**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





**ANNUAL
      REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT**


**OF
      1934 FOR THE YEAR ENDED DECEMBER 31, 2005**





Commission
      File Number 001-31718





**Q
      COMM INTERNATIONAL, INC.**





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





**501
      East Technology Ave, Building C, Orem, Utah 84097**





**(801)
      226-4222**





Securities
      registered under Section 12(b) of the Exchange Act:





Title
                of Each Class
            Name
                of Each Exchange on Which RegisteredCommon
                Stock, par value $.001 per share
            American
                Stock ExchangeCommon
                Stock Purchase Warrants
            American
                Stock Exchange





Securities
      Registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.001 per share





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
       [  ]  No [X]





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes  [ 
      ]  No [X]





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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. [  ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large accelerated filer [  ]
              Accelerated
                  filer [  ]
              Non-accelerated
                  filer
                  [X]




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes  [  ]  No [X]











Aggregate
      market value of the voting and non-voting common equity held by non-affiliates
      of the registrant as of the last business day of the registrant’s most recently
      completed second fiscal quarter (June 30, 2005): $21,234,110. Please see
      footnote 1 below.





On
      March
      22, 2006, 6,914,795 shares of the registrant’s common stock, par value $.001 per
      share, were outstanding.





Documents
      Incorporated by Reference: None





(1)
            The
                information provided shall in no way be construed as an admission
                that any
                person whose holdings are excluded from the figure is an affiliate
                or that
                any person whose holdings are included is not an affiliate and any
                such
                admission is hereby disclaimed. The information provided is solely
                for
                record keeping purposes of the Securities and Exchange Commission.




































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


**FORM
      10-K REPORT**





December 31,
      2005





TABLE
      OF
      CONTENTS





FORWARD-LOOKING
                STATEMENTS
            2PART
                I
            
            3Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            12Item
                2.
            Properties
            17Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            17PART
                II
            
            18Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer of Equity Securities
            18Item
                6.
            Selected
                Financial Data
            20Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            21Item
                7A.
            Quantitative
                and Qualitative Disclosure About Market
                Risk
            35Item
                8.
            Financial
                Statements and Supplementary
                Data
            36Item
                9.
            Changes
                In and Disagreements With Accountants On Accounting
                and Financial Disclosure
            61Item
                9A.
            Controls
                and Procedures
            61Item
                9B.
            Other
                Information
            64PART
                III
            
            64Item
                10.
            Directors
                and Executive Officers of the
                Registrant
            64Item
                11.
            Executive
                Compensation
            67Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            73Item
                13.
            Certain
                Relationships and Related
                Transactions
            75Item
                14.
            Principal
                Accountant Fees and Services
            77PART
                IV
            
            78Item
                15.
            Exhibits
                and Financial Statement
                Schedules
            78SIGNATURES
            81










1
 Table
            of Contents







FORWARD-LOOKING
      STATEMENTS





Various
      statements made in this Annual Report on Form 10-K are “forward-looking
      statements” (within the meaning of the Private Securities Litigation Reform Act
      of 1995) regarding the plans and objectives of management for future operations.
      These statements involve known and unknown risks, uncertainties and other
      factors that may cause our actual results, performance or achievements to be
      materially different from any future results, performance or achievements
      expressed or implied by these forward-looking statements. The forward-looking
      statements included in this report are based on current expectations that
      involve numerous risks and uncertainties. Our plans and objectives are based,
      in
      part, on assumptions involving judgments about, among other things, future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond our control. Although we believe that our assumptions underlying the
      forward-looking statements are reasonable, any of these assumptions could prove
      inaccurate and, therefore, we cannot assure you that the forward-looking
      statements included in this report will prove to be accurate. In light of the
      significant uncertainties inherent in the forward-looking statements included
      in
      this report, the inclusion of these statements should not be interpreted by
      anyone that our objectives and plans will be achieved. Factors that could cause
      actual results to differ materially and adversely from those expressed or
      implied by forward-looking statements include, but are not limited to, the
      factors, risks and uncertainties (i) identified or discussed herein;
      (ii) set forth under Part I, Item 1; (iii) set forth under the
      headings “Legal Proceedings” in Part I, Item 3, and “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” in Part II, Item 7,
      of this Annual Report on Form 10-K; and (iv) set forth in the Company’s
      periodic reports on Forms 10-Q and 8-K as filed with the Securities and Exchange
      Commission since January 1, 2005. We undertake no obligation to revise or
      update publicly any forward-looking statements for any reason.




























2
 Table
            of Contents







**PART
      I**





**Item
      1.****Business**





*Overview*





Q
      Comm’s
      business consists of the purchase and resale of a broad range of prepaid
      products and services using a proprietary electronic point-of-sale (POS)
      processing and distribution system. Historically, Q Comm’s products and services
      consisted primarily of prepaid wireless telephone talk time and prepaid long
      distance minutes. Q Comm uses its own proprietary Q  Xpress
      terminal for POS delivery, and also uses VeriFone terminals. In the future,
      Q
      Comm plans to use other commercially available terminals, as well as a web-based
      PC interface for delivery of prepaid products and for merchant processing.
      The Q
      Comm system includes the Q Xpress terminal, a third-party POS terminal, or
      a
      personal computer, communicating with a data center, and a comprehensive
      transaction processing platform that manages, operates and maintains the entire
      system. Q Comm intends to expand in its historical business while growing its
      product line to include a broad range of other prepaid and financial products
      and services, and to provide transaction processing and information management
      services to other vendors of prepaid products, both in the United States and
      abroad.





The
      Q
      Comm system was 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 Q
      Comm
      system can support the sale of a broad range of prepaid products and services
      in
      electronic format, from a single terminal placed in convenience stores and
      other
      retail establishments. Using a POS terminal, a retail merchant can sell wireless
      telephone talk time, traditional long distance service or other
      telecommunications products; add value to a prepaid debit card; accept
      electronic bill payments for a customer’s third-party creditors, transfer money
      or sell other prepaid products **** In
      general, prepaid products are 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, or in the form of a real-time
      electronic transaction where the customer is issued a printed receipt and
      transaction-tracking number. 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 transactions is divided among the retail merchant, the broker that placed
      the terminal with the retail merchant, the provider of the prepaid product
      and Q
      Comm.





Our
      system was designed to accommodate transactions involving virtually any prepaid
      product or service that can be delivered electronically. Within the prepaid
      market, our focus over the last several years has been on the telecommunications
      market. As a distributor of prepaid products and services in this market, we
      purchase PINs from national and regional telecommunication carriers and
      distribute these through an established networks of retail outlets, such as
      convenience stores, wireless product stores, check cashing stores, grocery
      stores and discount stores.





The
      market for prepaid products is rapidly expanding beyond telecommunications
      into
      an increasing array of new prepaid products and services such as gift and
      loyalty cards, prepaid debit cards, bill payment and money transfer services.
      The Q Comm system has been designed to easily support new classes of prepaid
      products, services and vendors, and thereby allows us to benefit from new
      sources of revenue and operating margin. ****





*Electronic
      Processing of Prepaid Products*





Distribution
      systems for prepaid products such as wireless telephone service, phone cards,
      debit cards, money transfers and currency exchange have generally failed to
      take
      full advantage of advances in electronic processing technology. For example,
      prepaid telecommunication products have generally been sold in the form of
      a
      card or voucher with a PIN number printed on it. Financial transactions, such
      as
      bill payment, money transfer or currency exchange have generally required the
      consumer to go to a bank, post office or other facility capable of providing
      the
      required service. Electronic processing systems such as our Q Comm system makes
      these transactions available through a single terminal that can be installed
      at
      an almost unlimited number of commercial locations and that can offer a wide
      range of different prepaid options. The electronic nature of the transaction
      Q
      Comm provides offers a variety of efficiencies when compared to traditional
      distribution methods. A few of the potential efficiencies are described
      below.





3
 Table
            of Contents








*Reduction
      in distribution costs, shrinkage and carrying costs* .
      There
      are three fundamental problems with the traditional hard card or voucher system
      for delivering prepaid wireless and wireline telecommunication products: high
      distribution costs, high carrying costs and shrinkage. Carriers sell hard cards
      to brokers who resell them to retail outlets. The carriers print the cards
      and
      ship them to brokers who, in turn, store the cards and ship them to retail
      stores. The retailers depend on the brokers to provide them with a sufficient
      number of cards to meet their demand. Both the brokers and retailers have to
      allocate valuable working capital to maintain an adequate card inventory. A
      convenience store may stock several
      thousand dollars worth of
      hard cards at any given time in various denominations from different carriers.
      A
      broker may service hundreds of convenience stores, requiring it to maintain
      inventory valued in the millions of dollars. If a retailer does not have a
      particular card in stock, it loses a potential sale. In addition, theft is
      a
      significant problem for many retailers who carry hard cards, because the cards
      are usually readily accessible, easy to conceal and have an intrinsic value.
      An
      electronic processing system reduces theft risk. Additionally, such a system
      permits better inventory management for distributors and merchants by
      eliminating the need to stock cards in a variety of denominations. Finally,
      such
      a system permits a “just-in-time” inventory purchasing program.





*Improved
      transactional data* .
      Traditional prepaid wireless transactions are virtually anonymous, and because
      carriers are not directly involved in the sale, they have very little
      information regarding prepaid wireless transactions. They have no demographic
      information about the buyers. An electronic system maintains the anonymity
      of
      individual users but permits better demographic data collection by creating
      an
      electronic record of each transaction that shows the time, value and location
      of
      each purchase.





*Improved
      distribution of financial services* .
      An
      appropriately enabled POS activation system that can process a wide variety
      of
      financial transactions, including replenishing prepaid debit cards, bill
      payment, funds transfers and currency exchanges, permits the consumer to engage
      in these kinds of transactions whenever and wherever the consumer desires.





*The
      Prepaid Market*





*Wireless.* In a
      prepaid wireless transaction, the consumer pays for a fixed number of minutes
      of
      telephone talk time in advance. In the traditional distribution scenario, in
      order to purchase prepaid wireless products, a consumer purchases a card,
      referred to in the industry as a “voucher”, “scratch card” or “hard card”, which
      entitles the bearer to a specific number of minutes of telephone talk time
      based
      on the value of the card. In order to activate his or her service, the customer
      must call the 800 number printed on the card and enter the PIN printed on the
      card. The carrier then credits the appropriate number of minutes to the
      consumer’s phone number. The carrier records usage and deducts the time as the
      minutes are used. Once all the minutes have been depleted, the consumer must
      purchase a new card.





Many
      carriers provide prepaid wireless services in the United States and Canada.
      They
      offer talk time increments in values ranging from $5 to $200 with most purchases
      being in the $10 to $50 range. Various carriers provide prepaid plans bundled
      with the purchase of a phone. Prepaid plans typically allow the consumer 30
      to
      90 days to use the purchased talk time. If not used, the minutes are forfeited
      at the end of the period. Consumers can keep the remaining talk time, however,
      by extending their service before the existing plan expires. There can be
      significant differences between the carriers in terms of quality of equipment,
      quality of service and plan features, such as voice mail, call waiting and
      three-way calling.




The
      prepaid wireless market is the dominant wireless market in most of the world.
      The prepaid wireless market, however, has had limited success in the United
      States and Canada, where it has been targeted primarily at consumers whose
      credit history and economic condition will not support an application for
      post-paid service. Accordingly, prepaid wireless in the United States and Canada
      has been more expensive on a per-minute basis than post-paid wireless, in part
      because the target market had no viable alternative, and in part because
      carriers looking to build and maintain a stable customer base disfavored prepaid
      customers who could more easily discontinue service than could postpaid
      customers on a contract.





4
 Table
            of Contents








As
      competition among wireless carriers has intensified, carriers have become
      increasingly interested in prepaid wireless services and have changed their
      distribution systems and prepaid wireless plans in an attempt to attract not
      only consumers with poor credit histories, but also consumers with good credit
      histories. These attempts have resulted in, among other things, a reduction
      in
      the cost-per-minute for prepaid services relative to the cost-per-minute for
      postpaid services. **** In
      2005,
      the Washington Post reported that prepaid wireless service in the United States
      was growing at an annual rate of 25-30%, outpacing the wireless industry’s
      overall annual growth rate of approximately 5%. In 2005, the Yankee Group,
      a
      research firm, stated that U.S. carriers in the wireless market have effectively
      saturated the market of consumers with good credit histories. As a result,
      from
      2006 forward the postpaid market is expected to remain flat, but the prepaid
      wireless market should continue to grow, because most new subscribers will
      be
      want prepaid wireless. In 2005 Atlantic ACM, another research firm, predicted
      that annual revenues in the United States from the sale of prepaid and hybrid
      wireless products will grow from approximately $10 billion in 2005 to more
      than approximately $13 billion in 2006.





As
      a part
      of their effort to promote prepaid plans, carriers generally support
      improvements in the distribution chain that allow prepaid wireless products
      to
      be more widely and conveniently available to consumers. Electronic systems,
      such
      as the Q Comm system, promote the efficient distribution of prepaid products.
      This in turn could render prepaid products a more attractive alternative for
      consumers and merchants and reduce distribution costs for prepaid products.
      At
      the same time, many carriers are experimenting with the Internet as a medium
      to
      provide product replenishment to prepaid subscribers. The use of the Internet
      may offer various advantages to carriers, including the ability to bypass the
      traditional distribution network. We view Internet based systems as a potential
      opportunity to augment our existing channels of distribution with new
      technology. We believe that the traditional POS distribution networks will
      also
      remain robust in order to meet the needs of consumers who do not have Internet
      access or credit cards or who have an immediate need to replenish telephone
      talk
      time when they are not able to access the Internet.





*Stored-value
      cards* .
      Q Comm
      offers a growing variety of stored-value cards through the Q Comm system.
      Consumers can add funds onto stored-value cards, and later
      withdraw such funds or use the card to pay for products or services. Funds
      are
      debited from the original balance during each financial transaction involving
      the card. Prepaid wireless and phone cards are two types of stored-value cards.
      Q Comm also offers a variety of prepaid debit cards branded by Visa and
      MasterCard. Q Comm is planning the introduction of gift cards in
      2006.





The
      PELORUS Group, a market research firm stated the market for stored-value-card
      will grow from $216 billion in 2005, to more than $650 billion by 2010. The
      2006
      report claimed that the increase is being driven by more corporations and
      governments seeking to lower the costs of and increase the accountability in
      connection with disbursements. According to PELORUS, prepaid debit cards can
      reduce disbursements costs by 75%.





*Bill
      Payment.* The
      Q
      Comm system also offers in-person bill payment. Consumers without a bank
      account, or with a bank account they rarely use, represent a large market of
      between 10 million to 22 million of the more than 100 million U.S. households,
      according to the Center for Financial Services Innovation in 2006. Many of
      these
      consumers find it more convenient, faster and less costly to make bill payments
      in person as opposed to purchasing a money order, envelope and stamp and mailing
      payment.





According
      to the Tower Group research firm in 2005, in-person bill payment was a $1.25
      billion market in 2004, up from $34 million in 2002 and is estimated to reach
      $5
      billion by 2008.





*Money
      transfer.* Q
      Comm
      offers money transfer through its Q Comm system. In 2006, *Market
      Watch* cited
      an
      industry report which stated that money transfers total more than $150 billion
      per year worldwide.





*The
      Q
      Comm Solution*





The
      Q
      Comm system is an integrated electronic POS activation and management
      information system that addresses many of the challenges associated with the
      distribution of prepaid wireless products and services. The Q Comm system
      provides retailers, brokers and suppliers with a system that facilitates and
      processes transactions for multiple prepaid products and services, simplifies
      collections, and provides custom reporting. It includes our proprietary POS
      terminal or third-party terminal, a data center, a comprehensive transaction
      processing platform that enables the terminals and the data center to
      communicate with each other, and customer and technical support. In addition
      to
      processing transactions, the data center and the terminal provide a suite of
      information management tools to assist merchants, brokers, carriers and others
      in the distribution chain with tracking sales, margins, account balances and
      managing their prepaid business.





5
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            of Contents








*Terminal
      hardware* .
      Our
      initial POS activation and management information **** system
      terminal was a commercially available product with limited functionality. It
      supported a limited number of products and lacked the ability to support transaction processing services such as sales and management reports. We
      continued to use this terminal in a limited number of locations until October
      2004, when we discontinued our support of such system and migrated all remaining
      customers to the Q Xpress terminal.





In
      the
      third quarter of 2002, we began shipping to our customers the Q Xpress terminal,
      our custom-designed, proprietary, POS activation system terminal. The Q Xpress
      terminal, which is about the size of a telephone and sits on the
      checkout counter, benefits from an improved aesthetic design and additional
      functionality, which, compared to our prior system terminal, improve
      distribution efficiencies both at the retail counter and in the back office.
      New
      features include a large terminal face that makes the operation of the Q Xpress
      unit intuitive for the first-time user and faster for the seasoned user. Each
      terminal also incorporates a 3-track magnetic stripe reader, multi-level
      password security, unique entry, multiple card denominations, and real-time
      PIN
      and PIN-less transaction capability. Each terminal can support multiple
      platforms, methods, suppliers, categories, products, foreign currencies and
      foreign languages. Each terminal contains a streaming media display that reads
      like a tiny, electronic billboard that consumers view during purchases. The
      streaming media display is effective means of enhancing brand awareness and
      of
      introducing new products to the market.





The
      steps
      necessary to initiate a prepaid transaction are contained within a particular
      sequence of specifically designed screen
      displays. The information that is displayed depends on the particular task
      or
      product sequence initiated by the user. The sales process is performed by the
      retailer, who, by pressing various keys on the terminal, enters a password,
      chooses a category, product type, denomination and language, and then prints
      the
      PIN, simple activation instructions and any other relevant information on a
      blank card. The capability of the terminal to store commonly used PINs allows
      for “offline” transactions to be completed. This is an important feature given
      that stores typically have only one phone line to service several devices (e.g.
      ATM, debit/credit card terminal and telephone). Transactions are stored on
      the
      terminal until the terminal calls the data center, at which time the terminal
      transfers stored transactions and automatically restocks PINs.





The
      Q
      Xpress terminal’s media display screen is designed to create a point-of-purchase
      awareness for the consumer. In an effort to promote additional purchasing
      behavior, the media display screen is positioned to face the consumer as he or she
      approaches the checkout counter. The prepaid product market changes frequently
      as a result of name changes, rate changes, destination changes, and
      specials-of-the-month. Currently, product-change information, specials and
      other
      promotions are handled in paper form or by asking sales personnel to deliver
      the
      message to the consumer orally. With the Q Xpress, the media display messaging
      is managed at the data center where proprietary instructions customize the
      information that is sent to an individual terminal or group of terminals. The
      substance of such messaging can come from a variety of sources including the
      retailer, broker, carrier or other advertiser. The terminal’s media display
      screen consists of two rows of 40 characters each, configured in a Fluorescent
      Vacuum Display internal to the terminal. The message can be as large as 256
      characters. In an effort to gain the attention of potential consumers, the
      message can scroll from top to bottom and flash.





In
      the
      first quarter of 2004, we announced that we also modified our software to run
      on
      a VeriFone 3700 series terminal. Beta testing began in March 2004, and we
      announced the commercial launch in the second quarter of 2004. This terminal
      is capable of providing both our prepaid application, which calls into the
      data
      center and functions much the same as our Q Xpress 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 the opportunity to expand
      our
      market share. While the VeriFone terminal does not offer as many options as
      our
      Q Xpress terminal for selling prepaid products, it is an excellent solution
      for
      customers who prefer to have only one terminal in their retail establishment.
      We
      are currently developing our software to enable other commercially available
      terminals , to
      be
      used with our system, which we believe will further expand Q Comm’s customer
      market.





6
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            of Contents








*Data
      center* .
      The
      data center is the key to the overall functionality of the Q Comm system,
      because it serves as an inventory and information hub for the distribution
      of
      prepaid products. At the same time we developed the Q Xpress terminal, we also
      developed new software for our data center and new communication protocols
      that
      allow for two-way communication between the data center and the terminals.
      The
      data center electronically distributes prepaid
      products to the terminals and the terminals report all of their transactions
      to
      the data center where the information is stored. The communication protocols,
      which work in conjunction with the Q Xpress terminals and data center, create
      a
      flexible delivery platform for multiple services formats, including real-time,
      just-in-time and batch inventory distribution, PIN-based transactions and
      PIN-less transactions. These methods enable efficient PIN restocking, quick
      product additions, and efficient reporting and management capabilities.
      Additionally, through our data center we are able to offer electronic automated
      clearing house, or ACH, services. ACH services entail the automatic transfer
      of
      funds from the merchants’ accounts to Q Comm’s account, eliminating the need for
      billing and collecting, as well as detailed accounting, inventory, sales,
      transaction and other management information reports for the retailers, brokers
      and carriers or other suppliers of the products we resell through our system.
      In
      addition, the system controls the advertising message on the back face of the
      terminal, and can produce custom-designed text and graphics for card backs.
      The
      system also works as a mechanism to process magnetic swipe transactions.
      Finally, the data center and communication protocols are TCP/IP-enabled to
      allow
      the system to connect to all types of devices and communications and enterprise
      systems. As a result, our system can also be integrated with third-party POS
      hardware/communications systems to provide an interface with installed legacy
      equipment.





The
      Q
      Comm system has the ability to produce terminal reports on demand and in
      real-time. The data center keeps all sales, product inventory, and terminal
      metrics current in its database. When a retailer initiates a report request ,
      the
      terminal processes this request and passes it to the communications server.
      The
      communications server validates the request and passes the request to the
      reports engine, which gathers the request data from its database and returns
      the
      requested information back to the terminal. The terminal then formats the
      information into a report and prints the report using the on-board thermal
      printer.





Communications
      between the terminal and data center are accomplished by using a proprietary
      transmission protocol. This transmission protocol involves communicating to
      and
      from the communications server and the terminal .
      Each
      transaction is handled in its entirety with no parsing to multiple destinations.
      There are three communications modes that can be initiated by the terminal:
      batch, just-in-time and real-time. Each product has a unique code associated
      with it which denotes the communication methodology for the product.





