues Task Force has issued EITF 03-1, “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments.”
      This 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.




**NOTE
      13 - SUBSEQUENT EVENTS**


On
        July
        11, 2005, the Company issued 427,000 restricted common shares at $3.07 per
        share
        for an aggregate of $1,311,000 in cash to two existing investors and one
        new
        investor.
  On
        July
        11, 2005, the Company executed a note in the amount of $614,000 to
        its
        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 this note, 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.
  On
        August
        2, 2005, the Company and Dial-Thru International completed the mediation
        of the
        dispute described above in Note 7, and reached a settlement whereby the Company
        paid Dial-Thru International $225,000 on August 9, 2005.
 The
          Company hired a new Chief Financial Officer on May 31, 2005. The Company
          entered
          into an employment agreement with its Chief Financial Officer on August
          18,
          2005. The employment agreement expires on December 6, 2006, but 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, which was
          August
          18, 2005.




14




**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 and did not, at that time, have any additional comments. There can
        be no
        assurance that the SEC will not have further comment at some point in the
        future, and require additional changes.




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


From
        the
        date on which we became a C corporation in 1998 through June 30, 2005, we
        incurred cumulative losses of $(24,653,808). For the three-month periods
        ended
        June 30, 2005 and 2004, net losses were $(3,296,998) and $(882,939),
        respectively. For the six-month periods ended June 30, 2005 and 2004, net
        losses
        were $($4,878,586) and $(2,229,438), 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 $2,801,648 as
        of June
        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
      July
      11, 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.




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


We
        incurred negative margins, after taking into account the cost of the products
        sold through the Qxpress system and the fees and commissions payable to
        distributors, brokers and retailers, depreciation on terminals and software
        amortization costs of approximately (11.6)% in the second quarter 2005 and
        (1.1)% for the comparable period in 2004. For the six-month periods ended
        June
        30, 2005 and 2004, we incurred negative margins, after taking into account
        the
        cost of the products sold through the Qxpress system and the fees and
        commissions payable to distributors, brokers and retailers, depreciation
        on
        terminals and software amortization costs of approximately (8.2)% in the
        first
        half of 2005 and (2.3)% for the comparable period in 2004.
 
 Our
        contribution margins, after taking into account the cost of the products
        sold
        through the Qxpress system and the fees and commissions payable to distributors,
        brokers and retailers, and excluding depreciation on terminals and software
        amortization costs were approximately (8.4)% in the second quarter 2005 and
        12.4% for the comparable period in 2004. For the six-month periods ended
        June
        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 (4.3)% in the second quarter 2005 and 11.5% for the comparable
        period in 2004.
 
 As
        a
        consequence, for us to be profitable to any meaningful extent, we must do
        one or
        more of the following:


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





15





In
      order
      to increase our revenue from our historical business, we must increase the
      number of terminals in use in addition to providing strategic products and
      services. In order to expand our product line, it is necessary to enter into
      new
      relationships with the suppliers of these products, build new sales channels
      or
      expand our existing channels, and develop processing applications to handle
      the
      new products.





**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 95.7% and 72.4% of revenues for the three months ended June 30, 2005
        and
        2004, respectively. The Company’s prepaid wireless products accounted for 94.4%
        and 72.2% of total revenues for the six months ended June 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.**




A
      small
      number of brokers account for a large percentage of our revenue. One aspect
      of
      our growth strategy is to increase the breadth of our account base. However,
      a
      high level of customer concentration could continue for the foreseeable future.
      For the three months ended June 30, 2005, our three largest customers accounted
      for approximately 29% of revenues and our top ten customers accounted for 49%
      of
      revenues, respectively. For the six months ended June 30, 2005, our three
      largest customers accounted for approximately 23% of revenues and our top ten
      customers accounted for 47% of revenues, respectively. We cannot assure you
      that
      the level of sales to these brokers will be sustained from year to year and
      there is a risk that these principal brokers may not continue to sell our
      products in the future. To the extent that any significant broker reduces its
      reliance on us, terminates its relationship with us, or defaults on payments,
      our revenues in the relevant fiscal period could decline substantially, which
      would result in increased net losses.




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




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




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




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









16





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 planning to upgrade its accounting systems in 2005. 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.