The
      just-in-time communications protocol supports our just-in-time solution. Our
      just-in-time solution provides for dynamic assessment and deployment of PIN
      inventory versus the standard batch-to-batch based on time or level. The
      just-in-time solution is not limited to the product type only, but rather
      applies also to the denomination level, allowing the Q Comm system to establish
      a history of PIN sales by denomination. This is used to determine the number
      of
      PINs an individual terminal should stock, with the objective of allowing a
      terminal to complete a typical day’s transactions without having to call the
      data center to restock. In this environment, the terminal is able to call the
      data center during early morning hours when phone line requirements are at
      a
      minimum. As the number of our terminals in service increases, inventory
      requirements for PINs will continue to escalate. The just-in-time methodology
      allows us to effectively manage our PIN inventory while establishing additional
      benefits to the merchants and carriers by providing the ideal inventory of
      PIN
      or product on demand.





The
      ability for real-time communications supports any transaction that needs to
      have
      a real-time element to it. A real-time process is usually required in PIN-less
      or immediate crediting environments, such as bill payment or debit card.





*Transaction
      Processing* .
      We
      currently process transactions from one primary data center with one remote
      data
      center as backup. We administer all of our data centers from our headquarters.
      Our primary data center is located in West Jordan, Utah in a bunkered,
      redundant, certified hosting center with multiple backup power sources, peered
      networking, secure biometric and card-controlled access. Our secondary facility
      is located in our headquarters in Orem, Utah. To ensure redundancy, our West
      Jordan and Orem data centers use different physical and network infrastructures.
      Both centers have adequate telephone and data access and we purchase telephone
      and network services from multiple vendors. Either center is capable of acting
      as the sole processing facility for all of our transactions in the event of
      a
      failure of the other center and all transaction data is reported to both
      locations.





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Our
      transaction processing facilities run on industry standard Intel-based hardware.
      We use Debian Linux for our operating system. We use multiprocessor, RAM laden
      servers with RAID Level 5 or RAID Level 1 on every system. We use MySQL as
      the
      database platform and PHP scripting in conjunction with Java servlets for the administration tools.
      All information is stored in the back end data store that is also fully
      encrypted and secure. Our high availability infrastructure employs hot-standby,
      instant failover services to ensure greater than 99.99% service uptime. All
      data
      is backed up a minimum of once per day. The data store is replicated across
      physical platforms constantly so that there are always at least three copies
      of
      critical data at any given point in time. Backups are stored off-site in a
      secure facility. The administration website uses 128-bit SSL running on an
      Apache web server. Java servlets and applications are run using the JBoss
      application server. Our networks are secured using Redundant Devil Linux servers
      which employ Department of Defense, triple-layered DMZs. We use VPN technology
      to securely connect data centers.





All
      Q
      Comm production systems and servers are monitored in real time 24 hours a day,
      365 days a year. IT personnel are notified promptly of any problems or
      performance degradations. The monitoring system aggressively tests
      the system from end-to-end to determine that all terminals in the field can
      sell
      products and report transactions. Software, hardware and network engineers
      are
      on call 24 hours a day, 7 days a week.




*Growth
      Strategy*





Our
      goal
      is to add to our strong market position in **** providing
      transaction processing and information management services for prepaid products
      and services. In order to achieve this goal we must continue to expand our
      footprint of terminals, increase the number of prepaid products and services
      that we sell, and develop new applications for our technology.





Q
      Comm
      plans to expand its presence in the prepaid telecommunications market. We
      believe that the prepaid telecommunications market by itself presents an
      attractive opportunity for us. Currently, we distribute wireless
      telecommunications products from approximately 30 carriers and distribute Q
      Xpress terminals through more than 90 brokers ,
      agents
      and other intermediaries. We believe we can expand our existing relationships
      with carriers, brokers, and independent sales organizations. In addition, we
      intend to pursue direct strategic relationships with large retail chains to
      distribute prepaid products and services through their stores.





Q
      Comm
      expects to acquire or develop new products, services and applications. The
      Q
      Xpress terminal can be adapted to accommodate almost any prepaid product or
      service. We began offering several new prepaid products and services
      during 2005 and will continue to look for new offerings to add to our current
      product library that provide good revenue and profit opportunities, have broad
      market appeal, and provide value for the distribution channel.





Q
      Comm
      plans to explore international opportunities to expand revenue from the sale
      or
      leasing of the Q Comm system and from transaction-revenue sharing through
      regional prepaid distributors. International opportunities could be
      significant as the demand for electronically delivered prepaid products and
      services increases outside of the United States.





Q
      Comm
      has expanded its technology to include third-party terminal support from
      VeriFone. We plan to expand our technology to support other terminal
      manufacturers. We also plan to seek other opportunities to further develop
      our system to
      interface with other debit/credit card terminal models, ATM machines, electronic
      cash register systems self-service kiosks and personal computer-based POS
      systems.





Q
      Comm
      also plans to consider strategic acquisitions. The types of acquisitions that
      we
      would consider as having strategic value include businesses with technology
      that
      complements our technology, businesses with prepaid products that we
      could add to our portfolio, or businesses that would enable us to expand our
      distribution channels or expand geographically.





*Significant
      Customers and Government Contracts*





No
      individual customer accounts for more than 10% of the consolidated total revenue
      of Q Comm. Q Comm is not party to any government contracts.





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*Software
      Development and Research and Development Costs*





Q
      Comm
      has made an ongoing commitment to the development, maintenance and enhancement
      of the Q Comm system, its proprietary electronic POS system.


Improvements
        or enhancements to the POS systems software are capitalized as software
        development costs only after the technological feasibility of the development
        has been established. Technological feasibility is established when we have
        completed a detailed program design or working model of the software. A detailed
        program design is established once all planning and designing activities
        necessary to establish that the software can be produced to meet the design
        specifications including functions, features and technical performance
        requirements. During the years ended December 31, 2005, 2004 and 2003, the
        Company capitalized software development costs of $80,774, $286,737 and
        $811,281, respectively, and has included these cost on its Consolidated Balance
        Sheet.
  The
        Company expenses the costs of further developing the software prior to
        establishing technological feasibility, and the cost of developing other
        hardware products, as research and development costs. Included in general
        and
        administrative expense at December 31, 2005, 2004 and 2003, are $544,368,
        $185,263 and $174,719, respectively, of research and development costs
        associated with the development of new products.
  *Competition*





Transaction
      processing and management information services for prepaid products are
      relatively new markets. We anticipate ,
      however, that this market will grow rapidly as the demand for prepaid products
      grows. Competition for our services may come from a variety of sectors,
      including companies, such as First Data Corporation, that provide merchant
      processing and management information services to the credit card market, as
      well as companies such as Pre-Solutions, Debisys, Incomm, and Euronet, which
      distribute a variety of prepaid telecommunication products and have developed
      electronic POS activation systems. Competition may also come from technology
      companies and e-commerce solution providers. The technology for POS activation
      systems is rapidly evolving. Increased competition could result in reduced
      operating margins, as well as a loss of market share. Although most of our
      competitors are privately held companies, some have substantial res ources
      and/or pre-existing market shares that have enabled them to establish a strong
      competitive position.





Because
      our system is focused on POS purchases, we also face competition from systems
      that offer prepaid products over the Internet. Internet-based commerce has
      increased dramatically in recent years as more and more people have access
      to
      the Internet, as e-commerce becomes generally accepted as safe, reliable and
      efficient, and as access speed and convenience increase. Most or all of the
      prepaid products that we offer can also be offered over the Internet. Many
      of
      the advantages of our system over traditional distribution systems will be
      available through the Internet. Online purchases, however, require access to
      the
      Internet and a credit card or other type of credit account. We are evaluating
      internet-based distribution opportunities to determine whether a strategic
      fit
      with our distribution model exists.





Q
      Comm
      believes that the principal competitive factors in our market include the
      following:





·
            Cost
                efficiencies;


·
            Breadth
                and depth of product offering;


·
            Quality
                of service;


·
            Convenience;


·
            Breadth
                of geographic presence;


·
            Customer
                service;


·
            Use
                of technology;


·
            Reliability;
                and


·
            Availability
                of enhanced services.








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Q
      Comm
      believes our competitive strengths include the following:





*Ease
      of use* .
      The Q
      Xpress terminal is the only one available in the market that was designed
      specifically for prepaid products. Generally, other terminals are adaptations
      of
      terminals designed for other purposes, such as processing credit card
      transactions. In designing a terminal for the prepaid transaction industry,
      we
      were able to take into account the specific needs of that industry. For example,
      our terminal includes an advertising display screen facing the customer, hot
      keys for commonly sold products, and a user training module included in the
      terminal. The success of this strategy has already begun to manifest itself
      by
      the strong market response to our new terminal.





*Versatility
      and flexibility* .
      We are
      able to offer our customers a wide array of products and services, both with
      a
      large number of product types and with several different carriers for products.
      Our business model allows customers to sell their own products through our
      terminals as well, while several of our competitors require their customers
      to
      only sell products supplied by the competitor. We are also able to offer our
      products and services through third-party terminals.





*Turn-key
      solution* .
      We are
      one of the few companies in this industry to develop a proprietary terminal
      that
      communicates directly with an accompanying data center to record and process
      transactions. This gives us total control of the transaction from beginning
      to
      end, which allows us to ensure service quality for our customers.





*Ability
      to customize* .
      Since
      we own the “front-end” (terminal) and “back-end” (data center) of the process,
      we are able to develop custom applications for customers in a relatively short
      time frame. Examples of these requests include items ranging from the custom
      reporting of transactions to enabling the terminal to process different types
      of
      transactions, such as debit/credit card transactions and PIN-less magnetic
      card
      swipes. We are also able to adapt our system to utilize alternate delivery
      methods, such as ATMs, cash registers and other terminal devices





*Scalable,
      efficient operating structure* .
      As a
      result of our technology, we can easily expand our operations without
      significantly increasing our fixed costs. Because all transactions are processed
      through our data center, we believe that our existing infrastructure can support
      a much higher revenue base. We believe this will be a significant competitive
      advantage as our business grows.





Q
      Comm
      believes that the Q Xpress has allowed us to compete successfully in the market
      for prepaid transaction processing and management information services.
      Nevertheless, our ability to compete successfully in the future will depend
      on
      our ability to support the distribution channels that are in fact used for
      prepaid products, our financial condition, and our related ability to form
      strategic alliances and joint ventures with third-party telecommunications
      service providers. We cannot guarantee that we will be able to compete
      successfully, and a failure to successfully compete would have a material
      adverse effect on our revenue growth and earnings. See “Risk Factors” below for
      a more in-depth discussion of various risks associated with our business.





*Suppliers
      and Customers*





We
      distribute prepaid telecommunication products, primarily PINs, from a number
      of
      sources, including national carriers such as Verizon Wireless, Boost, Cingular
      and T-Mobile, as well as regional and local carriers, such as Hargray Wireless
      and Iowa Wireless. We have direct purchase agreements with some of these
      carriers. In other cases we purchase products from secondary sources. The
      carriers determine prices for their products and we do not control the frequency
      or the quantity of the sales. To date, we have been able to purchase a
      sufficient number of products to meet customer demand. Some of our suppliers
      require that we pay for their products immediately, others extend us terms
      and
      some provide us with product on consignment.





We
      frequently add new wireless products as the demand arises. Since 2003, we have
      added a number of wireless products offered through Mobile Virtual Network
      Operators (MVNOs). These products include Boost Mobile, Tracfone ,
      Omni
      Wireless, Page Plus, O Mobile, Platinum Tel, Locus Mobile, Airvoice Wireless,
      Call Plus, STi Mobile, Movida, Telrite, Mojo Mobile and Ready Mobile. While
      these products generally offer better margins, the wireless market is highly
      competitive and historically MVNOs have a higher failure-rate than national
      wireless carriers. We will continue to evaluate new MVNO products and
      selectively add products with proven market demand.





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We
      have
      entered into agreements with approximately 90 brokers who, we believe, service
      more than
      100,000 **** retail locations throughout the country. Each broker and each retailer is required
      to
      execute a Services and Rental Agreement, and an Automated Clearinghouse (ACH)
      Agreement under which they authorize us to withdraw funds from their accounts
      to
      pay for the products they sell. **** The
      Q
      Xpress terminal is manufactured to our specifications by Universal Electronics,
      Inc., Milwaukee, Wisconsin, and by Shera Technology located in Shanghai, China.
      We have also entered into an agreement with VeriFone to allow us to purchase
      terminals directly from them.





*Sales
      and Marketing*





Our
      sales
      and marketing strategy is designed to utilize multiple channels to increase
      the
      number of retailers that use the Q Comm system, to increase the volume of
      transactions from each retailer, and to deploy new prepaid products and services
      in existing and new retail locations. Our sales organization is focused on
      specific geographic regions in the United States and Canada, is responsible
      for
      recruiting new retail locations and for developing existing locations within
      the
      assigned regions. The sales organization consists of a sales and support
      call-center staffed at our corporate headquarters as well as field- based sales
      personnel.





Q
      Comm
      recruits and develops retailers directly and by leveraging channel partnerships
      to develop business. We market directly to larger national or regional retail
      chains of company owned stores or franchises using our direct sales
      organization, and through leveraging a large extended sales force consisting
      of
      strategic partners, independent brokers, agents, and independent sales
      organizations (ISOs) who recruit, train, merchandize and service independent
      retailers and retail chains on our behalf. Our partner network significantly
      extends our geographic reach, customer service and speed to market. Q Comm
      compensates its partner network through revenue sharing agreements.





We
      use
      comprehensive, targeted marketing programs and promotional campaigns that
      include direct mail, electronic media, public relations, advertising, trade
      show
      participation and other communication programs to solicit new retail business
      and channel partners. Q Comm provides point-of-purchase marketing campaigns
      and
      materials to retailers to drive in-store sales, and we use a number of ongoing
      communications media to inform, train, and support participating retail
      merchants. During the first quarter of 2006, Q Comm reorganized its sales
      department into geographic regions. Pieter Hamman, Vice President of
      Sales—Western Region Sales, and Tom Baker, Vice President of Sales—Eastern
      Region will supervise sales in their respective geographic regions. Q Comm
      has
      also hired additional sales professionals to focus specifically on growing
      sales
      at the merchant level.





*Intellectual
      Property*





Proprietary
      rights are important to our success and our competitive position. To protect
      our
      proprietary rights, we rely on a combination of the following: laws with respect
      to patent, copyright, common law trademark, and trade secrets; confidentiality
      procedures; and contractual provisions.





We
      have
      filed multiple provisional patent applications in the United States relating
      to
      our proprietary technology, including the following: (i) design patent
      application, serial number 29/169,739, filed on October 25, 2003, for
      our “point-of-sale-activation device”; (ii) patent application, serial
      number 10/351,493, filed on January 23, 2003, for our “system and
      method for distributing inventory for POS-activation services”;
      (iii) patent application, serial number 10/350,198, filed on
      January 23, 2003, for our “point-of-sale-activation device”; and
      (iv) patent application, serial number 10/350,203, filed on
      January 23, 2003, for our “system and method for POS training concerning
      prepaid service transactions. We were awarded a patent on the first application
      for the design of our terminal. We cannot assure you that any allowed patent
      claims will result from these applications, that any patents that may be issued
      will protect our intellectual property, or that any issued patents will not
      be
      successfully challenged by third parties. Furthermore, other parties may
      independently develop similar or competing technologies or design around any
      patents that may be issued to us. It is possible that any patent issued to
      us
      may not provide any competitive advantages, that we may not develop future
      proprietary products or technologies that are patentable, and that the patents
      of others may seriously limit our ability to do business. In this regard, we
      have not performed any comprehensive analysis of patents of others that may
      limit our ability to do business.








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We
      license our software and technology to distributors and merchants who agree
      to
      sell our products through our system. The license agreements are limited in
      scope in that the software and the technology may only be used in connection
      with the Q Comm system in order to facilitate transactions over the system.
      The
      license agreements contain explicit language prohibiting the use of our
      intellectual property for any other purpose and prohibiting the licensee or
      any
      of its affiliates from copying or duplicating any aspect of the Q Comm system,
      including the software, in any way.





*Government
      Regulation*





Most
      of
      our products and services are not subject to governmental regulation that
      directly impacts our operations. As we market new classes of products and
      services that extend beyond our historical product mix of prepaid wireless
      talk
      time and prepaid long distance minutes, however, we increasingly fall with
      the
      purview of state and federal government regulations. This is particularly true
      with respect to certain classes of financial products and services that are
      governed by state and federal banking and money services business
      laws.





*Financial
      Information by Geographic Area*





Q
      Comm
      predominately operates in the United States and Canada. We currently have
      service-bureau revenue from customers in France and the Bahamas which has
      historically represented less then 1% of total revenue. The following table
      represents our revenue by major geographic segment for the years ended
      December 31, 2005, 2004 and 2003.





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**United
                States
            
            $
            41,978,851
            
            $
            14,317,113
            
            $
            6,318,103Canada
            
            
            4,141,868
            
            
            1,942,322
            
            
            -Other
            
            
            227,845
            
            
            316,888
            
            
            389,134Total
            
            $
            46,348,564
            
            $
            16,576,323
            
            $
            6,707,237





*Employees*





As
      of
      December 31, 2005, we had 48 employees, including 45 full-time and 3
      part-time employees. As of December 31, 2004, and 2003 we had 34 and 26
      full-time employees, respectively **.**





*Corporate
      Information*





Q
      Comm
      International, Inc. was incorporated in Utah in 1998. On March 20, 2000, we
      acquired 100% of Azore Acquisition, Inc., a corporation organized under the
      laws
      of the State of Nevada. Azore was afterwards merged into Q Comm and dissolved.
      Azore had no operations at the time of the merger. Our principal executive
      offices are located at 510 East Technology Ave, Building C, Orem, Utah 84097.
      The telephone number is (801) 226-4222 and the internet website address is
      www.qcomm.com. The information on the website is not incorporated in this report
      as a result of this reference. We make available on the website all materials
      filed with the Securities and Exchange Commission, including the Annual Report
      on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
      amendments to these reports as soon as such materials have been filed with
      the
      Securities and Exchange Commission.





**Item
      1A. Risk Factors**





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








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**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 December 31, 2005,
      we incurred cumulative losses of $28.4 million. For the years ended
      December 31, 2004 and 2003 we had cumulative losses of $19.8 million, and
      $13.3 million, respectively. Our independent auditors stated in their auditors'
      report for the year ended December 31, 2005 that our recurring losses raise
      substantial doubt about our ability to continue as a going concern (see Item
      8—“Financial Statements and Supplementary Data” for a more detailed discussion).
      Unless we can significantly increase the number of our POS terminals in use,
      we
      will continue to incur losses for the foreseeable future. Our working capital,
      which totaled $4.8 million as of December 31, 2005, may not be sufficient
      to sustain us until we reach profitability. We expect to raise additional
      capital in 2006, but there is no assurance that we will raise the capital needed
      to support our growth.





**Control
      by Management and Certain Major Shareholders**





As
      of
      March 22, 2006, the current executive officers and directors of Q Comm
      beneficially own or have voting control over approximately 24% of the
      outstanding common stock of Q Comm. William Jurika, the Chairman of our Board
      of
      Directors, beneficially owns or has voting control over approximately 22% of
      the
      outstanding common stock of Q Comm. Our largest shareholder, Pike Capital
      Partners, LP, beneficially owns or has voting control over 38% of the
      outstanding common stock of Q Comm. Accordingly, these individuals and entities
      have the ability to influence the election of Q Comm’s directors and most
      corporate actions. This concentration of ownership, together with other
      provisions in Q Comm’s charter and applicable corporate law, may also have the
      effect of delaying, deterring, or preventing a change in control of Q
      Comm.





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





We
      had
      negative margins, after taking into account the cost of the products sold
      through the Q Comm system, the fees and commissions payable to distributors,
      brokers and retailers, and including depreciation and software amortization
      expenses. Our margins were approximately (4.9%) in 2005, and (4.3%) in 2004,
      and
      (4.9%) in 2003. As a consequence, for us to be profitable to any meaningful
      extent, we must do one or more of the following:





·
            increase
                our revenue per terminal;


·
            increase
                the number of revenue generating
                terminals;


·
            add
                new products with higher profit margins to our portfolio;
                or


·
            develop
                new revenue models.





**The
      future success of our business will require a substantial ongoing 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 POS 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 primarily 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, approximately 93%, 87% and
      79%
      of revenue was generated from the sale of prepaid wireless products for the
      years ended December 31, 2005, 2004 and 2003, 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.








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**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 and their associated merchant customers account for a large
      percentage of our revenue. One aspect of our growth strategy is to increase
      the
      breadth of our broker-account base. However, a high level of broker
      concentration could continue for the foreseeable future. In 2005, our three
      largest brokers accounted for approximately 22.5% of revenue. We cannot assure
      you that the level of revenue to these brokers will be sustained from year
      to
      year, and there is a risk that these principal brokers may not continue to
      sell
      our products in the future. To the extent that any significant broker reduces
      its reliance on us, terminates its relationship with us, or defaults on
      payments, our revenues in the relevant fiscal period could decline
      substantially, which would result in lower net profits or increased net losses.
      The following table outlines the concentration of revenue by
      broker.


Percent
                  of Revenue
              
              **For
                  the Year Ended**
                **December
                  31, 2005**Top
                  broker
              
              
              9.6%Top
                  three brokers
              
              
              22.5%Top
                  ten brokers
              
              
              45.8%


**We
      derive a significant amount of revenue from a single** **MVNO.**





For
      the year ended
      December 31, 2005, approximately 38% of our revenue was derived from a single
      MVNO, any disruption in PIN sale or pricing changes related to this MVNO could
      result a substantial reduction in revenue and margin dollars.