17







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
      June 30, 2005, there were approximately 320 stockholders of record and our
      average daily share volume for the three months ended June 30, 2005 was
      approximately 6,300 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.
        In the future, the Company 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 5% 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
      system is designed to accommodate transactions involving virtually any prepaid
      product that can be delivered electronically. Within the prepaid transaction
      market, our initial focus has been on the telecommunications market. As a
      distributor of prepaid products in this market, we purchase PINs from national
      and regional telecommunication carriers and distribute these through our
      established networks of retail outlets, such as convenience stores, wireless
      product stores, check cashing stores, grocery stores and discount stores. The
      prepaid transaction market is rapidly expanding into various types of
      non-telecommunications products, such as gift and loyalty cards, prepaid debit
      cards, bill payment and money transfer. In addition to distributing traditional
      telecommunication products, our system is currently used to provide many of
      these products as well.




18








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 June 30,
              
              For
                  the Three Months Ended June 30,2005
              
              2004Amount
              
              Percentage
              
              Amount
              
              PercentageWireless
              
              $
              12,756,349
              
              
              95.7%
              
              $
              2,136,863
              
              
              72.4%Long
                  Distance
              
              
              181,904
              
              
              1.4%
              
              
              88,584
              
              
              3.0%Fees
              
              
              177,755
              
              
              1.3%
              
              
              144,325
              
              
              4.9%Service
                  Bureau
              
              
              86,069
              
              
              0.6%
              
              
              111,865
              
              
              3.8%Debit
                  Card
              
              
              33,025
              
              
              0.2%
              
              
              27,967
              
              
              0.9%Bill
                  Pay
              
              
              14,949
              
              
              0.1%
              
              
              -
              
              
              0.0%Other
              
              
              72,641
              
              
              0.5%
              
              
              441,333
              
              
              15.0%Total
              
              $
              13,322,692
              
              
              100.0%
              
              $
              2,950,937
              
              
              100.0%
  For
                  the Six Months Ended June 30,
              
              For
                  the Six Months Ended June 30,2005
              
              2004Amount
              
              Percentage
              
              Amount
              
              PercentageWireless
              
              $
              20,578,606
              
              
              94.4%
              
              $
              4,089,886
              
              
              72.2%Long
                  Distance
              
              
              253,585
              
              
              1.2%
              
              
              191,343
              
              
              3.4%Fees
              
              
              268,740
              
              
              1.2%
              
              
              291,284
              
              
              5.1%Service
                  Bureau
              
              
              137,355
              
              
              0.6%
              
              
              268,862
              
              
              4.7%Debit
                  Card
              
              
              70,580
              
              
              0.3%
              
              
              88,107
              
              
              1.6%Terminal
                  Sales
              
              
              26,380
              
              
              0.1%
              
              
              1,700
              
              
              0.0%Bill
                  Pay
              
              
              14,949
              
              
              0.1%
              
              
              -
              
              
              0.0%Other
              
              
              449,757
              
              
              2.1%
              
              
              736,989
              
              
              13.0%Total
              
              $
              21,799,952
              
              
              100.0%
              
              $
              5,668,171
              
              
              100.0%




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




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 six months ended June 30, 2005 and 2004.





19








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





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. Service bureau
      operations are a declining part of our business and for the three months ended
      June 30, 2005, this source of revenue decreased to 0.6% of total revenue from
      3.8% for the three months ended June 30, 2004.





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 negative margins of approximately (11.6)% for the three
          months ended June 30, 2005 and (1.1)% for the comparable period in 2004.
          The
          contribution margin excluding depreciation on terminals and amortization
          of
          capitalized software development costs was approximately (8.4)% for the
          three
          months ended June 30, 2005 and 12.4% for the comparable period in 2004.
 
 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 negative margins of approximately (8.2)% for the six
          months
          ended June 30, 2005 and (2.3)% for the comparable period in 2004. The
          contribution margin excluding depreciation on terminals and amortization
          of
          capitalized software development costs was approximately (4.3)% for the
          six
          months ended June 30, 2005 and 11.5% 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 2.1% and 1.3% for the three
          and six
          month period ended June 2005, respectively. 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.




20







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




**Operating
      Metrics**




We
      monitor our business and measure performance in a number of ways. Several of
      these key measures are shown in the table below.




For
                  the Three
                Months
                  Ended
              For
                  the Three
                Months
                  Ended
              For
                  the Three
                Months
                  Ended
              For
                  the Three
                Months
                  Ended
              For
                  the Three
                Months
                  EndedJune
                  30,
              March
                  31,
              December
                  31,
              September
                  30,
              June
                  30,2005
              2005
              2004
              2004
              2004**Broker
                  Model**Net
                  terminal activations (1)
              623
              396
              450
              288
              70Terminals
                  acquired (2)
              
              
              200
              -
              -Total
                  activated terminals
              3,342
              2,721
              2,325
              1,675
              1,387Average
                  activated terminals
              3,031
              2,523
              1,734
              1531
              1,352Average
                  monthly net revenue per activated terminal (3)
              46
              33
              22
              24
              22




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




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”).




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







21








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




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




**Critical
      Accounting Policies and Estimates**




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




*Revenue
      recognition*




We
        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. The Company receives an ongoing
      transaction fee for all sales through the system, which is recorded on a "net"
      basis.




*Cost
      of goods sold*




Cost
      of
      goods sold consists primarily of the costs of the prepaid telecommunication
      and
      other miscellaneous products sold at retail and terminals sold to customers.
      The
      full cost of the product, as well as all direct costs associated with the sale
      of the product, is recorded at the time of sale. Cost of goods sold does not
      include commissions and fees paid to brokers and other
      intermediaries, transaction processing fees paid to a third party,
      depreciation on terminals in use, and amortization expense on capitalized
      software. Those costs are recorded separately in operating expenses. For the
      three months ended June 30, 2005 and 2004 there was $429,156 and $398,344 of
      depreciation on terminals and amortization of capitalized software development
      costs, respectively, applicable to cost of goods sold.  For the six
      months
      ended June 30, 2005 and 2004 there was $866,982 and $781,159 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.  The Company 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 $285,000 during the
        period
        ending March 31, 2005.  The Company is pursuing litigation against
        this
        vendor (see Part II, Item 1).
  During
        the three months ending June 30, 2005, the Company completed a detailed analysis
        of the status of electronic PIN inventory and determined that factors occurring
        during the second quarter resulted in an inventory write-down of approximately
        $250,000 for the three months ending June 30, 2005. The Company is continuing
        to
        investigate whether this discrepancy is a result of deficiencies in the PIN
        control system or inadvertent deletion. Concurrent with its investigation,
        the
        Company is making changes to its software to ensure against future unauthorized
        or accidental PIN deletions.


22





*Software development costs*


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.





*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.




The
      Company has stock option plans that 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.








23





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 Six Months Ended
            
            IncreaseJune
                30,
            
            (Decrease)
            
            June
                30,
            
            (Decrease)2005
            
            2004
              (as
                restated)
            
            %
            
            2005
            
            2004
              (as
                  restated)
            
            %Revenues
            
            $
            13,322,692
            
            $
            2,950,937
            
            
            351.5%
            
            $
            21,799,952
            
            $
            5,668,171
            
            
            284.6%Expenses:Cost
                of goods sold (exclusive of amount shown separately below,
                see(1))
            
            
            12,107,343
            
            
            1,622,821
            
            
            646.1%
            
            
            18,563,280
            
            
            3,141,328
            
            
            490.9%Commissions
                and fees
            
            
            2,335,209
            
            
            963,640
            
            
            142.3%
            
            
            4,167,303
            
            
            1,873,972
            
            
            122.4%Selling
                expenses
            
            
            232,626
            
            
            156,751
            
            
            48.4%
            
            
            459,991
            
            
            299,448
            
            
            53.6%General
                and administrative expenses
            
            
            1,457,948
            
            
            642,987
            
            
            126.7%
            
            
            2,504,206
            
            
            1,425,626
            
            
            75.7%Depreciation
                and amortization
            
            
            468,713
            
            
            417,559
            
            
            12.3%
            
            
            952,248
            
            
            816,750
            
            
            16.6%Total
                expenses
            
            
            16,601,839
            
            
            3,803,758
            
            
            336.5%
            
            
            26,647,028
            
            
            7,557,124
            
            
            252.6%Loss
                from operations
            
            
            (3,279,147
            )
            
            (852,821
            )
            
            284.5%
            
            
            (4,847,076
            )
            
            (1,888,953
            )
            
            156.6%Total
                other expense - net
            
            
            (17,851
            )
            
            (30,118
            )
            
            -40.7%
            
            
            (31,510
            )
            
            (340,485
            )
            
            -90.7%Net
                loss
            
            
            (3,296,998
            )
            
            (882,939
            )
            
            273.4%
            
            
            (4,878,586
            )
            
            (2,229,438
            )
            
            118.8%




(1)
            Excludes
                  $429,156 and $398,344 of depreciation on terminals and amortization
                  of
                  capitalized software development costs applicable to cost of goods
                  sold
                  for the three months ended June 30, 2005 and 2004, respectively. For
                  the six months ended June 30, 2005 and 2004, depreciation on terminals
                  and
                  amortization of capitalized software development costs applicable
                  to cost
                  of goods sold totaled $866,982 and $781,159, respectively.