**We
      derive a significant amount of revenue in our business from service contracts
      signed with merchants to operate our terminals.**





Certain
      contacts have been, and in the future may be, terminated by the merchants,
      resulting in a substantial reduction in revenue and margin.





**We
      currently depend upon a single PIN provider for the majority of our PIN
      supply.**





We
      currently purchase approximately 55% of our PINs through a single PIN provider.
      Although we can obtain PINs from sources other than our single largest PIN
      supplier, a sudden disruption in PIN supply from such supplier could potentially
      interrupt service or leave us with no choice but to acquire PINs at a higher
      cost, which would have a negative financial impact on us.





**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 merchant processing terminals only, or information
      management services only, such as, PreSolutions and InComm. In addition to
      companies that are focused solely on the prepaid transactions market, we also
      face potential competition from companies, such as First Data Corporation,
      that
      provide merchant 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, merchants or consumers.








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The
      industry in which we compete is characterized by low barriers to entry, rapidly
      changing technology, 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 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 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 operating margins, as well as a loss of
      market share and brand recognition.





**We
      depend on brokers and other intermediaries to distribute our POS terminals.**





We
      generally rely on independent brokers, distributors, wholesalers and other
      intermediaries to distribute our POS activation system to retail merchants.
      Currently, we distribute through approximately 90 brokers. Our contractual
      relationships with these brokers are nonexclusive arrangements for terms of
      two
      years. As a result, we cannot prevent them from selling competitive products
      or
      discontinuing their relationship with us at the end of their two-year
      broker-contract term. Also, 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 the Q Comm system to induce
      brokers to contract with us. If we do not continue to offer performance and
      service advantages, our brokers may not aggressively market our system to their
      retail networks or may terminate their relationship with us. We cannot assure
      you that we will continue to derive revenue, at current levels, or at all,
      from
      our existing brokers, or that we will be able to successfully establish
      relationships with new brokers.





**We
      have no control over the prices suppliers charge us for their products. As
      a
      result, price increases could have a negative impact on our margins and
      profitability.**





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





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





We
      believe that our proprietary software and hardware provide us with a competitive
      advantage. While we have filed patent applications relating to various features
      of the Q Xpress 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 “Q Xpress” or “Q Xpress 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 POS 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.








15
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            of Contents







**Retaining
      certain key personnel may be important to our continued
      success.**





Our
      strategy and its implementation depend in large part on certain key personnel
      of
      our company and their continued involvement in Q Comm in the future. Our success
      also depends in part on our ability to hire and retain highly skilled and
      qualified management, operating, marketing, financial and technical personnel.
      The competition for qualified personnel is intense and, accordingly, we cannot
      assure you that we will be able to continue to hire or retain the required
      personnel. The loss of our key personnel could have a material adverse effect
      on
      our business, growth, financial condition or results of operations.





**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 will need to raise additional capital to meet the capital
      requirements of our business or to take advantage of expansion or acquisition
      opportunities. If we are unable to do so, we may not be able to increase our
      revenues or achieve profitability. Even if we are able to secure additional
      capital by selling equity or equity-linked securities, these securities could
      dilute the ownership percentage of our existing stockholders. The securities
      that we might sell could also have rights, preferences or privileges senior
      to
      those of our common stock. We cannot assure you that we will be able to obtain
      additional financing when needed on acceptable terms or at all.





In
      December 2005, we raised $3 million through the issuance of 1,000,001 shares
      of
      restricted common stock at $3.00 per share. 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.





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





Any
      significant revenue growth will strain our existing financial and operating
      resources. For example, the accounting system we currently use is limited in
      its
      financial reporting and we may need to purchase new accounting software and
      to
      hire additional qualified people for our accounting department as we grow.
      Expanding our operations will increase the demands on our senior management
      and
      our customer service departments. We will need to continually improve our
      management, operational, financial and other departments to manage our growth
      properly and any failure to do so may lead to inefficiencies and/or redundancies
      and may impair our ability to provide accurate and timely information and
      reports to our stockholders.





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





Our
      stock
      price has been extremely volatile, fluctuating over the last two years between
      $3.00 as of the year ended December 31, 2003, and $6.39 as of the year
      ended December 31, 2005. 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;


·
            Market
                fluctuations relating to markets generally or market sectors that
                include
                our competitors, which may or may not be based on earnings or other
                announcements by us or our
                competitors;


·
            Fluctuations
                in our revenue which may or may not be related to changes in the
                way we
                conduct our business;


·
            Announcements
                by our competitors of new technological innovations, service offerings,
                contracts, acquisitions or strategic
                relationships;


·
            Departures
                of key personnel; and


·
            Changes
                in business or regulatory
                conditions.








16
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In
      the
      past, following periods of market volatility, stockholders of some companies
      have instituted securities class action litigation against such companies.
      While
      we have not been involved in securities litigation to date, if we were to be
      involved in securities litigation, we could incur a substantial cost and
      experience diversion of resources and the attention of management away from
      our
      business. We cannot predict the future performance of the capital markets in
      general and stocks in our market sector in particular, and we cannot assure
      you
      that the price for our common stock will not drop significantly in the
      future.




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





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





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





As
      of
      March 14, 2006, there were approximately 68 record holders of our common
      stock as recorded by American Stock Transfer & Trust Company, and our
      average daily share volume for the year ended December 31, 2005 was
      approximately 7,500 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.




**Item
      2.****Properties**





In
      February 2004, we moved our executive offices, warehouse and other property
      to a
      new location in Orem, Utah. We lease 6,094 sq. ft. of space at 510 East
      Technology Avenue, Building C, Orem, Utah from TCU Properties I, LLC under
      a
      lease agreement dated as of December 23, 2003. The base monthly rent for
      2005 will be $7,061 including all utilities, cleaning and security. The lease
      is
      for a five-year period, however, we may cancel the lease after three
      years .
      On
      November 29, 2005 we entered to a thirty-nine month lease agreement to rent
      approximately 2,500 square feet of commercial space located in **** Sandy **,** Utah
      from Jordan Commons Funding L.L.C. to support our development and administrative
      efforts. Under a lease agreement the base monthly rent is approximately $5,300,
      which rent will increase 2.3% annually thereafter. The base monthly rent
      includes all utilities, cleaning and security.





**Item
      3.****Legal Proceedings**





As
      of
      March 20, 2006, we are not a party to any legal proceedings, except as set
      forth below.





*Q
      Comm International v. The Phone Store of Missouri, LLC and Kevin
      Montgomery* . **** In
      March
      2005, the Company filed an action **** in
      the
      Fourth District Court, State of Utah against a PIN provider named The Phone
      Store of Missouri, LLC. The Company believes it was owed approximately $1
      million in deactivated PINs which it believes were received in the fourth
      quarter of 2004. Subsequent to April 2005, the Company determined the
      obligation includes a mix of deactivated PINs and handsets paid for by the
      Company that were sold or are in the possession of the vendor. The Company
      is
      taking the appropriate legal action to recover the value due; 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.





**Item
      4.** **Submissionof
      Matters to a Vote of Security
      Holders**





At
      the
      2005 Annual Meeting of Shareholders of Q Comm, held on November 29, 2005,
      at Q Comm’s corporate offices in Orem, Utah, the Q Comm shareholders ratified
      the appointment of Hansen, Barnett & Maxwell, P.C. as Q Comm’s independent
      auditors for the fiscal year ended December 31, 2005, and elected the six
      directors set forth in the table below to serve for a one-year term that expires
      at the 2006 Annual Meeting of Shareholders.





The
      following table sets forth the shares cast for the election of the Board of
      Directors and ratification of the appointment of the independent
      auditors.





17
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            of Contents








**Election
                of the Board of Directors:**
            **Number
                of**
              **votes
                cast**
            
            **Votes
                For**
            
            **Votes
                For**
              **(%)(1)**
            
            **Votes**
              **Against**
            
            **Votes
                Abstained**Michael
                Keough
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0William
                Jurika
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0Gary
                Crook
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0Harry
                Hargen
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0Steven
                Phillips
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0Thomas
                Tesmer
            5,143,456
            
            5,134,237
            
            99.8%
            
            9,219
            
            0(1)
                As a percentage of votes cast.**Ratification
                of the appointment of Hansen, Barnett & Maxwell as independent
                auditors:**
            **Number
                of votes cast**
            
            **Votes
                For**
            
            **Votes
                For (%)(1)**
            
            **Votes
                Against**
            
            **Votes
                Abstained**5,143,456
            
            5,138,430
            
            99.9%
            
            5,026
            
            0





(1)
      As a
      percentage of votes cast.




**PART
      II**





**Item
      5. Market for Registrant’s CommonEquity, Related
      Stockholder Matters and Issuance of Equity Securities**





*Market
      Information*





Our
      common stock has traded on the American Stock Exchange under the symbol “QMM”
since June 2003. Before then, it traded on the OTC Bulletin Board of the
      National Association of Securities Dealers, Inc. under the symbol “QCCM”. The
      following table sets forth, for the periods indicated, the range of high and
      low
      sales and bid prices for our common stock. Bid prices reflect inter-dealer
      prices, without retail mark-up, markdown or commission and may not represent
      actual transactions. The sales information is available online at
      http://finance.yahoo.com.





**Sales
                Price**
            
            **Bid
                Price****High**
            
            **Low**
            
            **High**
            
            **Low**2004First
                Quarter
            
            $
            7.37
            
            $
            3.63
            
            Not
                Applicable*Second
                Quarter
            
            $
            4.68
            
            $
            2.60
            
            Not
                Applicable*Third
                Quarter
            
            $
            5.50
            
            $
            3.75
            
            Not
                Applicable*Fourth
                Quarter
            
            $
            6.00
            
            $
            3.35
            
            Not
                Applicable*2005First
                Quarter
            
            $
            7.37
            
            $
            3.63
            
            Not
                Applicable*Second
                Quarter
            
            $
            4.68
            
            $
            2.60
            
            Not
                Applicable*Third
                Quarter
            
            $
            3.78
            
            $
            2.99
            
            Not
                Applicable*Fourth
                Quarter
            
            $
            3.55
            
            $
            2.01
            
            Not
                Applicable*




*On
      June 25, 2003 our common stock began trading on the American Stock
      Exchange.










18
 Table
            of Contents


*Holders*


As
      of
      March 14, 2006, there were 68 record holders of our Common Stock as
      recorded by American Stock Transfer & Trust Company.





*Dividends*





We
      have
      not declared or paid any dividends and do not intend to pay any dividends in
      the
      foreseeable future. We intend to retain any future earnings for use in the
      operation and expansion of our business. Any future decision to pay dividends
      on
      common stock will be at the discretion of our Board of Directors and will depend
      on our financial position, results of operations, capital requirements, and
      other factors our Board of Directors may deem relevant.





*Recent
      Sales of Unregistered Securities*





*2005
      Unregistered Sales* .
      During
      2005, we completed the following unregistered sales:





In
      April
      2005, we issued 400,000 shares of restricted common stock at $5.00 per share
      through a private placement for an aggregate of $2,000,000 to a group of
      accredited investors.





In
      July
      2005, we issued 427,000 shares of restricted common stock at $3.07 per share
      through a private placement for an aggregate of $1,311,000 in cash to a group
      of
      accredited investors.





In
      July
      2005, we issued a promissory note to the Jurika Family Trust in the amount
      of
      $614,000. This note has an interest rate of 5% per year and is payable in full
      on or before July 7, 2007. In connection with the issuance of this note, we
      also issued warrants to the Jurika Family Trust for 230,000 shares of common
      stock exercisable for a period of five years at a price of $3.51 per share.
      The
      Jurika Family Trust is controlled by William Jurika, who is our Chairman of
      the
      Board and one of our largest shareholders.





In
      December 2005, we issued 1,000,001 shares of unrestricted common stock at $3.00
      per share through a private placement for an aggregate of $3,000,003 in cash
      to
      a group of accredited investors:





*2004
      Unregistered Sales.* During
      2004, we completed the following unregistered sales:





In
      July
      2004, we sold 850,000 shares of common stock to a group of accredited investors
      for $3,500,000 in cash.





In
      October 2004, we issued 12,127 shares of common stock valued at $50,000 in
      an
      acquisition of a subsidiary.





In
      June
      2004, we issued 1,667 shares of common stock valued at $7,668 for a stock bonus
      granted in 2003.





*2003
      Unregistered Sales.* During
      2003, we completed the following unregistered sales:





In
      March
      2003, we sold 3,333 shares of common stock to an accredited investor for $20,000
      in cash.





In
      January 2003, we sold a 12% unsecured convertible note in the principal amount
      of $200,000 and 24,242 shares of common stock to an accredited investor for
      an
      aggregate purchase price of $200,000 in cash.





In
      February 2003, we sold 12% secured convertible debentures due March 31,
      2004 in the aggregate principal amount of $1.5 million, 169,231 shares of common
      stock and warrants to purchase 169,231 shares of common stock to accredited
      investors. The debentures were repaid in March 2004 on their scheduled maturity
      date.





The
      foregoing securities were issued to accredited and/or
      sophisticated investors in reliance upon the exemption from the
      registration requirements of the Securities Act of 1933, as amended, provided
      in
      Section 4(2) thereof, as a transaction by an issuer not involving a public
      offering. We reasonably believed that each purchaser had such knowledge and
      experience in financial and business matters to be capable of evaluating the
      merits and risks of the investment. Each purchaser represented an intention
      to
      acquire the securities for investment only and not with a view to distribution
      thereof. Appropriate legends were affixed to the stock certificates or warrants.
      No commissions were paid in connection with such issuances.





19
 Table
            of Contents






**Item
      6. Selected Financial Data**





The
      summary consolidated financial data set forth below has been derived from,
      and
      are qualified by reference to, our audited Consolidated Financial Statements
      and
      the notes thereto, prepared in conformity with generally accepted accounting
      principles as applied in the U.S. (“U.S. GAAP”), which have been audited in 2005
      by Hansen, Barnett and Maxwell, in 2004 by Tanner LC, and in 2003 by Pritchett,
      Siler & Hardy, P.C. The table below contains data for the last three
      years—not the last five years. This is because we have restated our financial
      statements for the years ended December 31, 2003, and 2004, and we
      have not restated them for the two prior years.





*Consolidated
      Balance Sheet Data:*




**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Total
                Assets
            
            $
            8,883,749
            
            $
            10,299,841
            
            $
            12,893,591Total
                Current Liabilities
            
            
            1,764,111
            
            
            2,297,310
            
            
            2,104,455Total
                Liabilities
            
            
            2,187,192
            
            
            2,680,055
            
            
            2,363,841Total
                Stockholders’ Equity
            
            
            6,696,557
            
            
            7,619,786
            
            
            10,529,750








*Consolidated
      Statement of Operations:*




**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Total
                Sales and Revenue:
            
            
            46,348,564
            
            
            16,576,323
            
            
            6,707,237Total
                Cost of Sales and Revenue:Cost
                of prepaid PIN sales and fees
            
            
            38,644,211
            
            
            12,279,263
            
            
            4,748,787Impairment
                of long-lived assets
            
            
            2,165,624
            
            
            653,303
            
            
            -Cost
                of Product Sales
            
            
            708,093
            
            
            113,955
            
            
            130,103Distribution
                commissions and fees
            
            
            7,453,192
            
            
            4,892,987
            
            
            2,156,802Total
                cost of sales and revenue
            
            
            48,971,120
            
            
            17,939,508
            
            
            7,035,692Gross
                Loss
            
            
            (2,622,556
            )
            
            (1,363,185
            )
            
            (328,455
            )Operating
                expenses:Selling
            
            
            814,357
            
            
            757,588
            
            
            432,075General
                and administrative
            
            
            4,409,122
            
            
            3,805,514
            
            
            2,093,279Depreciation
                and amortization
            
            
            398,251
            
            
            206,226
            
            
            38,116Litigation
                settlements
            
            
            225,000
            
            
            -
            
            
            211,513Total
                operating expenses
            
            
            5,846,730
            
            
            4,769,328
            
            
            2,774,983Loss
                from operations
            
            
            (8,469,286
            )
            
            (6,132,513
            )
            
            (3,103,438
            )Total
                Other Expense, net
            
            
            (144,967
            )
            
            (390,290
            )
            
            (2,590,880
            )Loss
                before income taxes
            
            
            (8,614,253
            )
            
            (6,522,803
            )
            
            (5,694,318
            )Provision
                for income taxes
            
            
            -
            
            
            25,000
            
            
            -








20
 Table
            of Contents








**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                Loss
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )Basic
                and diluted net loss per common share
            
            $
            (1.54
            )
            $
            (1.51
            )
            $
            (2.12
            )Basic
                and diluted weighted average common shares outstanding
            
            
            5,586,932
            
            
            4,345,016
            
            
            2,691,118Other
                Comprehensive Income (Loss):Net
                loss
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )Foreign
                currency translation adjustment
            
            
            (15,392
            )
            
            67,139
            
            
            -Comprehensive
                Loss
            
            $
            (8,629,645
            )
            $
            (6,480,664
            )
            $
            (5,694,318
            )





Total
      sales and revenue identified in the table above includes the categories outlined
      below.  These revenue categories are identified individually on the
      Consolidated Statement of Operations and Comprehensive Loss.




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.
      Non-consigned revenue is recognized at the time products are sold as is
      reflected as “Prepaid sales” on the Consolidated Statement of Operations and
      Comprehensive Loss. Sales of products are generally made directly to end-users.
      There is no right of return for products sold and the Company does not have
      future performance obligations 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 (consigned products) 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. Consigned product sales are reflected as “Prepaid PIN fees” on
      the Consolidated Statement of Operations and Comprehensive Loss.





Product
      sale includes terminals and handset sales.





Process
      and other fees represent
      transaction fees, service-bureau sales, and point-of-purchase material sales.
      The Company uses the service-bureau model primarily with international customers
      and it is a diminishing part of its 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 for
      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.





Please
      refer to Item 7 of this report for a discussion of the main factors causing
      the
      substantial changes in certain of the items set forth above, particularly when
      comparing the year 2005 results to the earlier periods.





**Item** **7.
      Management’s Discussionand Analysis of Financial Condition
      and Results of Operation**





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, the following: (i) projections of revenues, income or loss, earnings
      per share, capital expenditures, dividends, capital structure and other
      financial items; (ii) statements regarding our plans and objectives
      including product enhancements, or estimates or predictions of actions by
      customers, suppliers, competitors or regulatory authorities;
      (iii) statements of future economic performance; and (iv) statements
      of assumptions underlying other statements.





21
 Table
            of Contents








This
      report also identifies important factors that could cause our actual results
      to
      differ materially from those indicated by the forward-looking statements. These
      risks and uncertainties include, but are not limited to, the factors, risks
      and
      uncertainties (i) identified or discussed herein; (ii) set forth under
      Part I, Item 1A of this report; (iii) set forth under the heading “Legal
      Proceedings” in Part I, Item 3 of this report; (iv) set forth under the
      heading “Management’s Discussion and Analysis of Financial Condition and Results
      of Operation” in Part II, Item 7 of this report; and (v) set forth in the
      Company’s periodic reports on Forms 10-Q and 8-K as filed with the Securities
      and Exchange Commission since January 1, 2005.





*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 consolidated financial
      statements and related notes, which are included herein.





Q
      Comm’s business
      consists of the purchase and resale of many
      types of prepaid
      telecommunication and
      other products and services using a proprietary electronic point-of-sale system called Q
      Xpress. Q Comm also uses VeriFone terminals, and in the future, plans to use
      other commercially available terminals for merchant processing. The Q Xpress
      system includes
      either the Q
      Xpress 200 terminals ,
      or one
      of a variety of third-party merchant processing terminals, a data center, and
      a
      comprehensive transaction processing platform that manages, operates and
      maintains the system, and that enables the terminals to communicate with the
      data center. We
      intend
      to expand our historical business while expanding our product line to
      include a broad range of other prepaid and
      financial products
      and services,
      and to
      provide transaction processing and information management services to other
      vendors of prepaid products, both in the United States and abroad.





The
      Q
      Xpress 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 Q
      Xpress 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 Q Xpress terminal, a retail merchant can sell
      wireless telephone time, traditional long distance service or other telephone
      products, add value to a prepaid debit card, add wireless time to a customer’s
      account by electronic bill payment, and sell other prepaid products. In general,
      the prepaid product are sold in the form of personal identification numbers,
      or
“PINs,” 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 divided among the retail merchant, the broker that placed
      the
      terminal with the retail merchant, the provider of the prepaid product, and
      Q
      Comm.





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 network 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.





In
      the
      first quarter of 2004, we announced that we had modified our software to run
      on
      a VeriFone 3700 series terminal. We began beta testing in March 2004 and
      announced the commercial launch in the second quarter of 2004. This terminal
      is
      capable of providing both our prepaid application, which calls into our data
      center and functions much the same as our Q Xpress 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
      Q Xpress 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, and PC based
      point-of-sale systems. We believe that expanding the number of devices that
      can
      connect to our data center and sell prepaid products will provide access to
      additional customers and increased revenue in the future .





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            of Contents








*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. Commissions and fees paid
      to brokers and retailers are recorded as operating expense.





Beginning
      in 2003, we began offering our service-bureau business model. Under this model,
      our customers license our data center software and purchase Q Xpress 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. On an on-going
      basis, we expect service bureau to be a diminishing portion of our business
      as a
      percent of total revenue.





Historically,
      revenues from international operations have accounted for less than 9% of annual
      revenues. In 2003, we began generating revenues from customers in Canada,
      France, the Bahamas and Australia. Given that prepaid wireless is much more
      widely accepted in Europe, Asia and Latin America than it is in North America,
      we will continue to explore new international opportunities.





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.





**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003****Amount**
            
            **Percentage**
            
            **Amount**
            
            **Percentage**
            
            **Amount**
            
            **Percentage**Wireless
            
            $
            43,469,364
            
            
            93.8%
            
            $
            14,474,142
            
            
            87.3%
            
            $
            5,323,393
            
            
            79.4%Long
                Distance
            
            
            749,212
            
            
            1.6%
            
            
            449,761
            
            
            2.7%
            
            
            197,374
            
            
            2.9%Terminal
                and Handset Sales
            
            
            728,396
            
            
            1.6%
            
            
            125,442
            
            
            0.8%
            
            
            127,325
            
            
            1.9%Fee
            
            
            485,573
            
            
            1.0%
            
            
            462,580
            
            
            2.8%
            
            
            407,132
            
            
            6.1%Service
                Bureau
            
            
            251,765
            
            
            0.5%
            
            
            347,273
            
            
            2.1%
            
            
            414,123
            
            
            6.2%Gift
                Cards
            
            
            269,108
            
            
            0.6%
            
            
            100,019
            
            
            0.6%
            
            
            22,844
            
            
            0.3%Debit
                Card
            
            
            119,063
            
            
            0.3%
            
            
            151,824
            
            
            0.9%
            
            
            35,908
            
            
            0.5%Bill
                Pay
            
            
            73,285
            
            
            0.2%
            
            
            -
            
            
            0.0%
            
            
            -
            
            
            0.0%Other
            
            
            202,798
            
            
            0.4%
            
            
            465,282
            
            
            2.8%
            
            
            179,138
            
            
            2.7%Totals
            
            $
            46,348,564
            
            
            100.0%
            
            
            16,576,323
            
            
            100.0%
            
            $
            6,707,237
            
            
            100.0%




*Prepaid
      wireless.* 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.





23
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            of Contents








*Prepaid
      long distance.* We
      continued to focus on prepaid long distance revenue in 2005. Our marketing
      analysis suggests that we can increase prepaid long distance revenues by
      improving our product offering and by providing informative and attractive
      point
      of sale advertising materials to our brokers and merchants.





*Terminal
      and handset sales.* Terminal
      and handset sales during 2005 were primarily driven by the sale of 20,650 Nokia
      handsets totaling $640,000 in revenue. Terminal sales drove the remaining sales
      during 2005 and all prior year sales.





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





*Service
      bureau.* We
      first
      began setting up service-bureau customers in 2003 and we acquired our
      service-bureau customer in Canada in July 2004. Although the Canada Service
      Bureau has shown growth during 2005, the overall service-bureau 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.





*Gift
      and loyalty cards.* Gift
      and
      loyalty cards recognized growth during 2005. These products allow a user to
      prepay funds on to a value card to be used at a specific retailer. Gift and
      loyalty products are expected to continue to grow but are not anticipated to
      be
      a major catalyst for sales growth.





*Prepaid
      debit cards.* Prepaid
      debit cards represent 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 that 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* .
      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 thermal card sales, wireless phone features, home dial tone,
      wholesale products and prepaid internet.





*Analysis
      of Margins*




Historically,
      our results of operations have been characterized by low-margin products. Under
      our broker model, we record the entire value of the transaction as revenues.
      Our
      direct operating expenses include the amount we pay for the product. Our direct
      operating expenses do not include the fees and commissions we pay the broker
      and
      the retailer who participated in the sale. Several of these key measures
      describing costs and margins are shown in the table below for 2005, 2004 and
      2003.




**Years
                ended December 31,****2005**
            
            **2004**
            
            **2003**Total
                sales and revenue
            
            $
            46,348,564
            
            $
            16,576,323
            
            $
            6,707,237Cost
                of prepaid PIN sales and fees
            
            
            38,644,211
            
            
            12,279,263
            
            
            4,748,787Percent
                of revenue
            
            
            83.4%
            
            
            74.1%
            
            
            70.8%Cost
                of product sales
            
            
            708,093
            
            
            113,955
            
            
            130,103Percent
                of revenue
            
            
            1.5%
            
            
            0.7%
            
            
            1.9%


Distribution
                commissions and fees
            
            $
            7,453,192
            
            $
            4,892,987
            
            $
            2,156,802Percent
                of revenue
            
            
            16.1%
            
            
            29.5%
            
            
            32.2%Impairment
                of assets
            
            $
            2,165,624
            
            $
            653,303
            
            $
            -Percent
                of revenue
            
            
            4.7%
            
            
            3.9%
            
            
            0.0%Gross
                Loss
            
            $
            (2,622,556
            )
            $
            (1,363,185
            )
            $
            (328,455
            )Percent
                of revenue
            
            
            -5.7%
            
            
            -8.2%
            
            
            -4.9%Terminal
                depreciation and software amortization
            
            
            1,940,419
            
            
            1,534,000
            
            
            924,000Percent
                of revenue
            
            
            4.2%
            
            
            9.3%
            
            
            13.8%Specific
                costs
            
            $
            641,000
            
            $
            600,000
            
            $
            -Percent
                of revenue
            
            
            1.4%
            
            
            3.6%
            
            
            0.0%Adjusted
                gross loss excluding terminal depreciation and amortization, impairment
                of
                assets and specific costs
            
            $
            (2,124,487
            )
            $
            (1,424,118
            )
            $
            (595,545
            )Percent
                of revenue
            
            
            -4.6%
            
            
            -8.6%
            
            
            -8.9%


_____________________________


24
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The
      change in gross loss from 2004 to 2005 was primarily driven by $356,000 in
      negative PIN inventory adjustments and a $285,000 write-down in the value of
      a
      one-time inventory of Nokia 3300 telephone handsets. Our gross loss percent
      was
      also impacted by the reduction of our higher-margin consigned product sales.
      Consigned products represented 3.2% and 4.7% of net revenue in 2005 and 2004,
      respectively, negatively impacting the gross margin by 1.4% in 2005, compared
      to
      2004. The change in adjusted gross loss was due to: (i) $2,165,624 in asset
      impairment charges related to a write-down in the value of our terminal
      inventory and terminal obsolescence reserves, which negatively impacted our
      margin by 4.7%; and (ii) specific costs totaling approximately $641,000
      related to an adjustment in value for handsets and terminals, which negatively
      impacted our margin by 1.4%. Our adjusted gross loss, excluding depreciation
      and
      amortization of assets and specific costs, was 4.6%.





The
      change in margins from 2003 to 2004 was due primarily to a write-down of
      $600,000 in the value of the Nokia 3300 handsets. This specific cost negatively
      impacted 2004 margins by 3.6%. Excluding these specific charges and terminal
      depreciation and amortization, the net contribution margin was
      8.6%.





For
      both
      2005 and 2004, our gross loss was also negatively impacted by the increase
      in
      revenues from lower-margin wireless products and by a reduction in high-margin
      fees. In addition, because of our thin margins, a minor change in the price that we pay
      for products has a substantial effect on our net income or loss if we are not
      able (or, in the case of price decreases, are 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. The amount of margin available to each
      participant in the distribution chain can be affected by various factors,
      however, such as the service provided, the risk assumed by the participant,
      and
      the volume and payment terms on which the participant can purchase product.
      Historically, we have purchased product from a reseller at a markup from the
      supplier price. As our business expands, we believe that there may be
      opportunities to increase margins by purchasing a greater percentage of our
      products 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 difficult to anticipate potential
      changes that may occur in the distribution chain. Thus, there is no assurance
      that we will be successful in realizing these opportunities.







25
 Table
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Substantially
      all of our revenues are collected through automated clearinghouse, or ACH,
      transactions initiated by us within 72 hours of the sale of the product. In
      an
      ACH transaction, funds are electronically transferred from the merchants’
accounts to our accounts. In most cases, our brokers 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 our performance in a number of ways. Several
      of
      these key measures, including our adjusted average monthly revenue per activated
      terminal, which we think is a key indicator of our business, are shown in the
      table below for the four quarters in 2005. We note that our average monthly
      revenue per activated terminal decreased from $53, for the period ended
      September 30, 2005, to $39, for the period ended December 31,
      2005.  For the three month period ended December 31, 2005, our contribution
      margin was $444,834, a decrease of $129,149, compared with the three month
      period ended September 30, 2005. This decrease is attributable to a decrease
      in
      prepaid product sales, higher distributor and broker commissions, and product
      mix impacts, including a $20,000 decrease in fees. We plan to improve our
      contribution margin through the following: (i) changing our fee structure
      and increasing our fees for the period ending March 31, 2006;
      (ii) improving our economies of scale by increasing the sales of prepaid
      PIN products and fee sales; (iii) increasing sales of higher-margin
      financial services products; (iv) increasing sales of PINs by establishing
      more direct relationships with carriers; and (v) improving the terms of
      pricing agreements with MVNOs and brokers.





**Broker
                Model:**
            
            **For
                the Three Months**
              **Ended**
              **December
                31,**
              **2005**
            
            **For
                the Three**
              **Months**
              **Ended**
              **September
                30,**
              **2005**
            
            **For
                the Three**
              **Months**
              **Ended**
              **June
                30,**
              **2005**
            
            **For
                the Three**
              **Months**
              **Ended**
              **March
                31,**
              **2005****(in
                dollars, except for terminal figures)**Net
                terminal activations (1)
            
            
            (69
            )
            
            536
            
            
            621
            
            
            396Total
                activated terminals
            
            
            3,809
            
            
            3,878
            
            
            3,342
            
            
            2,721Average
                activated terminals (2)
            
            
            3,844
            
            
            3,610
            
            
            3,032
            
            
            2,523**Average
                monthly revenue per unit (ARPU) calculation:**Total
                sales and revenue less product sales and service bureau
                revenue
            
            
            11,677,055
            
            
            12,055,181
            
            
            13,232,308
            
            
            8,403,909Less
                cost of prepaid PIN sales and fees, and distribution commissions
                and fees,
                excluding depreciation and amortization allocable to cost of sales
                and
                specific charges (3)
            
            
            11,232,171
            
            
            11,481,199
            
            
            12,816,467
            
            
            7,986,076Total
                contribution margin
            
            
            444,834
            
            
            573,983
            
            
            415,841
            
            
            417,833**Average
                monthly revenue per activated terminal (3)**
            
            
            **39**
            
            
            **53**
            
            
            **46**
            
            
            **55**








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





(2)
            Average
                activated terminals includes the average of the total activated terminals
                at the end of the current and prior quarter.


(3)
              The
                  specific costs for the 2005 period totaled approximately $641,000,
                  and
                  included approximately $356,000 in PIN-inventory adjustments for
                  the
                  period ended June 30, 2005, and a $285,000 write-down of the value of
                  the Nokia 3300 handsets for the period ended March 31,
                  2005.


_____________________________





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 Table
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Although
      we had approximately 670 new terminals activated at merchant locations for
      the
      period ended December 31, 2005, we had approximately 740 terminals
      deactivated. This resulted in a net terminal count of approximately 3,800.
      The
      deactivations were driven by the following: (i) the deactivation of certain
      terminals that we determined to be unfavorable credit risks; (ii) the
      bankruptcy of a broker/merchant chain; (iii) losing one broker/merchant to
      a competitor; and (iv) deactivations resulting from normal discontinuance
      by certain customers of their subscription service.




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”).




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 Q Xpress terminal (e.g. electronic cash
      registers and Kiosk’s), our focus will shift from terminals in service to total
      retail locations regardless of the method of product distribution.





Our
      strategy with average revenue per terminal is to focus our sales efforts on
      quality brokers and retail chains with established prepaid sales histories,
      maintain or better the pricing in our contracts with new brokers, gain better
      discounts from suppliers by securing direct relationships and buying larger
      quantities, and continue to charge rental and minimum performance fees on all
      terminals placed.





*Critical
      Accounting Policies and Estimates*





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




*Revenue
      recognition.* We
      use
      two models to generate revenues: the broker model and the service-bureau model.
      Under the broker model, which has been and continues to be the dominant
      alternative, we sell our prepaid products through third-party retail locations.
      Revenue is recognized at the time products are sold. Sales of products are
      generally made directly to end-users. There is no right of return for products
      sold and the Company is not obligated for further performance after the sale.
      These sales transactions, categorized as “prepaid PIN sales” on the consolidated
      statements of operations and comprehensive loss, 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.
      Revenue recorded on a “net” basis is categorized as “prepaid PIN fees” on the
      consolidated statements of operations and comprehensive loss.





27
 Table
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We
      use
      the service-bureau model primarily with international customers and is a
      diminishing part of our business. In this model, the Company licenses its
      proprietary  software and sells its point-of-sale  terminals. The
      customer is responsible for operation of the system and providing services
      to its retail stores. We receive an ongoing transaction fee for all sales
      through the system, which is recorded on a “net” basis.




*Cost
      of prepaid PIN sales and fees* .
      Cost of
      prepaid sales and fees ** consists
      primarily of the costs of the prepaid telecommunication and other miscellaneous
      products sold at retail and terminals sold to customers and depreciation on
      terminals in use, and amortization expense on capitalized software. 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.





During
      2005 we recognized approximately $356,000 in negative PIN inventory adjustments.
      In addition, in January 2005, a vendor sold or took possession of approximately
      9,000 handsets without reimbursing the Company.  We expensed these missing handsets
      in the first quarter of 2005 and recorded a receivable from the vendor, and
      recorded a reserve totaling $285,000 during the period ended March 31,
      2005. We are pursuing litigation against this vendor (see Item 3—“Legal
      Proceedings” for a more detailed discussion).  During 2004, we also
      recognized a write-down of $600,000 related to the value of the Nokia 3300
      handsets.





*Cost
      of product sales.* Cost of product sales
      includes the cost of terminals and handsets sold.





*Distribution
      commissions and fees.* Distribution
      commissions and fees include fees paid to brokers and other intermediaries
      and
      transaction processing fees paid to a third party.





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




*Impairment
      of long-lived assets.* In
      accordance with SFAS No. 144, ** “Accounting
      for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as
      property and equipment and purchased intangibles that are 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.





For
      the
      year ended December 31, 2005, we performed an impairment analysis and
      determined that terminals were impaired and recorded an impairment loss of
      $711,672; we also recorded a goodwill impairment loss of $187,247, which related
      to acquisitions from 2000 and 2004. For the period ended June 30, 2005, we
      completed an impairment analysis and determined long-lived assets were impaired.
      As a result, we recorded an impairment loss of $1,266,704, which related to
      terminals.




For
        the
        year ended December 31, 2004, we recorded an impairment of $653,000 related
        to
        the purchase of Point de Vente (PDV) in July 2004. In the fourth quarter
        of
        2004, we assessed the recoverability of the intangible assets of PDV and,
        inasmuch as we had not yet realized expected increases in sales volumes and
        cash
        flows, we determined to write off all intangible assets that were recorded
        at
        the time of purchase.


*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.





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





*Income
      taxes.* At
      December 31, 2005, we had an accumulated net operating loss for federal and
      state corporate income tax purposes of approximately $22.0
      million. Because our
      ability to use this net operating loss depends on our ability to earn future
      taxable income, and because management has determined that the deferred tax
      assets may not be realized, we have established a valuation allowance equal
      to
      the net deferred tax asset. The amount of and ultimate realization of the
      benefits from these deferred tax assets for income tax purposes depend, in
      part,
      on applicable tax laws in effect, our future earnings, and other future events,
      the effects of which cannot be determined. Our ability to use our accumulated
      net operating loss against future taxable income, if any, may cause our future
      reported earnings, if any, to be greater than they would be if fully taxable.





*Results
      of Operations*





The
      following table sets forth statement of operations data as a percentage of
      revenues for the years presented. The trends suggested by this table may not
      be
      indicative of future operating results. As noted earlier, these percentages
      may
      change substantially as a result of our implementation of different sales models
      and other factors.








**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Revenue
            
            
            100.0%
            
            
            100.0%
            
            
            100.0%Cost
                of prepaid PIN sales and fees
            
            
            83.4%
            
            
            74.1%
            
            
            70.8%Cost
                of product sales
            
            
            1.5%
            
            
            0.7%
            
            
            1.9%Impairment
                of long-lived assets
            
            
            4.7%
            
            
            3.9%
            
            
            0.0%Distribution
                commissions and fees
            
            
            16.1%
            
            
            29.5%
            
            
            32.2%Selling
                expenses
            
            
            1.8%
            
            
            4.6%
            
            
            6.4%General
                and administrative expenses
            
            
            9.5%
            
            
            23.0%
            
            
            31.2%Depreciation
                and amortization
            
            
            0.9%
            
            
            1.2%
            
            
            0.6%Litigation
                settlements
            
            
            0.5%
            
            
            0.0%
            
            
            3.2%Loss
                from operations
            
            
            -18.3%
            
            
            -37.0%
            
            
            -46.3%Other
                Income (expenses) - net
            
            
            -0.3%
            
            
            -2.4%
            
            
            -38.6%Net
                loss before income taxes
            
            
            -18.6%
            
            
            -39.4%
            
            
            -84.9%Provision
                for income taxes
            
            
            0.0%
            
            
            0.2%
            
            
            0.0%Net
                loss
            
            
            -18.6%
            
            
            -39.5%
            
            
            -84.9%


_____________________________








29
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            of Contents





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





**For
                the Years Ended December 31,**
            
            **Increase
                (Decrease)****2005**
            
            **2004**
            
            $
            
            %**Total
                Sales and Revenues**
            
            $
            46,348,564
            
            $
            16,576,323
            
            $
            29,772,241
            
            
            179.6%**Cost
                of Sales and Revenue:**Cost
                of prepaid PIN sales and fees
            
            
            38,644,211
            
            
            12,279,263
            
            
            26,364,948
            
            
            214.7%Cost
                of product sales
            
            
            708,093
            
            
            113,955
            
            
            594,138
            
            
            521.3%Impairment
                of long-lived assets
            
            
            2,165,624
            
            
            653,303
            
            
            1,512,321
            
            
            231.5%Distribution
                commissions and fees
            
            
            7,453,192
            
            
            4,892,987
            
            
            2,560,205
            
            
            52.3%**Total
                Cost of Sales and Revenue**
            
            
            48,971,120
            
            
            17,939,508
            
            
            31,031,612
            
            
            173.0%**Gross
                Loss**
            
            
            (2,662,556
            )
            
            (1,363,185
            )
            
            (1,259,371
            )
            
            92.4%**Operating
                Expenses:**Selling
            
            
            814,357
            
            
            757,588
            
            
            56,769
            
            
            7.5%General
                and administrative
            
            
            4,409,122
            
            
            3,805,514
            
            
            603,608
            
            
            15.9%Depreciation
                and amortization
            
            
            398,251
            
            
            206,226
            
            
            192,015
            
            
            93.1%Litigation
                settlements
            
            
            225,000
            
            
            -
            
            
            225,000
            
            
            100.0%**Total
                operating expenses**
            
            
            5,846,730
            
            
            4,769,328
            
            
            1,077,402
            
            
            22.6%**Loss
                from operations**
            
            
            (8,469,286
            )
            
            (6,132,513
            )
            
            (2,336,773
            )
            
            38.1%Total
                Other Expense, net
            
            
            (144,967
            )
            
            (390,290
            )
            
            245,323
            
            
            62.9%Loss
                before Income Taxes
            
            
            (8,614,253
            )
            
            (6,522,803
            )
            
            (2,091,450
            )
            
            32.1%Provision
                for Income Taxes
            
            
            -
            
            
            25,000
            
            
            (25,000
            )
            
            -100.0%**Net
                Loss**
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (2,066,450
            )
            
            31.6%**Basic
                and Diluted Net Loss per Common Share**
            
            $
            (1.54
            )
            $
            (1.51
            )
            $
            (0.03
            )
            
            2.0%**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            $
            5,586,932
            
            $
            4,345,016
            
            $
            1,241,916
            
            
            28.6%**Other
                Comprehensive Income (Loss):**Net
                loss
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (2,066,450
            )
            
            31.6%Foreign
                currency translation adjustment
            
            
            (15,392
            )
            
            67,139
            
            
            (82,531
            )
            
            -122.9%Comprehensive
                Loss
            
            $
            (8,629,645
            )
            $
            (6,480,664
            )
            $
            (2,148,981
            )
            
            33.2%


_____________________________








30
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            of Contents





The
      following table presents our statements of operations, showing dollar and
      percentage changes from 2004 to 2003.