**Three
      and six months ended June 30, 2005 compared to three and six months ended June
      30, 2004**




*Revenues.* Our
      revenues increase for the three and six months ended June 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 Six Months EndedJune
                30,
            
            June
                30,Cost
                of goods sold as a percent of revenue:
            
            2005
            
            2004
            
            2005
            
            2004Including
                terminal depreciation capitalized
                software development costsand amortization
            
            
            94.1
            %
            
            68.5
            %
            
            89.1
            %
            
            69.2
            %Excluding
                terminal depreciation capitalized
                software development costs and amortization
            
            
            90.9
            %
            
            55.0
            %
            
            85.2
            %
            
            55.4
            %




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) $1,266,704 in terminal impairment and fixed asset write-down charges
        incurred during the period ending June 30, 2005, iii) 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 iv) A PIN inventory
        write-down of approximately $250,000 incurred for period ended June 30, 2005
        and
        v) 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 June 30, 2005 and June 30, 2004 was 17.5% and 32.7%, respectively.
        Commissions and fees as a percentage of revenue for the six months ended
        June
        30, 2005 and 2004 was 19.1% and 33.1%, 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 six months ended June
        30,
        2005.
  *Selling* .
        Selling
        expenses for the three and six months ended June 30, 2005 increased by $75,875
        and $160,543, respectively, over the same periods ended June 30, 2004.
        Components of this increase are increased expenses for base salaries,
        commissions and benefits of approximately of $50,000 and $110,000 for the
        three
        and six-month periods ended June 30, 2005, respectively. The increases resulted
        from adding six additional sales and marketing personnel. Advertising expenses
        increased approximately $11,000 and $24,000 for the three and six-month periods
        ended June 30, 2005, respectively. We may continue to experience increases
        in
        selling costs from additional sales staff and increased advertising and
        marketing program expenses in 2005.




24


*General
        and administrative.* General
        and administrative expenses increased $814,961 during the three months ended
        June 30, 2005, over the comparable period ended June 30, 2004,
        but decreased as a percentage of revenue. This absolute dollar increase
        is
        due to $175,000 in settlement costs related to the Dial-Thru International
        litigation (see Note 7 - Litigation and contingencies), approximately $188,000
        in incremental payroll and benefit costs, approximately $160,000 in bad debt
        expense, approximately $100,000 in incremental accounting and other related
        professional fees, approximately $63,000 in incremental bonus expenses,
        approximately $45,000 in incremental legal fees, and approximately $83,000
        in
        incremental director and officer insurance expense, stock offering expenses,
        contract labor, rent, travel and other expenses.
 
 General
        and administrative expenses increased $1,078,580 during the six months ended
        June 30, 2005, over the comparable period ended June 30, 2004, but
        decreased as a percentage of revenue. The absolute dollar increase
        is due
        to an increase of approximately $388,000 in incremental payroll and benefit
        costs, $175,000 in settlement costs related to the Dial-Thru litigation (see
        Note 7 - Litigation and contingencies), approximately $206,000 in incremental
        professional and accounting fees, approximately $100,000 in bad debt expense,
        approximately $63,000 in incremental bonus expenses, approximately $55,000
        in
        incremental legal fees, and approximately $91,000 in directors and officer
        insurance expense, board fees, stock offering expense, contract labor, rent,
        and
        other expenses.
 
 The
        Company will be making the necessary investment in 2005 to comply with SOX
        requirements and make additional investments in its internal control systems
        and
        corporate infrastructure. As revenue increases, we expect general and
        administrative expenses to decrease as a percentage of revenue. However,
        in the
        immediate future, we expect to incur costs in advance of the business growth
        that they are intended to support.