**For
                the Years Ended December 31,**
            
            **Increase
                (Decrease)****2004**
            
            **2003**
            
            $
            
            %


**Total
                Sales and Revenues**
            
            $
            16,576,323
            
            $
            6,707,237
            
            $
            9,869,086
            
            
            147.1%**Cost
                of Sales and Revenue:**Cost
                of prepaid PIN sales and fee
            
            
            12,279,263
            
            
            4,748,787
            
            
            7,530,476
            
            
            158.6%Cost
                of product sales
            
            
            113,955
            
            
            130,103
            
            
            (16,148
            )
            
            -12.4%Impairment
                of long-lived assets
            
            
            653,303
            
            
            -
            
            
            653,303
            
            
            100.0%Distribution
                commissions and fees
            
            
            4,892,987
            
            
            2,156,802
            
            
            2,736,185
            
            
            126.9%**Total
                Cost of Sales and Revenue**
            
            
            17,939,508
            
            
            7,035,692
            
            
            10,903,316
            
            
            155.0%**Gross
                Loss**
            
            
            (1,363,185
            )
            
            (328,455
            )
            
            1,034,730
            
            
            315.0%**Operating
                Expenses**Selling
            
            
            757,588
            
            
            432,075
            
            
            325,513
            
            
            75.3%General
                and administrative
            
            
            3,805,514
            
            
            2,093,279
            
            
            1,712,235
            
            
            81.8%Depreciation
                and amortization
            
            
            206,226
            
            
            38,116
            
            
            168,110
            
            
            441.0%Litigation
                settlements
            
            
            -
            
            
            211,513
            
            
            (211,513
            )
            
            -100.0%**Total
                operating expenses**
            
            
            4,769,328
            
            
            2,774,983
            
            
            1,994,345
            
            
            71.9%**Loss
                from operations**
            
            
            (6,132,513
            )
            
            (3,103,438
            )
            
            3,029,075
            
            
            97.6%Total
                Other Expense, net
            
            
            (390,290
            )
            
            (2,590,880
            )
            
            2,200,590
            
            
            84.9%Loss
                before Income Taxes
            
            
            (6,522,803
            )
            
            (5,694,318
            )
            
            (828,485
            )
            
            14.5%Provision
                for Income Taxes
            
            
            25,000
            
            
            -
            
            
            25,000
            
            
            0.0%**Net
                Loss**
            
            $
            (6,547,803
            )
            $
            (5,694,318
            )
            $
            (853,485
            )
            
            15.0%**Basic
                and Diluted Net Loss per Common Share**
            
            $
            (1.51
            )
            $
            (2.12
            )
            $
            0.61
            
            
            -28.8%**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            $
            4,345,016
            
            $
            2,691,118
            
            $
            1,653,898
            
            
            61.5%**Other
                Comprehensive Income (Loss):**Net
                loss
            
            $
            (6,547,803
            )
            $
            (5,694,318
            )
            $
            (853,485
            )
            
            15.0%Foreign
                currency translation adjustment
            
            
            67,139
            
            
            -
            
            
            67,139
            
            
            0.0%**Comprehensive
                Loss**
            
            $
            (6,480,664
            )
            $
            (5,694,318
            )
            $
            (786,346
            )
            
            13.8%


_____________________________




*Years
      ended December 31, 2005, 2004, and 2003*





*Sales
      and revenues* .
      Our
      2005 sales and revenues increased over the 2004 results due to both an increase
      in number of terminals in the field and an increase in revenues per terminal
      during 2005. Wireless products were the dominant growth category, with $28.4
      million in incremental revenue. Sales and revenues from other prepaid products,
      including long distance, gift cards and bill pay also realized increases over
      2004, as did revenues from sales of terminals. We also had one-time revenue
      in
      2005 from the sale of telephone handsets that we received in settlement of
      a
      note receivable. We expect the following factors to positively impact revenues
      in 2006: (i) a continuing increase in our installed base of terminals, some
      of which were only recently installed and therefore did not contribute
      significantly to 2005 revenues; (ii) our recently expanded direct sales
      force that will be fully trained and active throughout 2006; (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 new
      vendors of existing products; and (v) the anticipated continuing growth of
      the prepaid wireless market. While we believe that these factors will result
      in
      further revenue growth in 2006, there is no assurance that they will.





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Our
      2004
      sales and revenues increased over the 2003 amount due to both an increased
      number of terminals in the field and to an increase in revenues per terminal
      during 2004. The acquisition of Point de Vente in July 2004 added approximately
      $2.0 million in revenues to the 2004 total. Most revenue categories experienced
      increases during 2004 compared to 2003, with the largest increase of $9.1
      million coming from prepaid wireless products.





*Cost
      of prepaid PIN sales and fees* .
      Our
      cost of prepaid PIN sales and fees (including terminal depreciation and
      amortization) for the year ended December 31, 2005, as a percentage of
      revenues, was 83.4%, compared to 74.1% for the year ended December 31,
      2004. This increase was primarily attributable to approximately $641,000 in
      specific charges, including $356,000 in PIN inventory adjustments and a $285,000
      write-down in value of Nokia 3300 handsets. In the future, we expect our margins
      to fluctuate as changes occur in our product mix, level of fees charged, and
      discount rates offered by carriers.





Our
      cost
      of prepaid PIN sales and fees (including terminal depreciation and amortization)
      for the year ended December 31, 2004, as percentage of revenues, was 74.1%,
      compared to 70.8% for the year ended December 31, 2003. This increase was
      attributable to a $600,000 loss resulting from handsets that were not received
      by the Company in connection with the previously discussed deposit made to
      a
      vendor-inventory write down related to telecommunications products, and our
      mix
      of sales. This increase was offset in part by several new wireless MVNO carriers
      we added in 2004 who offer higher discounts on their products. In the future,
      we
      expect our margin to fluctuate as changes occur in our product mix, level of
      fees charged, and discount rates offered by carriers.





*Cost
      of product sales* .
      Our
      cost of product sales for the year ended December 31, 2005, as a percent of
      revenues, was 1.5%, compared to 0.7% for the year ended December 31, 2004.
      This increase was primarily attributable to the sale of 20,650 Nokia handsets
      totaling $640,000 in revenue.





Our
      costs
      of product sales, as a percent of revenue, were 0.7% and 1.9%, for the years
      ended December 31, 2005 and 2004, respectively. This decrease is
      attributable to a lower mix of terminal sales as a percent of
      revenue.





*Impairment
      of long-lived assets* .
      For the
      year ended December 31, 2005, we experienced approximately $2,165,000 (a
      4.7% margin impact) in impairment losses. The impairments included approximately
      $1,978,000 in losses resulting from a write-down in terminal-value and
      terminal-obsolescence reserves and a $144,580 impairment charge due to the
      loss
      of a customer and related to an acquisition made in 2000, which was classified
      as an indefinite-life intangible asset. In accordance with SFAS no. 142, the
      Company completed its test of goodwill for impairment during the year ended
      December 31, 2005. The Company used the quoted market price of its common
      stock to test the remaining goodwill for impairment, and recorded the
      appropriate impairment expense.  Finally, the impairments included a
      $42,668 impairment charge related to the purchase of 300 customer accounts
      in
      August 2004.





We
      recorded an impairment of $653,000 in 2004 related to the purchase of Point
      de
      Vente (a 3.9% margin impact). Because we did not realize expected increases
      in
      sales volumes and cash flows from that acquisition, we determined to write
      off
      all intangible assets that were recorded at the time of purchase. Our primary
      reason for purchasing Point de Vente was to gain access to the Canadian market.
      Canadian telecom carriers generally do not grant direct distribution agreements
      to U.S.-based customers.




*Distribution
      commissions and fees* .
      These
      expenses are principally commissions paid to retailers and brokers for product
      sales through the Q Xpress terminals and are a fixed percentage of the product
      sales price. Commissions and fees for the year ended December 31, 2005 as a
      percent of revenue were 16.1%, compared to 29.5% for the year ended
      December 31, 2004, and 32.2% for the year ended December 31, 2004. The
      primary driver for the reduction during 2005 and 2004 is a shift in our sales
      strategy from brokered sales to a larger direct sales force.





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For
      the
      years ended December 31, 2004 and 2003 distribution commissions and fees,
      as a percent of revenue, were 29.5% compared to 32.3%. The primary driver for
      the reduction was the transfer of all customers from a third-party processor
      to
      our Q Xpress system during 2004.





*Margin.* After
      subtracting cost of prepaid PIN sales and fee, and distribution commissions
      and
      fees paid to the brokers and retailers from revenue, we had margins (including
      terminal depreciation and software amortization expenses) of approximately
      (1.0%) for the year ended December 31, 2005 and (4.3%) for the comparable
      period in 2004. This increase is primarily attributable to a loss in
      2004 of approximately $600,000 (a negative 3.6% margin impact) resulting
      from a write-down in value of Nokia handsets. Fees and Service Bureau both
      reduced in absolute dollars terms and as a percent of revenue. The impact the
      Fee and Service Bureau reduction negatively impact margins on a
“dollar-for-dollar” basis. During 2005 we were able to reduce commission and
      fees costs primarily by obtaining more direct customers. During 2006 one of
      our
      primary strategies is to further improve margins by obtaining more direct
      contracts with retail chains where we would not have to pay a broker commission
      and by obtaining more direct contracts with PIN providers, thus avoiding the
      mark up added by primary distributors. There is no assurance that we will be
      successful in improving our margin after commissions and fees in 2006. Our
      market is increasingly competitive and we may have to discount fees to gain
      market share; this and other factors could result in lower margins in 2006.





After
      subtracting cost of prepaid PIN sales and fee, and distribution commissions
      and
      fees that were paid to the brokers and retailers from revenue, we had margins
      (including terminal depreciation and software amortization expenses) of
      approximately (4.3%) for the year ended December 31, 2004 and (4.9%) for
      the comparable period in 2003. The decrease is primarily attributable to: (i)
      an
      offset to the benefit in margin from our mix of sales and a $600,000 (a
      negative 3.6% margin impact) loss resulting from handsets that were not received
      by the Company in connection with the previously discussed deposit to a vendor;
      and (ii) our mix of sales. This decrease was offset in part by an increase
      in fees charged during 2004, compared with 2003.





*Selling
      and marketing expenses* .
      Selling
      and marketing expenses increased by $57,000 during 2005 compared to 2004, but
      declined as a percentage of revenues. This increase included a $68,000 increase
      in sales commissions from a commission plan instituted in 2005, an increase
      in
      base salaries of $25,000, and an increase of $17,000 for advertising and
      promotion. These increases were offset in part by a $50,000 decrease in travel.
      We may continue to experience increases in selling and marketing costs in 2006
      as we continue to focus on direct sales and as we invest in new programs to
      introduce our products.





Selling
      and marketing expenses for the year ended December 31, 2004 increased by
      approximately $325,000, compared to 2003. This was due to increased base
      salaries of $210,000 from the addition of five new sales personnel and an
      increase of $115,000 in sales commissions from a commission plan instituted
      in
      2004.





*General
      and administrative* .
      General
      and administrative expenses increased by $603,608 during 2005 compared to 2004,
      but declined as a percentage of revenues. This increase in expenses can be
      primarily attributed to the addition of 12 new employees, and an increase in
      base salaries expense of $528,000.  Other factors that contributed to the
      increase in G & A expenses include $337,000 in increased accounting fees and
      $134,000 in increased legal fees. These increases were offset in part by:
      (i) a $146,000 decrease in loss on disposal of assets; (ii) a $107,000
      decrease in postage and supplies; (iii) a $84,000 decrease in investor
      relations expenses; (iv) a $41,000 decrease in consulting fees; and
      (v) a $18,000 decrease in director and officer insurance, utilities,
      recruiting and repair and maintenance. In order to support expanded operations,
      we expect that general and administrative expenses will also continue to
      increase in the coming year.





General
      and administrative expenses increased during 2004 compared to 2003 in terms
      of
      the gross dollar amount of expenses, but declined as a percentage of revenues.
      This increase was due to a number of factors, including increased salaries
      and
      benefits of $297,000. Of this amount, $126,000 was due to a reduction in the
      salaries that were eligible to be capitalized as software development costs
      in
      2004. Additional factors causing the increase include the following: (i) a
      $160,000 accrual toward a team bonus payment due in March 2005 for 2004
      performance, while no expense of this nature was recorded in 2003; (ii) a
      $140,000 increase in loss or disposal of assets; (iii) increases in
      corporate costs such as board fees and expenses ($90,000), directors and
      officers insurance ($75,000), recruiting costs for board members and management
      positions ($43,000) and professional services ($105,000); and (iv) an
      increase in office costs such as rent and telephone of $130,000.





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*Depreciation
      and amortization.* Depreciation and amortization expenses increased by approximately $599,000,
      compared to 2004. Of this increase, approximately $255,000 is attributable
      to
      higher amortization of software development costs in 2005 and to higher
      depreciation expenses from an increased number of terminals in service. As
      we
      continue to amortize software development costs and we increase the number
      of
      terminals in service, we expect depreciation and amortization expenses to
      increase in the future.





Depreciation
      and amortization expenses for the year ended December 31, 2004 increased by
      approximately $778,000, compared to 2003. Of this increase, approximately
      $624,000 is attributable to higher amortization of software development costs
      in
      2004 and to higher depreciation expenses from an increased number of terminals
      in service.





*Litigation
      settlements* .
      For
      2005, we recorded litigation settlement expense of $225,000. This amount relates
      to an action with Dial-Thru International that was fully resolved in 2005.
      No
      such settlement expenses were recorded in 2004. For 2003, we recorded a
      litigation settlement expense of $211,523. This amount relates to two separate
      actions that were fully resolved in 2003.





*Other
      income and expense-net* .
      This
      category consists primarily of interest income and expense. For the years ended
      December 31, 2005 and 2004, this number was $145,000 and $390,000,
      respectively. This decrease of $45,000 is attributable to several factors.
      In
      2004, we recorded $301,000 as interest expense from the discount on debt and
      an
      additional $118,000 in interest expense on a related party note and capital
      lease obligations. The 2005 result is primarily attributable to interest expense
      related to a warrant to purchase 230,000 shares of common stock that was issued
      to the Company’s Chairman of the Board of Directors in conjunction with a
      $614,000 loan the Chairman made to the company on July 11, 2005. The
      warrant was treated as a discount on the note and amortized over the two-year
      term of the loan. Also, the Company recognized approximately $76,000 in interest
      expense related the value of the warrant, approximately $15,000 in interest
      earned related to a $614,000 loan, and approximately $65,000 in interest expense
      primarily related to lease obligations.





The
      “Other income and expense” category for the years ended December 31, 2004
      and 2003 was $390,000 and $2,591,000, respectively. In 2003, the Company
      incurred $2,640,000 of interest expense related to the unsecured note,
      convertible note and debentures that we sold in 2003.





*Income
      tax expense* .
      At
      December 31, 2005, we had operating loss carryforwards of approximately
      $22.0 million that may be applied against future taxable income, if any, through
      2025. The net operating loss carryforwards and other items resulted in net
      deferred tax assets of approximately $9.2 million. The amount of and ultimate
      realization of the benefits from these deferred tax assets for income tax
      purposes depends, in part, on applicable tax laws in effect, our future
      earnings, if any, and other future events, the effects of which cannot be
      determined. As a result of the uncertainty surrounding the realization of the
      deferred tax assets, we established a valuation allowance that is equal to
      the
      value of net deferred tax assets, and no income tax benefit from our operating
      loss has been recognized for any of the periods presented.





*Liquidity
      and Capital Resources*





*Cash
      and cash equivalents.* As
      of
      December 31, 2005, our balance of cash and cash equivalents was $3,806,904,
      and the balance of our restricted cash was $532,875. Restricted cash is
      maintained to support letters of credit covering capital lease arrangements
      and
      to secure a bank account that is 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 that have been
      processed through the account.





As
      of
      December 31, 2005 ,
      we had
      working capital of approximately $4.8 million and a current ratio of 3.7 to
      1.





34
 Table
            of Contents








*Financing
      activity cash flows.* Historically,
      we have financed our working capital requirements through the
      sale
      of equity, proceeds from the sale of convertible debentures and notes, and
      proceeds from short-term and long term borrowings.





In
      2005,
      we entered into a number of financing transactions, including $6.3 million
      in
      private placements of our common stock and a $614,000 related party note. In
      2004, we also relied on a number of financing transactions, including $3.5
      million in private placements of our common stock and $850,000 in capital
      leases. In 2003, we raised $13.7 million through the sale of common stock in
      public offering, $1.6 million in the sale of common stock in connection with
      notes payable, and $1.0 million through the issuance of warrants in connection
      with notes payable.





The
      Company does not have the necessary capital to continue its operations as
      planned. In this regard, our independent auditors have stated in their auditors'
      report for the year ended December 31, 2005 that our recurring losses raise
      substantial doubt about our ability to continue as a going concern (see Item
      8
“Financial Statements and Supplementary Data” for a more detailed discussion).
      Accordingly, the Company plans to raise additional funds in 2006. These
      additional funds may be in the form of equity, debt or convertible securities,
      or a combination of these.  There is no assurance that the Company will
      successfully raise additional funds.




*Recently
      Enacted Accounting Standards*




For
      a
      discussion of recently enacted accounting standards, see Note 1—“Recently
      Enacted Accounting Standards” to the Consolidated Financial Statements, set
      forth in Item 8.




*Contractual
      Obligations and Off Balance Sheet Items*




In
      the course of
      ordinary business activities, Q Comm International enters into a variety of
      contractual cash obligations and other
      commitments.  We
      can
      offer no assurances that we will be able to generate sufficient cash from
      operations or obtain financing to meet our remaining obligations when due.





The
      following table summarizes significant contractual cash obligations as of
      December 31, 2005:




**Total**
            
            **Less
                than**
              **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                Years**Debt
                obligations, plus interest
            
            $
            673,628
            
            $
            —
            
            $
            673,628
            
            $
            —
            
            $
            —Capital
                leases
            
            
            449,766
            
            
            408,132
            
            
            31,890
            
            
            9,744
            
            
            —Operating
                leases
            
            
            484,356
            
            
            159,164
            
            
            325,192
            
            
            —
            
            
            —Total
            
            $
            1,607,750
            
            $
            567,296
            
            $
            1,030,710
            
            $
            9,744
            
            $
            —


_____________________________





For
      additional information on each of these items ,
      see
      Note 6 - related Party Obligations, and Note 8 — Lease Obligations” to the
      Consolidated Financial
      Statements, set forth in Item 8.





We
      are
      from time to time a party to litigation arising in the ordinary course of its
      business. Currently, there are no legal proceedings that management believes
      would have a material adverse effect upon our consolidated results of operations
      or financial condition. From time to time, Q Comm International enters into
      agreements with unaffiliated parties that contain indemnification provisions,
      the terms of which may vary depending on the negotiated terms of each respective
      agreement. The amount of such obligations is not stated in the agreements.
      Our
      liability under such indemnification provision may be subject to time and
      materiality limitations, monetary caps and other conditions and defenses.





**Item
      7A. Quantitative and QualitativeDisclosure About Market
      Risk**





Not
      applicable.





35
 Table
            of Contents








**Item
      8.** **Financial
      Statementsand Supplementary Data**








**INDEX
      TO FINANCIAL STATEMENTS**


**Page
                No.**Report
                of Independent Registered Public Accounting Firm (Hansen, Barnett
&
                Maxwell)
            37Report
                of Independent Registered Public Accounting Firm (Tanner
                LC)
            38Report
                of Independent Registered Public Accounting Firm (Pritchett, Siler
&
                Hardy)
            39Consolidated
                Balance Sheets
            40Consolidated
                Statements of Operations and Comprehensive Loss
            41Consolidated
                Statements of Stockholders’ Equity
            42Consolidated
                Statements of Cash Flows
            43Notes to Consolidated Financial
              Statements
            46






























































36
 Table
            of Contents




**H****ANSEN****,
                  B****ARNETT****&
                  M****AXWELL**A
                  Professional CorporationCERTIFIED
                  PUBLIC ACCOUNTANTS
              
              **Registered
                  with the Public Company**5
                  Triad Center, Suite 750
              
              **Accounting
                  Oversight Board**Salt
                  Lake City, UT 84180-1128Phone:
                  (801) 532-2200
                Fax:
                    (801) 532-7944www.hbmcpas.com






**REPORT
      OF INDEPENDENT REGISTERED** **PUBLIC
      ACCOUNTING FIRM**








To
      the
      Board of Directors and Stockholders


Q
      Comm
      International, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Q Comm International,
      Inc. and subsidiaries as of December 31, 2005, and the related consolidated
      statements of operations and comprehensive loss, stockholders’ equity, and cash
      flows for the year then ended. These financial statements are the responsibility
      of the Company’s management. Our responsibility is to express an opinion on
      these financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audit provides a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Q Comm International, Inc.
      and subsidiaries as of December 31, 2005, and the results of their
      operations and their cash flows for the year then ended, in conformity with
      accounting principles generally accepted in the United States of
      America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      financial statements, the Company has suffered recurring losses from operations,
      used cash in its operating activities and as of December 31, 2005, has an
      accumulated deficit of $28,389,476. These matters raise substantial doubt about
      the Company’s ability to continue as a going concern. Management’s plans in
      regard to these matters are also described in Note 1. The financial statements
      do not include any adjustments relating to the recoverability and classification
      of asset-carrying amounts or the amount and classification of liabilities that
      might result should the Company be unable to continue as a going
      concern.





**HANSEN,
                BARNETT & MAXWELL**


Salt
      Lake
      City, Utah


March 17,
      2006





37
 Table
            of Contents








**REPORT
        OF INDEPENDENT REGISTERED** **PUBLIC
        ACCOUNTING FIRM**






To
      the
      Board of Directors


Q
      Comm
      International, Inc.








We
      have
      audited the accompanying consolidated balance sheet of Q Comm International,
      Inc. and subsidiaries as of December 31, 2004, and the related consolidated
      statements of operations and comprehensive loss, stockholders’ equity and cash
      flows for the year then ended. These consolidated financial statements are
      the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Q Comm
      International, Inc. and subsidiaries as of December 31, 2004, and the
      results of their operations and their cash flows for the year then ended in
      conformity with U.S generally accepted accounting principles.








Tanner
      LC







March 29,
      2005 except for Notes 9 and 14,


which
      are
      dated August 9, 2005





38
 Table
            of Contents





REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 To
        the
        Board of Directors
 **Q
        COMM INTERNATIONAL, INC. AND SUBSIDIARY**
 Orem,
        Utah
 
 We
        have
        audited the accompanying consolidated statements of operations and comprehensive
        loss, stockholders' equity and cash flows of Q Comm International, Inc. and
        Subsidiary for the year ended December 31, 2003. These consolidated financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Oversight Board (United States). Those standards require that we plan and
        perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements audited by us present fairly,
        in
        all material respects, the results of operations and cash flows of Q Comm
        International, Inc. and Subsidiary for the year ended December 31, 2003 in
        conformity with accounting principles generally accepted in the United States
        of
        America.
 
 
 
 **PRITCHETT,
        SILER & HARDY, P.C.**
 
 Salt
        Lake
        City, Utah
 February
        7, 2004, except for Note 17 as
 t o
        which
        the date is August 5, 2005





39
 Table
            of Contents





Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEET





**For
                the Years ended December 31,****2005**
            
            **2004****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            3,806,904
            
            $
            773,052Trade
                accounts receivable, net
            
            
            638,725
            
            
            895,388Other
                receivables, net
            
            
            -
            
            
            61,434Inventory,
                net
            
            
            1,456,937
            
            
            1,081,637Equipment
                held for resale
            
            
            610,000
            
            
            -Deposit
                on handsets
            
            
            -
            
            
            925,000Prepaid
                expenses
            
            
            46,550
            
            
            156,375**Total
                Current Assets**
            
            
            6,559,116
            
            
            3,892,886**Property
                and Equipment, net**
            
            
            1,321,564
            
            
            4,382,953**Other
                Assets:**Restricted
                cash
            
            
            532,875
            
            
            510,692Capitalized
                software development costs, net
            
            
            283,762
            
            
            1,052,344Goodwill,
                net
            
            
            -
            
            
            144,580Intangible
                assets, net
            
            
            24,000
            
            
            166,667Deposits
            
            
            162,432
            
            
            149,719**Total
                Other Assets**
            
            
            1,003,069
            
            
            2,024,002**Total
                Assets**
            
            $
            8,883,749
            
            $
            10,299,841**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                Liabilities:**Accounts
                payable
            
            $
            909,231
            
            $
            1,525,634Accrued
                expenses
            
            
            463,974
            
            
            281,302Capital
                lease obligations - current portion
            
            
            390,906
            
            
            490,374**Total
                Current Liabilities**
            
            
            1,764,111
            
            
            2,297,310**Long
                Term Liabilities:**Related
                party obligation, net of unamortized discount of $223,216
            
            
            390,784
            
            
            -Capital
                lease obligations, net of current portion
            
            
            32,297
            
            
            382,745**Total
                Long term Liabilities**
            
            
            423,081
            
            
            382,745**Total
                Liabilities**
            
            
            2,187,192
            
            
            2,680,055**Commitments
                and Contingencies (notes 2, 8, 9 and 14)****Stockholders’
                Equity:**Common
                stock, $0.001 par value; 50,000,000 shares authorized, 6,914,795
                shares
                and 4,859,044 shares outstanding, respectively
            
            
            6,915
            
            
            4,859Additional
                paid-in capital
            
            
            35,038,139
            
            
            27,333,779Accumulated
                deficit
            
            
            (28,389,476
            )
            
            (19,775,223
            )Accumulated
                other comprehensive income
            
            
            51,747
            
            
            67,139Receivable
                from shareholder
            
            
            (10,768
            )
            
            (10,768
            )**Total
                Stockholders’ Equity**
            
            
            6,696,557
            
            
            7,619,786**Total
                Liabilities and Stockholders’ Equity**
            
            $
            8,883,749
            
            $
            10,299,841





See
      accompanying notes to consolidated financial statements.





40
 Table
            of Contents






Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS




**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003****SALES
                AND REVENUE**Prepaid
                PIN sales
            
            $
            43,214,886
            
            $
            14,783,482
            
            $
            5,333,730Prepaid
                PIN fees
            
            
            1,500,160
            
            
            785,014
            
            
            390,399Product
                sales
            
            
            728,396
            
            
            125,442
            
            
            114,593Processing
                and other fees
            
            
            905,122
            
            
            882,385
            
            
            868,515**Total
                sales and revenue**
            
            
            46,348,564
            
            
            16,576,323
            
            
            6,707,237**COST
                OF SALES AND REVENUE**Cost
                of prepaid PIN sales and fees
            
            
            38,644,211
            
            
            12,279,263
            
            
            4,748,787Cost
                of product sales
            
            
            708,093
            
            
            113,955
            
            
            130,103Impairment
                of long-lived assets
            
            
            2,165,624
            
            
            653,303
            
            
            -Distribution
                commissions and fees
            
            
            7,453,192
            
            
            4,892,987
            
            
            2,156,802**Total
                cost of sales and revenue**
            
            
            48,971,120
            
            
            17,939,508
            
            
            7,035,692**Gross
                Loss**
            
            
            (2,622,556
            )
            
            (1,363,185
            )
            
            (328,455
            )**OPERATING
                EXPENSES**Selling
            
            
            814,357
            
            
            757,588
            
            
            432,075General
                and administrative
            
            
            4,409,122
            
            
            3,805,514
            
            
            2,093,279Depreciation
                and amortization
            
            
            398,251
            
            
            206,226
            
            
            38,116Litigation
                settlements
            
            
            225,000
            
            
            -
            
            
            211,513**Total
                operating expenses**
            
            
            5,846,730
            
            
            4,769,328
            
            
            2,774,983**Loss
                from operations**
            
            
            (8,469,286
            )
            
            (6,132,513
            )
            
            (3,103,438
            )**OTHER
                INCOME (EXPENSE)**Interest
                income
            
            
            20,626
            
            
            32,092
            
            
            51,984Interest
                and other expense
            
            
            (165,593
            )
            
            (422,382
            )
            
            (2,642,864
            )Total
                Other Income Expense, net
            
            
            (144,967
            )
            
            (390,290
            )
            
            (2,590,880
            )Loss
                before income taxes
            
            
            (8,614,253
            )
            
            (6,522,803
            )
            
            (5,694,318
            )Provision
                for income taxes
            
            
            -
            
            
            25,000
            
            
            -**Net
                Loss**
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )**Basic
                and Diluted Net Loss per Common Share**
            
            $
            (1.54
            )
            $
            (1.51
            )
            $
            (2.12
            )**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            $
            5,586,932
            
            $
            4,345,016
            
            $
            2,691,118**OTHER
                COMPREHENSIVE LOSS**Net
                loss
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )Foreign
                currency translation adjustment, net of tax
            
            
            (15,392
            )
            
            67,139
            
            
            -**Comprehensive
                Loss**
            
            $
            (8,629,645
            )
            $
            (6,480,664
            )
            $
            (5,694,318
            )





See
      accompanying notes to consolidated financial statements.





41
 Table
            of Contents






Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY


FOR
      THE
      YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005




**Common
                  Stock**
              
              **Additional
                  Paid-in**
              
              **Receivable
                  from**
              
              **Accumulated
                  Other Comprehensive**
              
              **Accumulated**
              
              **Total
                  Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Shareholder**
              
              **Income**
              
              **Deficit**
              
              **Equity****Balance
                  as of December 31, 2002**
              
              
              1,268,443
              
              $
              1,268
              
              $
              7,511,857
              
              $
              (130,950
              )
              $
              -
              
              $
              (7,533,102
              )
              $
              (150,927
              )Issuance
                  of common stock for cash, at $6.00 to $6.50 per share, net of offering
                  costs of $2,807,185
              
              
              2,533,333
              
              
              2,533
              
              
              13,655,282
              
              
              -
              
              
              -
              
              
              -
              
              
              13,657,815Issuance
                  of common stock in connection with notes payable, valued at $8.44
                  to $8.86
                  per share
              
              
              193,474
              
              
              194
              
              
              1,645,261
              
              
              -
              
              
              -
              
              
              -
              
              
              1,645,455Issuance
                  of warrants issued in connection with notes payable
              
              
              -
              
              
              -
              
              
              1,000,000
              
              
              -
              
              
              -
              
              
              -
              
              
              1,000,000Cash
                  received for subscription receivable
              
              
              -
              
              
              -
              
              
              -
              
              
              71,725
              
              
              -
              
              
              -
              
              
              71,725Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (5,694,318
              )
              
              (5,694,318
              )**Balance
                  at December 31, 2003**
              
              
              3,995,250
              
              
              3,995
              
              
              23,812,400
              
              
              (59,225
              )
              
              -
              
              
              (13,227,420
              )
              
              10,529,750Issuance
                  of common stock for cash, at $4.00 to $5.00 per share, net of offering
                  costs of $35,425
              
              
              850,000
              
              
              850
              
              
              3,463,725
              
              
              -
              
              
              -
              
              
              -
              
              
              3,464,575Issuance
                  of common stock for services, at $4.60 per share
              
              
              1,667
              
              
              2
              
              
              7,666
              
              
              -
              
              
              -
              
              
              -
              
              
              7,668Issuance
                  of common stock for purchase of Point de Vente, at $4.12 per
                  share
              
              
              12,127
              
              
              12
              
              
              49,988
              
              
              -
              
              
              -
              
              
              -
              
              
              50,000Cash
                  received for subscription receivable
              
              
              -
              
              
              -
              
              
              -
              
              
              48,457
              
              
              -
              
              
              -
              
              
              48,457Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              67,139
              
              
              -
              
              
              67,139Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,547,803
              )
              
              (6,547,803
              )**Balance
                  at December 31, 2004**
              
              
              4,859,044
              
              
              4,859
              
              
              27,333,779
              
              
              (10,768
              )
              
              67,139
              
              
              (19,775,223
              )
              
              7,619,786Exercise
                  of warrants
              
              
              100,000
              
              
              100
              
              
              524,900
              
              
              -
              
              
              -
              
              
              -
              
              
              525,000Exercise
                  of options
              
              
              128,750
              
              
              129
              
              
              589,634
              
              
              -
              
              
              -
              
              
              -
              
              
              589,763Issuance
                  of common stock for cash at $5.00 per share net of issuance costs
                  of
                  $18,000
              
              
              400,000
              
              
              400
              
              
              1,981,600
              
              
              -
              
              
              -
              
              
              -
              
              
              1,982,000Issuance
                  of common stock for cash at $3.07 per share
              
              
              427,000
              
              
              427
              
              
              1,310,463
              
              
              -
              
              
              -
              
              
              -
              
              
              1,310,890Warrants
                  issued in connection with related party note payable
              
              
              -
              
              
              -
              
              
              298,760
              
              
              -
              
              
              -
              
              
              -
              
              
              298,760Issuance
                  of common stock for cash at $3.00 per share
              
              
              1,000,001
              
              
              1,000
              
              
              2,999,003
              
              
              -
              
              
              -
              
              
              -
              
              
              3,000,003Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,392
              )
              
              -
              
              
              (15,392
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,614,253
              )
              
              (8,614,253
              )**Balance
                  at December 31, 2005**
              
              
              6,914,795
              
              $
              6,915
              
              $
              35,038,139
              
              $
              (10,768
              )
              $
              51,747
              
              $
              (28,389,476
              )
              $
              6,696,557






See
      accompanying notes to consolidated financial statements.





42
 Table
            of Contents






Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS




**For
                the years ended December 31,****2005**
            
            **2004**
            
            **2003****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Loss
                on disposal of property andequipment
            
            
            6,507
            
            
            153,020
            
            
            10,591Depreciation
                and amortization
            
            
            2,338,670
            
            
            1,740,226
            
            
            962,116Amortization
                of discount on debenturesand
                notes
            
            
            75,544
            
            
            300,947
            
            
            2,344,507Provision
                for doubtful accounts
            
            
            710,792
            
            
            596,585
            
            
            -Loss
                of partial deposit on handsets
            
            
            -
            
            
            600,000
            
            
            -Impairment
                of assets
            
            
            2,165,624
            
            
            653,303
            
            
            -Loss
                from inventory adjustments
            
            
            23,169
            
            
            -
            
            
            -Non-cash
                compensation
            
            
            -
            
            
            1,001
            
            
            6,667**Change in
                operating assets and liabilities**Accounts
                receivable
            
            
            (454,128
            )
            
            (527,038
            )
            
            (392,310
            )Other
                receivables
            
            
            61,434
            
            
            (1,061,434
            )
            
            -Inventory
            
            
            (398,469
            )
            
            338,520
            
            
            (551,625
            )Deposit
                on handsets
            
            
            925,000
            
            
            (1,525,000
            )
            
            -Prepaid
                expenses
            
            
            109,825
            
            
            (156,139
            )
            
            (9,741
            )Accounts
                payable
            
            
            (616,403
            )
            
            (192,507
            )
            
            (373,729
            )Accrued
                liabilities
            
            
            182,671
            
            
            76,448
            
            
            (58,438
            )Other
                assets
            
            
            (12,713
            )
            
            -
            
            
            -Unearned
                revenue
            
            
            -
            
            
            (80,000
            )
            
            80,000Contingent
                liabilities
            
            
            -
            
            
            (70,000
            )
            
            (289,235
            )**Net
                Cash Used in Operating Activities**
            
            
            (3,496,730
            )
            
            (5,699,871
            )
            
            (3,965,515
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Change
                in restricted cash
            
            
            (22,183
            )
            
            939,891
            
            
            (1,450,583
            )Investment
                in note receivable
            
            
            -
            
            
            -
            
            
            (150,000
            )Collection
                of note receivable
            
            
            -
            
            
            150,000
            
            
            -Payment
                for Intangible assets
            
            
            -
            
            
            (265,397
            )
            
            -Cash
                from acquisition of Pointe de Vente
            
            
            -
            
            
            86,157
            
            
            -Proceeds
                from sales of property and equipment
            
            
            -
            
            
            3,955
            
            
            23,966Purchase
                of property and equipment
            
            
            (881,832
            )
            
            (1,588,032
            )
            
            (2,181,559
            )Capitalized
                software development costs
            
            
            (80,774
            )
            
            (286,737
            )
            
            (811,281
            )Increase
                in deposits
            
            
            -
            
            
            (114,992
            )
            
            -**Net
                Cash Used by Investing Activities**
            
            $
            (984,789
            )
            $
            (1,075,155
            )
            $
            (4,569,457
            )





See
      accompanying notes to consolidated financial statements.







43
 Table
            of Contents





Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Continued)





**For
                the years ended December 31,****2005**
            
            **2004**
            
            **2003****CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                from issuance of common stock
            
            $
            7,407,656
            
            $
            3,464,575
            
            $
            13,657,815Cash
                received from subscription receivable
            
            
            -
            
            
            48,457
            
            
            71,725Proceeds
                from issuance of related party notes payable and warrants
            
            
            1,114,000
            
            
            -
            
            
            -Proceeds
                from issuance of notes and debentures
            
            
            -
            
            
            -
            
            
            2,700,000Principal
                payments on convertible notes payable
            
            
            -
            
            
            (1,230,000
            )
            
            (681,247
            )Principal
                payments on notes payable
            
            
            (500,000
            )
            
            -
            
            
            (1,031,350
            )Payments
                on capital lease obligations
            
            
            (490,893
            )
            
            (66,175
            )
            
            (27,262
            )Payments
                on related party obligations
            
            
            -
            
            
            (260,692
            )
            
            (150,000
            )Decrease
                in bank overdraft
            
            
            -
            
            
            -
            
            
            (595,544
            )**Net
                Cash Provided by Financing Activities**
            
            
            7,530,763
            
            
            1,956,165
            
            
            13,944,137Net
                increase (decrease) in cash and cashequivalents
            
            
            3,049,244
            
            
            (4,818,861
            )
            
            5,409,165Effect
                of foreign-exchange-rate changes on cash
            
            
            (15,392
            )
            
            67,139
            
            
            -Cash
                and cash equivalents,beginning
                of year
            
            
            773,052
            
            
            5,524,774
            
            
            115,609**Cash
                and cash equivalents,****end
                of year**
            
            $
            3,806,904
            
            $
            773,052
            
            $
            5,524,774Supplemental
                Disclosures of Cash FlowInformation:Cash
                paid during the year for:Interest
            
            $
            155,502
            
            $
            106,191
            
            $
            113,087Income
                taxes
            
            $
            193
            
            $
            200
            
            $
            100






See
      accompanying notes to consolidated financial statements.




44
 Table
            of Contents





Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Continued)





Supplemental
      Schedule of Non-cash Investing and Financing Activities:





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Equipment
                purchases under capital leases of which $166,947 was paid directly
                to the
                equipment vendor
            
            $
            -
            
            $
            878,918
            
            $
            66,992Issuance
                of common stock for services of which $6,667 was accrued in
                2003
            
            
            -
            
            
            7,668
            
            
            -Amortized
                discount on debt to interest expenses
            
            
            -
            
            
            300,947
            
            
            -Foreign
              currency translation
            
            
            (15,392
            )
            
            67,139
            
            
            -Total
            
            $
            (15,392
            )
            $
            1,254,672
            
            $
            -




The
        Company, in 2004, acquired a subsidiary by issuing common stock valued at
        $50,000. In connection with the acquisition, the Company acquired assets
        with a
        fair value of $1,015,942 as shown below:
 
 Cash
              
              $
              86,157Inventory
              
              
              103,041Prepaid
                  expenses
              
              
              236Accounts
                  receivable, net
              
              
              120,926Property
                  and equipment
              
              
              61,209Intangible
                  assets
              
              
              301,812Goodwill
              
              
              341,649Other
                  assets
              
              
              912Accounts
                  payable
              
              
              (929,285
              )Accrued
                  expense
              
              
              (36,657
              )Common
                  stock issued
              
              $
              50,000




















See
      accompanying notes to consolidated financial statements.





45
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            of Contents





Q
      COMM
      INTERNATIONAL, INC. AND SUBSIDIARIES


NOTES
      TO
      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 (PINs) through a proprietary electronic point-of-sale
      activation system known as Q Xpress. 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. During 2004, the Company
      acquired Point de Vente (PDV), a company located in Quebec, Canada through
      the
      acquisition of 100% of its stock (see Note 5).




*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, allowances for obsolete inventory,
      impairments of long-lived tangible and intangible assets, and accruals for
      litigation and contingencies.





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





*Receivables* -
      Accounts receivable consist of trade receivables arising in the normal course
      of
      business. At December 31, 2005, and December 31, 2004, the Company
      established an allowance for doubtful accounts of approximately $1,207,000
      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 $112,415
      and $377,000 as of December 31, 2005 and December 31, 2004,
      respectively.




Equipment
        Held for Resale
  *Depreciation* -
        Depreciation of property and equipment that is related to computer and office
        equipment is provided using the straight-line method over the estimated useful
        lives of the assets of two to five years. During the fourth quarter of 2005,
        the
        Company determined that a depreciable life for equipment of two years would
        more appropriately reflect the expected useful life of the equipment. This
        was
        accounted for as a “change in accounting estimate” and, accordingly, the effect
        of the decrease in useful life has been recognized prospectively from that
        quarter forward. The additional depreciation expense recognized in the fourth
        quarter of 2005 due to this change in estimate was $166,390.





46
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            of Contents








Prior
      to
      the fourth quarter of 2005 the Company had been depreciating its point of sale
      terminals using the straight-line method over an estimated useful life of three
      years. During the fourth quarter of 2005, the Company determined that a
      depreciable life of two years would more appropriately reflect the expected
      useful life of the equipment. This was accounted for as a change in accounting
      estimate and, accordingly, the effect of the decrease in useful life is being
      recognized prospectively from that quarter forward. The additional depreciation
      expense recognized in the fourth quarter of 2005 due to this change in estimate
      was $252,870. Prior to the fourth quarter of 2003, the Company had been
      depreciating its point of sale terminals over an estimated useful life of five
      years. During the fourth quarter of 2003, the Company determined that a
      depreciable life of three years would more appropriately reflect the expected
      useful life of the equipment. This was accounted for as a change in accounting
      estimate and, accordingly, the effect of the decrease in useful life has been
      recognized prospectively from that quarter forward. The additional depreciation
      expense recognized in the fourth quarter of 2003 due to this change in estimate
      was $140,828. For the year ended December 31, 2005, we had $1,978,376 in
      impairment losses, which resulted from a write-down in inventory value and
      terminal obsolescence reserves. These losses totaled $1,266,704 and $711,672
      for
      the periods ended June 30, 2005 and December 31, 2005,
      respectively.





*Goodwill
      and Intangible Assets* - The
      Company accounts for indefinite-lived 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 assesses the recoverability of goodwill on at least an
      annual basis, or more frequently if events or changes in circumstances indicate
      that the asset might be impaired.





The
      Company recorded an impairment loss on goodwill of $144,580 related to an
      acquisition made in 2000 which was classified as an indefinite-lived intangible
      asset. In accordance with SFAS no. 142, the Company completed its test of goodwill for
      impairment during the year ended December 31, 2005. The Company used the
      quoted market price of its common stock to test the remaining goodwill for
      impairment and determined that goodwill had been impaired and recorded the
      impairment loss.





The
      Company recorded other intangible assets related to the acquisition of PDV
      in
      2004, including a covenant not to compete, customer lists, supplier
      relationships and goodwill. At December 31, 2004, the Company assessed the
      recoverability of these assets due to less than expected sales and cash flows
      and determined these assets to be impaired. An impairment loss of $653,303
      was
      recorded in the accompanying 2004 statement of operations and comprehensive
      loss.





The
      Company purchased approximately 300 customer accounts in August 2004 for
      $200,000. The accounts are being amortized over two years on a straight line
      basis and have accumulated amortization of $133,000 at December 31, 2005.
      At December 31, 2005, the Company tested this asset for impairment and
      determined that the asset was impaired. The Company recorded an impairment
      loss
      of $42,667 in 2005 related to this purchase. Following the impairment, there
      is
      $24,000 which is being amortized through August 2006.





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




Research
      and Development Cost




*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. The recoverability of assets to be held and
      used is measured by a comparison of the carrying amount of an asset or asset
      group to the estimated undiscounted future cash flows that are 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.





47
 Table
            of Contents








For
      the
      year ended December 31, 2005, the Company performed an impairment analysis
      and determined that certain long-lived assets related
      to terminals were
      impaired and recorded an impairment loss of $1,978,000. For the period ended
      December 31, 2005, the Company performed an impairment analysis and
      determined that long-lived assets related to terminals were impaired and
      recorded an impairment loss of $711,672; the Company also recorded an impairment
      loss of $187,247, which related to acquisitions from 2000 and 2004. For the
      period ended June 30, 2005, the Company completed an impairment analysis
      and determined long-lived assets related to terminals were impaired, and the
      Company recorded an impairment loss of $1,266,704.





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





*Revenue
      Recognition* - The
      Company either purchases or is consigned large blocks of prepaid
      telecommunications access and other access in blocks of time, referred to as
      PINs (unique activation codes) and other prepaid products, and resells
      individual blocks of time to end-user customers through electronic,
      point-of-sale terminals at retail locations. Although the retail stores collect
      and remit the sales proceeds to the Company, they do not have access to or
      the
      risk of loss associated with the PINs. Through its terminals, the Company
      controls the delivery of the PIN to the retail customer. There is no right
      of
      return granted for prepaid products sold to the customers and the Company has
      no
      obligations for further performance after the sale, except when the PIN is
      non-operative.