*Depreciation
        and amortization.* Depreciation and amortization expense for the three months ended June 30,
        2005
        increased by approximately $51,000 over the comparable period in 2004.
        Depreciation and amortization expense for the six months ended June 30, 2005
        increased by approximately $135,000 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 June 30, 2005 and 2004 was approximately $17,000 and $30,000,
        respectively. This decrease represents reduced losses on disposal of property
        and equipment offset, in part, by increased interest expense. Total other
        income
        and expense for the six months ended June 30, 2005 decreased approximately
        $308,000 over the comparable period in 2004. This decrease is attributable
        primarily to a reduction in interest expense related to a note issued and
        debentures sold in 2003.




**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
        June 30, 2005, we had working capital of approximately $2,801,648 and a current
        ratio of 2.4 to 1.
  As
        of
        June 30, 2005, we own approximately 9,100 Qxpress terminals available for
        placement (including new terminals held by brokers). 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
        $1,464,000 as of June 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.


25






**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
      sigificant 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 in
        the process of improving our internal controls in an effort to remediate
        these
        significant deficiencies and material weaknesses through the hiring of
        additional accounting staff and 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.  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.
  During
        2004, the Company’s former CFO entered into a transaction without authorization
        and acted to hide the transaction from the Company’s CEO and other members of
        management, the Board of Directors, and the Company’s auditors by knowingly
        making false statements and intentionally altering documents.  This
        transaction included using Company funds to make a $1,525,000 deposit with
        a
        third-party vendor for 30,000 Nokia 3300 handsets.  Company records
        were
        falsified to present $925,000 of this deposit as cash.  The remaining
        $600,000 was reserved for at December 31, 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 on handsets.
         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.
  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.  Also subsequent to December 31, 2004, the vendor to whom
        the
        deposit was made sold or took possession of approximately 9,000 of the handsets
        without reimbursing the Company.  The Company is taking legal action
        to
        recover the value of these handsets and all losses sustained by the Company
        in
        this transaction.  There can be no assurance the Company will successfully
        recover these losses from either the vendor or the former CFO.  Subsequent
        to taking possession of the handsets, the Company has sold 12,950 handsets
        at
        $31 per headset and has firm commitments to sell the remaining 7,700 handsets
        at
        $31 per headset by September, 2005. No additional losses are expected from
        this
        transaction.  The Company’s Audit Committee hired a forensic investigator
        to inquire into all of these matters and believes a thorough and complete
        investigation has been undertaken.


26








**Changes
      in Internal Control Over Financial Reporting**


During
        the three months ended June 30, 2005 the Company made several changes to
        it
        internal controls including tightening restrictions on access to the
        Company’s proprietary Q Control systems. The Company is in the process of
        implementing enhanced internal controls with respect to its accounting
        for
        and monitoring of its PIN inventory. In particular, the Company is in the
        process of modifying 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
        June 30, 2005, we are not a party to any legal proceedings, except as set
        forth
        below.
  OnJanuary23,2004,
        Dial-Thru Internationalfiled
        acomplaintagainstthe
        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
        Companyfiled 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 grantingthe
        Company’smotion
        for dismissal.The
        proceedings were stayed pending the outcome of the matter in the state of
        Utah.In
        July
        2004,the
        plaintifffiled
        substantially the same suit againstthe
        Companyin the
        United States District Court in the State of Utah.On
        August
        2, 2005, the partiescompleted
        mediation ofthe
        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*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)








27








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


_____________________________________


*
      Included as an exhibit herein.




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


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


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


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


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




(b)
      Reports on Form 8-K


On
        M ay
        16,
        2005, the Company filed a
        Current Report on Form 8-K under Item 1.01 regarding the execution of an
        Amended and Restated Employment Agreement with the Company’s President and CEO,
        Michael D. Keough.
 
 On
        May
        24, 2005, the Company filed a Current Report on Form 8-K under Item 2.02
        to
        report its issuance of a press release relating to the preliminary financial
        statements for the first quarter of 2005.
 
 On
        May
        25, 2005, the Company filed a Current Report on Form 8-K under Item 3.01
        to
        report the Company’s receipt of a notice from the staff of the American Stock
        Exchange that the Company had failed to timely file its Form 10-Q for the
        quarter ending March 31, 2005.
 
 On
        May
        31, 2005, the Company filed a
        Current Report on Form 8-K under Item 5.02 regarding the resignation
        of Michael Openshaw from his positions as Chief Financial Officer, Treasurer
        and
        Secretary of the Company and the hiring of Mark W. Robinson to assume those
        roles with the Company.
 
 On
        June
        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.


28







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:
            August
                26, 2005























29