When
      PINs
      are purchased, the Company is subject to the risks and rewards of ownership
      and
      does not have the right to return the PINs to the provider, except when the
      PINs
      are non-operative. Accordingly, the Company recognizes prepaid PIN-sales on
      a
      gross basis in accordance with 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 (i) the PINs are consigned to the Company, (ii) the Company does
      not own the PINs sold, and (iii) another entity retains the risk and reward
      of product ownership, or where certain other requirements of SAB 104 or EITF
      99-19 are not met, the Company recognizes revenue on a net basis, with the
      net
      revenue earned by the Company reported as prepaid PIN fees.





The
      Company licenses its proprietary software and sells its point-of-sale terminals
      to international customers. 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, and reported in the consolidated statements of operations as
      processing and other fees.





*Cost
      of prepaid PIN sales and fees* - Cost
      of prepaid PIN sales and fees consists primarily of the costs of the prepaid
      telecommunication PINs and other miscellaneous products 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 product sales -* Cost
      of
      product sales includes the cost of terminals and handsets sold.





*Distribution
      commission and fees -* Distribution
      commissions and fees include fees paid to brokers and other intermediaries
      and
      transaction processing fees paid to a third party.





*Net
      Loss Per Common Share* - The
      Company computes net loss per common share in accordance with Statement of
      Financial Accounting Standards No.128, “Earnings Per Share,” which requires the
      Company to present basic earnings per share and dilutive earnings per share
      when
      the effect of options, warrants and convertible notes is dilutive. Because
      the
      Company incurred losses for the years ended December 31, 2005, 2004 and
      2003, the effect of options, warrants and convertible notes, totaling 2,785,993
      shares, 2,557,160 shares, and 2,216,307 equivalent shares, respectively, has
      been excluded from the net loss per common share computation because its impact
      would be antidilutive.





*Income
      Taxes* - The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No.109, “Accounting for Income Taxes.” This statement
      requires an asset and liability approach for accounting for income taxes.




*Realization
        of assets -* The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America,
        which contemplate continuation of the Company as a going concern. However,
        the
        Company sustained losses of $8,614,253, $6,547,803 and $5,964,318 for the
        years
        ended December 31, 2005, 2004 and 2003, respectively. As of December 31,
        2005,
        the Company had an accumulated deficit of $28,389,476. The Company used,
        rather
        than provided, cash in its operations in the amounts of $3,496,730, $5,699,871
        and $3,965,515 for the years ended December 31, 2005, 2004 and 2003,
        respectively. During the years ended December 31, 2005 and 2004, the Company
        concluded that the carrying value of certain property and equipment, goodwill
        and intangible assets may not be recoverable and accordingly recognized
        impairment charges of $2,165,624 and $653,303, respectively. At December
        31,
        2005, the Company had $3,806,904 of cash, $4,795,005 of working capital and
        $6,696,557 of stockholders’ equity. If the Company continues to incur losses or
        if operations continue to use cash at rates similar to 2005, 2004 and 2003,
        the
        Company may not have sufficient cash, working capital or net assets to sustain
        its operations. These conditions raise substantial doubt about the Company’s
        ability to continue as a going concern.





48
 Table
            of Contents


In
        view
        of the matters described in the preceding paragraph, the recoverability of
        a
        major portion of the recorded-asset amounts shown in the accompanying
        consolidated balance sheets is dependent upon the following:  continued
        operations of the Company, raising additional capital from investors,
        and succeeding in its future operations. The financial statements do not
        include any adjustments relating to the recoverability and classification
        of
        recorded-asset amounts or amounts and classification of liabilities that
        might
        be necessary should the Company be unable to continue as a going concern.
  Unless
        the Company can significantly increase the number of terminals in use, it
        will
        continue to incur losses for the foreseeable future. The Company plans to
        allocate a significant amount of working capital to sales and marketing in
        an
        attempt to increase the number of terminals in use as well as developing
        new
        products and services with higher profit margins. The Company also plans
        on
        raising additional capital in 2006 to meet its operating needs. There is
        no
        assurance that these plans will be successful.





*Restricted
      Cash* -
      Restricted cash of $532,875 and $510,692 at December 31, 2005 and 2004,
      respectively, is maintained to support letters of credit covering capital lease
      arrangements and to secure a bank account that is used for processing automated
      clearinghouse transactions. In order to secure the bank account, the Company
      must maintain a balance of 2% of the previous month’s total transactions
      processed through the account.





*Stock
      Options* - 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 11. 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 exceeds the exercise price.





During
      the years presented in the accompanying financial statements, the Company has
      granted options under its 2000, 2003 and 2004 Stock Options Plans. No
      stock-based employee compensation cost has been recognized for grants of options
      to employees and directors in the accompanying statements of operations, as
      all
      options granted under these plans have an exercise price equal to or greater
      than the market price of the underlying stock on the date of grant. 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, 2004,
      and 2003 consistent with the provisions of SFAS No.123, “Accounting for
      Stock-Based Compensation,” 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:




**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                loss, as reported
            
            $
            (8,614,253
            )
            $
            (6,547,803
            )
            $
            (5,694,318
            )Less
                stock-based employee compensation expense determined under fair value
                based method for all awards, net of related tax effects
            
            
            (1,081,678
            )
            
            (1,159,438
            )
            
            (1,193,831
            )Pro
                forma net loss
            
            $
            (9,695,931
            )
            $
            (7,707,241
            )
            $
            (6,888,149
            )Basic
                and diluted net loss per common share, as reported
            
            $
            (1.54
            )
            $
            (1.51
            )
            $
            (2.12
            )Pro
                forma basic and diluted net loss per common share
            
            
            (1.74
            )
            
            (1.77
            )
            
            (2.55
            )**Basic
                and Diluted Weighted Average Common Shares
                Outstanding**
            
            $
            5,586,932
            
            $
            4,345,016
            
            $
            2,691,118





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





*Reverse
      Stock Split* - All
      references to the number of common shares, price per common share, and net
      loss
      per common share have been retroactively adjusted to reflect a 1-for-15 reverse
      stock split that was effective June 4, 2003.





*Reclassifications* -
      Certain reclassifications to the 2003 and 2004 amounts have been made to conform
      to the 2005 presentation.





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*Recently
      Enacted Accounting Standards*





In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment,* which is
      a revision to SFAS No. 123. SFAS No. 123R establishes standards for the
      accounting for transactions in which an entity exchanges its equity instruments
      for goods or services. Primarily, SFAS No. 123R focuses on accounting for
      transactions in which an entity obtains employee services in share-based payment
      transactions. It also addresses transactions in which an entity incurs
      liabilities in exchange for goods or services that are based on the fair value
      of the entity’s equity instruments or that may be settled by the issuance of
      those equity instruments.





SFAS
      No.
      123R requires the Company to measure the cost of employee services received
      in
      exchange for an award of equity instruments based on the grant-date fair value
      of the award. That cost will be recognized over the period during which an
      employee is required to provide service in exchange for the award, which is
      usually the vesting period. No compensation cost is recognized for equity
      instruments for which employees do not render the requisite
      service.





In
      accordance with the Securities and Exchanges Commission’s Staff Accounting
      Bulletin 107, SFAS No. 123R is effective as of the beginning of the
      annual reporting period that begins after June 15, 2005. Under these
      guidelines, the Company will adopt SFAS No. 123R as of January 1, 2006. The
      Company expects the adoption of this standard will have a material impact on
      its
      future results of operation.





In
      December 2004, the FASB issued SFAS Statement No. 153, *Exchanges
      of Non-monetary Assets—an amendment of APB Opinion No. 29.* This
      Statement amends APB Opinion 29 to eliminate the exception for non-monetary
      exchanges of similar productive assets and replaces it with a general exception
      for exchanges of non-monetary assets that do not have commercial substance.
      A
      non-monetary exchange has commercial substance if the future cash flows of
      the
      entity are expected to change significantly as a result of the exchange. The
      Company implemented this standard on January 1, 2006 and will not have a
      material impact on the company.




In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* SFAS
      No.
      154 applies to all voluntary changes in accounting principle or when an
      accounting pronouncement does not include specific transition provisions and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This statement requires retrospective application to prior
      periods’ financial statements of changes in accounting principle, unless it is
      impracticable to determine either the period specific effects or the cumulative
      effect of the change. The
      Company implemented this standard on January 1, 2006, and it will not have
      a material impact on the Company.





In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments — an amendment of FASB
      Statements No. 133 and 140.* SFAS No. 155 resolves issues addressed in SFAS No. 133
      Implementation Issue No. D1, *Application
      of Statement 133 to Beneficial Interests in Securitized Financial
      Assets.* SFAS No. 155
      will become effective for the Company’s fiscal year after September 15,
      2006. The impact of SFAS No. 155 will depend on the nature and extent of any
      new
      derivative instruments entered into after the effective date.





NOTE
      2 -
      PROPERTY AND EQUIPMENT





The
      following is a summary of property and equipment:





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Point
                of sale terminals and related items - in service
            
            $
            1,821,225
            
            $
            2,987,184
            
            $
            1,518,205Office
                and computer equipment
            
            
            488,665
            
            
            341,140
            
            
            194,264Total
                cost of depreciable equipment
            
            
            2,309,809
            
            
            3,328,324
            
            
            1,712,469


Accumulated
                depreciation and amortization
            
            
            (1,134,947
            )
            
            (1,280,770
            )
            
            (583,935
            )Property
                and equipment in service, net
            
            
            1,174,943
            
            
            2,047,554
            
            
            1,128,534Point
                of sale terminals and related items -not placed in service
            
            
            146,621
            
            
            2,054,643
            
            
            1,738,855Parts
                deposit held by manufacturers
            
            
            -
            
            
            280,756
            
            
            -Net
                property and equipment
            
            $
            1,321,564
            
            $
            4,382,953
            
            $
            2,867,389




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Point
      of
      sale terminals that are held by the Company as property and equipment will
      either be sold to customers or placed in service with the Company retaining
      ownership. The Company begins depreciating the terminals that it owns at the
      time they are shipped to the broker or retailer. Depreciation expense for the
      years ended December 31, 2005, 2004 and 2003 was $939,760, $855,620, and
      $382,107, respectively.





NOTE
      3 -
      GOODWILL





**Goodwill
      consists of the following at December 31, 2005 and
      2004:**





2005
            
            
            2004Goodwill
                related to acquisition in 2000
            
            $
            224,561
            
            
            224,561Less
                accumulated amortization recorded prior to adoption of SFAS
                No.142
            
            
            (79,981
            )
            
            (79,981
            )Impairment
                of goodwill - 2005
            
            
            (144,580
            )
            
            -Net
                goodwill
            
            $
            -
            
            $
            144,580








NOTE
      4 -
      CAPITALIZED SOFTWARE DEVELOPMENT





Information
      related to capitalized software development costs is as follows:




Capitalized
                software development costs, December 31, 2003
            
            $
            2,262,249Additional
                costs capitalized during the year
            
            
            286,737Capitalized
                software development costs, December 31, 2004
            
            
            2,548,986Accumulated
                amortization
            
            
            (1,496,642
            )Capitalized
                software development costs, net, December 31, 2004
            
            $
            1,052,344Capitalized
                software development costs, December 31, 2004
            
            $
            2,548,986Additional
                costs capitalized during the year
            
            
            80,774Capitalized
                software development costs, December 31, 2005
            
            
            2,629,760Accumulated
                amortization
            
            
            (2,345,998
            )Capitalized
                software development costs, net, December 31, 2005
            
            $
            283,762





Of
      the
      balance of capitalized software development costs at December 31, 2005,
      approximately $1,180,774 was paid to a third-party software development company
      and other outside entities. The remaining costs represent capitalized internal
      costs, which are primarily employee salaries and benefits, and related
      capitalized interest of approximately $100,000 that were 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 cash flows
      related to its capitalized software development costs and has determined that
      these costs were not impaired as of December 31, 2005. The Company
      amortizes capitalized software costs over a three-year period. During the years
      ended December 31, 2005, 2004 and 2003, the Company recorded amortization
      expense of $849,356, $829,051, and $580,009, respectively.


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NOTE
      5 -
      ACQUISITION





On
      July 7, 2004, the Company acquired Point de Vente (PDV), a company located
      in Quebec, Canada, by issuing 12,127 shares of common stock valued at $50,000.
      Prior to the date of acquisition, PDV was a service bureau customer of the
      Company. The Company assumed liabilities of approximately $965,000. At
      December 31, 2004, the Company determined the intangible assets to be
      impaired and recorded a loss of $653,303 in the accompanying 2004 statement
      of
      operations and comprehensive loss. PDV’s results of operations are included in
      the accompanying consolidated 2004 statement of operations and comprehensive
      loss from July 8, 2004. Comparative pro forma financial information for the
      PDV acquisition as though it had taken place at January 1, 2004, is not
      provided because the results of operations were not material to the Company’s
      consolidated financial statements.





The
      Company acquired Point de Vente by issuing common stock valued at $50,000.
      In
      connection with the acquisition, the Company acquired assets with a fair value
      of $1,015,942 as shown below:





Cash
            
            $
            86,157Inventory
            
            
            103,041Prepaid
                expenses
            
            
            236Accounts
                receivable, net
            
            
            120,926Property
                and equipment
            
            
            61,209Intangible
                assets
            
            
            301,812Goodwill
            
            
            341,649Other
                assets
            
            
            912Accounts
                payable
            
            
            (929,285
            )Accrued
                expense
            
            
            (36,657
            )Common
                stock issued
            
            $
            50,000





NOTE
      6 -
      RELATED PARTY OBLIGATIONS





In
      June
      2003, the Company repaid its Chief Executive Officer $150,000 related to
      obligations due for unpaid equipment lease expenses, deferred salary, notes
      payable and accrued interest.





On
      January 1, 2004, the Company owed its then CEO an aggregate of $260,692,
      primarily for advances he had made to the Company and for deferred salary.
      The
      unsecured note required monthly payments of $7,382 (including interest at 10%)
      and was due the earlier of December 31, 2007, a change in control of the
      Company, or a sale or liquidation of the Company’s assets. The Company elected
      to repay the note in full during the year ended December 31, 2004.





During
      the years ended December 31, 2004 and 2003, the Company recorded interest
      expense on this obligation of $21,462 and $33,569, respectively.





The
      Company received $500,000 in cash on March 25, 2005 in exchange for the issuance
      of a note payable to our Chairman of the Board. This unsecured loan was
      scheduled to mature on June 24, 2005, and carried an annual interest rate of
      5%.
      In April 2005, the Company repaid this note and $972 in interest was
      recorded.





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In
      July
      2005, the Company received $614,000 in cash from the Company’s Chairman of the
      Board of Directors and entered into a written agreement, dated July 11,
      2005, setting forth the terms of the debt financing. This debt arrangement
      is
      evidenced by a note bearing interest at an annual rate of 5% and is payable
      in
      full on or before July 7, 2007. The note calls for the Company to issue to
      the chairman of the Board of Directors, a warrant to purchase 230,000 shares
      of
      common stock that is exercisable for a period of five years at a price of $3.51
      per share. The proceeds from the debt financing were allocated to the financial
      instruments issued, based upon their fair values, and resulted in an allocation
      of $315,240 to the note and $298,760 to the warrants. While the allocated value
      of the warrants was less than their fair value of $581,900, the fair value
      of
      the warrants was measured using the Black-Scholes option pricing model, with
      the
      following weighted assumptions: risk-free interest rate of 3.90%, expected
      dividend yield of 0% volatility of 109.13% and expected life of 3.61
      years.





The
      $298,760 fair value of the warrant was recorded as a discount against the note.
      For the year ended December 31, 2005, the Company recorded related party
      interest expense of $90,431 on the note, which includes $75,544 related to
      the
      amortization of the discount and $14,887 in accrued interest
      expense.





NOTE
      7 -
      CONVERTIBLE DEBENTURES





During
      2003, the Company issued the following: (i) 12% secured convertible
      debentures, due March 31, 2004, in the aggregate principal amount of $1.5
      million; (ii) 169,231 shares of restricted common stock; and
      (iii) warrants to purchase 169,231 shares of common stock for the total
      cash proceeds of $1.5 million. The value of the shares of common stock and
      warrants of $1.5 million was offset against the outstanding balance of the
      debentures. At December 31, 2003, the outstanding principal balance of the
      debentures was $1,230,000 and the unamortized discount was $300,947. The
      debentures were repaid in March 2004 according to their terms and the remaining
      discount was amortized as interest expense.





NOTE
      8 -
      LEASE OBLIGATIONS





Certain
      computer equipment and point of sale terminals are leased under capital lease
      arrangements and are presented in the accompanying consolidated balance sheet
      as
      property and equipment. At December 31, 2005, the total carrying cost of
      equipment that is held under capital leases and the related accumulated
      amortization was approximately $450,000.





As
      of
      December 31, 2005, total future minimum lease payments for capital leases,
      including interest and other costs, are as follows:





**Years
                ending December 31:**2006
            
            $
            408,1322007
            
            
            10,6302008
            
            
            10,6302009
            
            
            10,6302010
            
            
            9,744Total
            
            
            449,766Less
                interest and other costs
            
            
            (26,563
            )Present
                value of future minimum lease payments
            
            
            423,203Less
                current portion
            
            
            (390,906
            )Long-term
                portion
            
            $
            32,297





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








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The
      Company is committed under non-cancelable operating leases for office space
      and
      office equipment. Rent expense paid for the years ended December 31, 2005,
      2004, and 2003 was approximately $72,000, $70,000, and $55,000, respectively.
      The Company’s future minimum rental payments under operating leases at
      December 31, 2005, amount to approximately $484,000 annually through 2009
      as follows:





**Years
                Ending December 31:**2006
            
            $
            159,0002007
            
            
            148,0002008
            
            
            158,0002009
            
            
            19,000Total
            
            $
            484,000





NOTE
      9 -
      LITIGATION AND CONTINGENCIES





In
      January 2002, the Company filed an action against an individual for non-payment
      of funds owed for the purchase of common stock in the amount of $135,000. The
      Company has been awarded summary judgment in this matter and expects to receive
      the remaining outstanding amount, which was $10,768 as of December 31,
      2005. This receivable is reflected in the accompanying consolidated balance
      sheet as a reduction to stockholders’ equity.





The
      Company was party to a suit from a bank, claiming damages of $175,477 related
      to
      a merchant credit card account. Management disputed the bank’s claim. During the
      year ended December 31, 2004, the parties reached a settlement wherein the
      Company paid $70,000 in satisfaction of the claim, which had previously been
      accrued at December 31, 2003.





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





In
      March
      2005, the Company filed an action against a PIN provider, due to approximately
      $1 million in deactivated PINs that the Company received in the fourth quarter
      of 2004. Subsequent to March 31, 2005, the Company determined that the
      obligation includes a mix of deactivated PINs and handsets paid for by the
      Company that were sold or were in the possession of the vendor. The Company
      is
      proactively taking the appropriate legal action to recover the amount due,
      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.





In
      August
      2005, the Company filed an action in the Fourth District Court, State of Utah
      against a PIN provider named Posa Systems, LLC. The Company believes it was
      owed
      approximately $50,000 in deactivated PINs which it received in the first quarter
      of 2005. In March 2006, the parties mediated and settled the dispute for
      $20,000.





NOTE
      10 -
      CAPITAL STOCK





A
      summary
      of common stock transactions for the years ended December 31, 2005, 2004
      and 2003 is as follows:








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*Year
      Ended December 31, 2005*





The
      Company issued 400,000 shares of restricted common stock at $5.00 per share
      through a private placement for an aggregate of $2,000,000, in cash, less
      offering costs of $18,000.





The
      Company issued 427,000 common shares at $3.07 per share through a private
      placement for an aggregate of $1,310,890 in cash.





As
      discussed in Note 6, the Company issued a promissory note in the amount of
      $614,000. In connection with the issuance of this note, the Company also issued
      warrants for 230,000 shares of common stock exercisable for a period of five
      years at a price of $3.51 per share. The warrants were recorded at
      $298,760.





The
      Company issued 1,000,001 shares of common stock at $3.00 per share in a private
      placement for an aggregate of $3,000,003 in cash.





*Year
      Ended December 31, 2004*





The
      Company sold 850,000 shares of restricted common stock at $4.00 to $5.00 per
      share through private placements for an aggregate of $3,500,000 in cash, less
      offering costs of $35,425.





The
      Company issued 12,127 shares of restricted common stock at $4.12 per share
      in an
      acquisition of a subsidiary (see Note 5).





The
      Company issued 1,667 shares of restricted common stock at $4.60 per share as
      payment for a stock bonus granted in 2003.





*Year
      Ended December 31, 2003*





The
      Company sold 1,265,000 units in an underwritten public offering for $16,445,000
      in cash, or $13.00 per unit. Underwriter discount and offering costs of
      $2,807,185 were recorded in connection with the offering. Each unit consisted
      of
      two shares of common stock and a warrant to purchase one share of common stock
      for $9.75 per share, expiring in 2008. The stock and the warrants included
      in
      the units traded only as a unit for the first 30 days following the effective
      date of the offering, after which the units were delisted and the stock and
      warrants included in the units began trading separately.





The
      Company sold 3,333 shares of restricted common stock at $6.00 per share through
      a private placement for $20,000 in cash.





The
      Company issued 24,242 shares of restricted common stock in connection with
      a
      convertible note in the amount of $200,000. The shares were valued at $6.00
      per
      share, or $145,454.





The
      Company issued 169,231 shares of restricted common stock and warrants to
      purchase 169,231 shares of restricted common stock in connection with the sale
      of $1,500,000 of debentures (see Note 7). The shares of common stock and the
      warrants were valued at an aggregate of $1,500,000.





NOTE
      11 -
      STOCK OPTIONS AND WARRANTS





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








55
 Table
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**2005**
            
            **2004**
            
            **2003****Stock**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Stock**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Stock**
              **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            532,667
            
            $
            5.95
            
            
            304,250
            
            $
            10.00
            
            
            204,688
            
            $
            15.45Granted
            
            
            390,000
            
            
            3.66
            
            
            502,500
            
            
            4.65
            
            
            190,667
            
            
            6.75Exercised
            
            
            (128,750
            )
            
            4.58
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (113,419
            )
            
            5.46
            
            
            (274,083
            )
            
            8.16
            
            
            (86,105
            )
            
            15.00Expired
            
            
            (43,164
            )
            
            8.66
            
            
            -
            
            
            -
            
            
            (5,000
            )
            
            15.00Outstanding
                at end of year
            
            
            637,334
            
            
            4.72
            
            
            532,667
            
            
            5.95
            
            
            304,250
            
            
            10.00Exercisable
                at end of year
            
            
            172,330
            
            
            6.50
            
            
            296,998
            
            
            6.68
            
            
            102,000
            
            
            15.78Weighted
                average fair value of options granted
            
            
            390,000
            
            
            3.66
            
            
            502,500
            
            
            4.65
            
            
            190,667
            
            
            6.26








The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option pricing model, with the following weighted-average
      assumptions for grants during the years ended December 31, 2005, 2004 and
      2003: expected dividend yields of zero, expected life of 10 years, 10 years
      and
      10 years, respectively, expected volatility of 90%, 124% and 140%, respectively,
      and risk-free interest rates of 4.2%, 4.3% and 3.1%, respectively.





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


**Options
                  Outstanding**
              
              **Options
                  Exercisable****Range
                  of Exercise**
                **Prices**
              **Number**
                **Outstanding**
              **Weighted**
                **Average**
                **Remaining**
                **Contractual
                  Life**
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Number
                  Exercisable**
              **Weighted**
                **Average**
                **Exercisable**
                **Price**$
                  3.30 - $ 4.92
              538,500
              7.75
                  years
              $        
                  3.94
              
              109,330
              $        
                  4.33$
                  6.50
              70,000
              8.13
                  years
              6.50
              
              35,000
              6.50$15.00
              28,834
              0.67
                  years
              15.00
              
              28,000
              15.00$
                  3.30 - $ 15.00
              637,334
              7.7  
                  years
              4.68
              
              172,330
              6.50




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 in connection with a debt financing.




The
      Company has issued warrants to non-employees under various agreements expiring
      through November 2008. The warrants granted in 2005 were valued on the date
      of
      issue using the Black-Scholes pricing model and the following assumptions:
      exercise price of the warrant stated in the agreements, $3.50 underlying stock
      price, 109% volatility, 3.6 year expected life, 3.9% risk free interest rate,
      and expected dividend yield of zero. A summary of the status of warrants granted
      at December 31, 2005, 2004 and 2003, and the changes during the periods
      then ended are as follows:





56
 Table
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**2005**
            
            **2004**
            
            **2003****Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of period
            
            
            2,044,493
            
            $
            9.14
            
            
            2,052,826
            
            $
            9.18
            
            
            1,315,500
            
            $
            10.00Granted
            
            
            230,000
            
            
            3.51
            
            
            -
            
            
            -
            
            
            737,326
            
            
            7.72Exercised
            
            
            (100,000
            )
            
            5.25
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (25,834
            )
            
            18.51
            
            
            (8,333
            )
            
            17.85
            
            
            -
            
            
            -Outstanding
                at end of period
            
            
            2,148,659
            
            $
            8.61
            
            
            2,044,493
            
            $
            9.14
            
            
            2,052,826
            
            $
            9.18








A
      summary
      of the status of all warrants outstanding at December 31, 2005, is
      presented below:




**Warrants
                    Outstanding**
                
                **Warrants
                    Exercisable****Range
                    of Exercise**
                  **Prices**
                **Number**
                  **Outstanding**
                **Weighted**
                  **Average**
                  **Remaining**
                  **Contractual**
                  **Life**
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Number**
                  **Exercisable**
                **Weighted**
                  **Average**
                  **Exercisable**
                  **Price**$3.51
                230,000
                4.50
                    years
                $        
                    3.51
                
                230,000
                $        3.51$5.25
                      - $7.80
                359,095
                2.00
                    years
                6.81
                
                359,095
                6.81$9.75
                1,544,231
                2.40
                    years
                9.75
                
                1,544,231
                9.75$11.25
                    - $15.00
                15,333
                0.65
                    years
                12.03
                
                15,333
                12.03$ 3.51
                      - $15.00
                2,148,659
                7.7 
                     years
                8.61
                
                2,148,659
                8.61


At
      December 31, 2005, the Company had 1,265,000 outstanding warrants to
      purchase shares of common stock at $9.75 per share that were publicly
      traded.





As
      of
      December 31, 2005, the Company had outstanding warrants to purchase
      2,148,659 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 $15.00 per share and a weighted average exercise price
      of
      $8.61 per share, expiring between September 2006 and July 2010. 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,
      $3.51 and $6.00 underlying stock price, respectively, 109% and 140% volatility,
      respectively, five year expected life, 3.9% and 2.9% risk free interest rate,
      respectively, and expected dividend yield of zero.








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





**Compensatory**
            
            **Non-Compensatory**
            
            **Total**Stock
                options issued to employees and board members under stock option
                plans
            
            
            594,000
            
            
            -
            
            
            594,000Stock
                options issued to employees outside stock option plans
            
            
            43,334
            
            
            -
            
            
            43,334Total
            
            
            637,334
            
            
            -
            
            
            637,334Warrants
                issued to non-employees
            
            
            330,000
            
            
            1,818,659
            
            
            2,148,659Total
                options and warrants outstanding
            
            
            967,334
            
            
            1,818,659
            
            
            2,785,993





NOTE
      12 -
      INCOME TAXES





The
      Company accounts for income taxes in accordance with SFAS No.109, “Accounting
      for Income Taxes.” SFAS No.109 requires the Company to record a net current and
      deferred tax asset or liability equal to the expected future tax benefit or
      expense of temporary reporting differences between book and tax accounting
      and
      any available net operating loss or tax credit carryforwards.





The
      amount of and ultimate realization of the benefits from the deferred tax assets
      for income tax purposes is dependent, in part, upon the tax laws in effect,
      the
      Company’s future earnings, and other future events, the effects of which cannot
      be determined. Because of the uncertainty surrounding the realization of the
      deferred tax assets, the Company has established a valuation allowance of
      approximately $9,225,000, $6,086,000, and $3,763,000 at December 31, 2005,
      2004 and 2003, respectively.





The
      Company had available at December 31, 2005, net operating loss
      carryforwards of approximately $22,063,000, which may be applied against future
      taxable income and which expire in various years through 2025.








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The
      components of income tax expense from operations for the years ended
      December 31, 2005, 2004 and 2003 consist of the following:





**2005**
            
            **2004**
            
            **2003****CURRENT
                INCOME TAX EXPENSE**Federal
            
            $
            -
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            25,000
            
            
            -**Current
                tax expense**
            
            $
            -
            
            $
            25,000
            
            $
            -**DEFERRED
                TAX EXPENSE (BENEFIT) ARISING FROM**Depreciation
                and amortization
            
            $
            -
            
            $
            (404,000
            )
            $
            188,000Impairment
                of assets
            
            
            (241,000
            )
            
            (240,000
            )
            
            -Allowance
                for doubtful accounts
            
            
            108,000
            
            
            (476,000
            )
            
            -Allowance
                for inventory
            
            
            73,000
            
            
            (139,000
            )
            
            -Net
                operating loss
            
            
            (3,063,000
            )
            
            (1,059,000
            )
            
            (1,874,000
            )Deferred
                compensation
            
            
            -
            
            
            -
            
            
            104,000Settlement
                reserve
            
            
            -
            
            
            -
            
            
            75,000Other
            
            
            (86,000
            )
            
            (5,000
            )
            
            (6,000
            )Valuation
            
            
            3,208,000
            
            
            2,323,000
            
            
            1,513,000**Net
                deferred tax expense**
            
            $
            -
            
            $
            -
            
            $
            -





A
      reconciliation of income tax expense at the federal statutory rate to income
      tax
      expense at the Company’s effective rate is as follows:





**2005**
            
            **2004**
            
            **2003**Computed
                at the Federal statutory rate
            
            $
            (2,929,000
            )
            $
            (2,115,000
            )
            $
            (1,839,000
            )State
                and local income taxes, net of federal benefit
            
            
            (248,000
            )
            
            (328,000
            )
            
            (285,000
            )Interest
                expense due to issuance of options/warrants
            
            
            
            
            
            120,000
            
            
            611,000Other
            
            
            5,000
            
            
            25,000
            
            
            -Change
                in valuation allowance
            
            
            3,208,000
            
            
            2,323,000
            
            
            1,513,000$
            -
            
            $
            25,000
            
            $
            -





The
      temporary differences, tax credits and carryforwards gave rise to the following
      deferred tax asset and liability at December 31, 2005 and 2004:





**2005**
            
            **2004**
            
            **2003**Deferred
                tax asset:Net
                operating loss carryforwards
            
            $
            8,299,000
            
            $
            5,237,000
            
            $
            4,485,000Allowance
                for losses
            
            
            383,000
            
            
            491,000
            
            
            15,000Inventory
                allowance
            
            
            67,000
            
            
            140,000
            
            
            -Depreciation
                and impairment of assets
            
            
            503,000
            
            
            262,000
            
            
            (737,000
            )Other
            
            
            42,000
            
            
            (44,000
            )
            
            -Less
                valuation allowance
            
            
            (9,294,000
            )
            
            (6,086,000
            )
            
            (3,763,000
            )Deferred
                tax asset net of valuation allowance
            
            $
            -
            
            $
            -
            
            $
            -








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NOTE
      13 -
      CONCENTRATION OF REVENUES





The
      Company's concentration of revenue by broker and product for the years ended
      December 31, 2005, 2004 and 2003 included:





**For
                the Year Ended December 31,****2005**
            
            **2004**
            
            **2003**Top
                Broker
            
            
            9.6%
            
            
            28.6%
            
            
            56.0%Wireless
                Products
            
            
            93.4%
            
            
            87.3%
            
            
            79.4%TopMVNO(1)
            
            
            38.2%
            
            
            13.1%
            
            
            1.9%




"




NOTE
      14 -
      EMPLOYMENT AGREEMENTS





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





The
      Company hired a new Chief Financial Officer on May 31, 2005. On
      August 18, 2005, the Company entered into an employment agreement with its
      Chief Financial Officer, which expires on December 6, 2006. The agreement
      may be extended for successive one-year periods. If the Company terminates
      the
      agreement without cause, or if the CFO terminates the agreement for good reason,
      the CFO is entitled to receive the greater of one year’s salary, plus any target
      cash bonus he would be eligible to receive during that year or payment through
      the expiration date of the agreement. In addition, any stock options would
      vest
      immediately. The CFO was granted an option to purchase 60,000 shares of common
      stock at the $3.30 market price per share on the date of grant in August 2005.




NOTE
      15 -
      SUBSEQUENT EVENTS





In
      February and March of 2006, the Company sold a total of 4,100 terminals to
      an
      international service bureau for $610,000. The value of this sale is recognized
      as equipment held for resale on the December 31, 2005 balance sheet. In
      conjunction with this sale, the Company recognized an impairment loss totaling
      $776,000, which was recorded in 2005.





On
      February 16, 2006, the Company acquired certain assets from Sun
      Communications, including approximately 300 merchant locations and terminals.
      These assets were purchased for $150,000 in cash paid on February 16, 2005.
      In addition, the Company is obligated to pay an earn-out provision totaling
      up
      to $50,000 based on acceptance of certain performance criteria. The earn-out
      provision provides for a $15,000 payment due to Sun Communications in June
      2006
      and the remainder, if earned, due February 2007.





NOTE
      16 -
      BUSINESS SEGMENT INFORMATION





The
      Company predominately operates in the United States and Canada. The Company
      currently has service bureau revenues from customers in France and the Bahamas,
      which has historically represented less then 1% of revenue. The following table
      represents the Company’s revenue by geographic segment for the years ended
      December 31, 2005, 2004 and 2003.





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**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**United
                States
            
            $
            41,978,851
            
            $
            14,317,113
            
            $
            6,318,103Canada
            
            
            4,141,868
            
            
            1,942,322
            
            
            -Other
            
            
            227,845
            
            
            316,888
            
            
            389,134Total
            
            $
            46,348,564
            
            $
            16,576,323
            
            $
            6,707,237





**Item
      9. Changes Inand Disagreements With Accountants On
      Accounting and Financial Disclosure**





Our
      former independent registered public accounting firm, Tanner LC, declined to
      stand for re-election effective October 5, 2005. Tanner LC reported on our
      consolidated financial statements for the year ended December 31, 2004, and
      reviewed our unaudited condensed consolidated financial statements for the
      quarterly periods ended September 30, 2004, March 31, 2005, and
      June 30, 2005. For these periods and up to October 5, 2005, there
      were no disagreements with Tanner LC on any matter of accounting principles
      or
      practices, financial statement disclosure, or auditing scope or procedure,
      which
      disagreements, if not resolved to the satisfaction of Tanner LC, would have
      caused it to make reference to the subject matter of the disagreement in
      connection with its report. The audit report of Tanner LC, dated March 29,
      2005, except for Notes 9, 14, 16 and 17, which are dated August 9, 2005, on
      our consolidated financial statements as of December 31, 2004, and for the
      year then ended, did not contain an adverse opinion or disclaimer of opinion
      and
      was not qualified or modified as to uncertainty, audit scope or accounting
      principles. In addition to its engagement as our independent registered public
      accounting firm, Tanner LC prepared our federal and state income tax filings
      for
      the year ended December 31, 2004.





There
      were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v))
      during the year ended December 31, 2004, or the subsequent interim periods
      through October 5, 2005, except that Tanner LC reported in a letter to the
      Company’s Audit Committee, dated March 23, 2005, that it had identified
      deficiencies that existed in the design or operation of our internal controls
      over financial reporting that it considered to be “significant deficiencies” and
“material weaknesses.” For additional detail with respect to these significant
      deficiencies and material weakness in our internal controls, see Item
      9A.—“Controls and Procedures”.





**Item
      9A. Controlsand Procedures**


*Disclosure
        Controls and Procedures*
 
 *The
        SEC’s Requirement of Disclosure Controls and Procedures.* Pursuant
        to Rule 13a-14(a) under the Exchange Act, our management must maintain
“disclosure controls and procedures.” Rule 13a-15(e) under the Exchange Act
        defines “disclosure controls and procedures” as controls and other procedures
        that are designed to ensure that a company can record, process, summarize,
        and
        report in a timely manner all the required information in its SEC reports.
        These
        disclosure controls and procedures include the ability of a company to
        accumulate and communicate such information to its management so that they
        can
        review such information in a timely manner in advance of filing such
        reports.
 
 *Controls
        Provide Only Reasonable Assurance.* We
        note
        that our disclosure controls and procedures (including our “internal control
        over financial reporting,” as defined below), however well designed and
        operated, can provide only reasonable assurance—not absolute assurance—that we
        will be able to detect or prevent all errors or fraud. We also note that,
        although we may have determined that our “disclosure controls and procedures”
were effective as of a date in the past, such determination may not apply
        to the
        future, as circumstances change.
 
 *Our
        Disclosure Controls and Procedures Are Not Effective.* Pursuant
        to Rule 13a-15(b) under the Exchange Act, our management is required to evaluate
        the effectiveness of our disclosure controls and procedures as of the end
        of
        each fiscal quarter. Such evaluation must include the participation of our
        principal executive officer and our principal financial officer. Accordingly,
        as
        of December 31, 2005, the end of our fourth fiscal quarter, our management
        has
        completed an evaluation of the effectiveness and the design and operation
        of our
        disclosure controls and procedures. Based upon this evaluation and as a result
        of the significant deficiencies and material weakness discussed below, our
        management (including our CEO and CFO) has concluded that our disclosure
        controls and procedures were not effective as of December 31, 2005. Management
        nevertheless has concluded that the consolidated financial statements included
        in the Form 10-K present fairly, in all material respects, our results of
        operations and financial position for the periods presented in conformity
        with
        generally accepted accounting principles.





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*Internal
        Controls Over Financial Reporting*
 
 *Issues
        regarding Our Internal Control Over Financial* Reporting.
        Pursuant to an SEC exemptive order that applies to all small public companies,
        the Company is not yet technically required, pursuant to Rule 13a-15(a) and
        (c)
        under the Exchange Act, to maintain “internal control over financial reporting”
or to evaluate the effectiveness thereof as of the end of its fiscal year,
        as
        otherwise is required for larger public companies. Although not required
        by SEC
        rules, the Company maintains internal controls over financial reporting,
        except
        as described below. In connection with the audits of the Company’s financial
        statements for both 2004 and 2005, the Company’s independent auditors have
        identified to us certain “significant deficiencies” and “material weaknesses” in
        our “internal control over financial reporting.” The following paragraphs define
        each of these terms, identify these “significant deficiencies” and “material
        weaknesses,” and describe what the Company has done or will do to correct them.
        We also report any change to our “internal control over financial reporting”
that occurred during the fourth quarter of 2005, as we are required to do
        by
        Rule 13a-15(d) under the Exchange Act.
 
 *Definition
        of “Internal Control over Financial Reporting.”* Rule
        13a-15(f) under the Exchange Act defines “internal control over financial
        reporting” as a process that is designed to provide reasonable assurance
        regarding the reliability of financial reporting and the preparation of
        financial statements for external purposes in accordance with U.S. generally
        accepted accounting principles (“GAAP”), including those policies and procedures
        that:
 
 ·
              pertain
                  to the maintenance of records that, in reasonable detail, accurately
                  and
                  fairly reflect the transactions and dispositions of
                  assets;
 
 ·
              provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  the preparation of financial statements in accordance with
                  GAAP;
 
 ·
              provide
                  reasonable assurance that receipts and expenditures are being made
                  only in
                  accordance with the authorization of our management and Board of
                  Directors; and
 
 ·
              provide
                  reasonable assurance regarding the prevention or timely detection
                  of
                  unauthorized acquisition, use, or disposition of assets that could
                  have a
                  material effect on the financial
                  statements.
 
 Rule
        13a-15(f) also requires that these processes be designed by or under the
        supervision of a company’s principal executive officer and principal financial
        officer and that they be effected by the company’s board of directors,
        management, and other personnel.
 
 *Definitions
        of “Significant Deficiency” and “Material Weakness.”* The
        terms, “significant deficiency” and “material weakness” are terms that have been
        defined by the Public Company Accounting Oversight Board (“PCAOB”) in its *Auditing
        Standard No. 2.* First,
        the PCAOB has defined a “control deficiency” as a deficiency in a control that
        does not allow management to prevent or detect misstatements in financial
        statements on a timely basis. Second, the PCAOB has defined a “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 GAAP
        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.” Third, 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.”
 
 *Problems
        with Internal Control over Financial Reporting in 2004.* In
        connection with the completion of its audit of, and the issuance of its report
        on, our financial statements for the year ended December 31, 2004, Tanner
        LC identified in its letter to our Audit Committee and management certain
        “significant deficiencies” or “material weaknesses” in our internal control over
        financial reporting, as those terms are defined by the PCAOB. Specifically,
        these “significant deficiencies” and “material weaknesses” related to our lack
        of segregation of incompatible duties, our lack of timely reconciliation
        of
        general ledger accounts (including cash), our lack of controls over inventory
        (including the potential for employees to purposefully or inadvertently delete
        PIN’s without authorization or systems control), our inadequate monitoring of
        accounting for acquisitions, and our inadequate review and accounting for
        impairment of intangible assets. Additionally, Tanner LC identified significant
        deficiencies and material weakness in our internal controls over the preparation
        of certain disclosures in the footnotes to the financial statements, including
        those relating to the stock option disclosures required by SFAS No.148 and
        income tax disclosures required by SFAS No.109. The Company disclosed these
        significant deficiencies and material weaknesses to the Company’s Audit
        Committee and Board of Directors.


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*Our
        Remediation Efforts in 2005.* The
        Company has taken the following actions to remedy the above control
        issues:
 
 ·
              In
                  May 2005, the Company engaged outside accounting personnel to remedy
                  the
                  control issues relating to the preparation of the footnotes to
                  our
                  financial statements relating to our stock options (SFAS No. 148)
                  and
                  income tax (SFAS No. 109). These outside accounting personnel performed
                  this function in advance of the Company’s reporting of financial
                  information for the periods ended June 30, 2005, September 30,
                  2005 and
                  December 31, 2005.
  ·
              On
                  July 5, 2005, in order to remedy our lack of segregation of
                  incompatible duties and our lack of timely reconciliation of our
                  general
                  ledger accounts (including cash),we hired a new Controller, improved
                  the
                  supervision and training of our accounting staff, and segmented
                  the job
                  responsibilities of our accounting
                  staff.
 
 ·
              As
                  of September 30, 2005, the Company implemented new processes and
                  procedures to remedy our lack of control over inventory (including
                  a
                  system that prohibits individuals from purposefully or inadvertently
                  deleting PIN inventory without authorization or system
                  control).
  ·
              For
                  the year ended December 31, 2005, in order to remedy our inadequate
                  monitoring of accounting for acquisitions and our inadequate review
                  and
                  accounting for impairment of intangible assets, the Company timely
                  and
                  adequately completed the necessary analysis of impairment of intangible
                  assets and recorded the appropriate impairment losses.
 
 *Problems
        with Internal Control over Financial Reporting in 2005.* In
        connection with the completion of its audit of, and the issuance of its report
        on, our financial statements for the year ended December 31, 2005, Hansen,
        Barnett & Maxwell has identified to us one “significant deficiency” and one
“material weakness” in our internal control over financial reporting, as those
        terms are defined by the PCAOB. Specifically, Hansen, Barnett & Maxwell
        identified a “significant deficiency” in our ability to summarize timely and
        adequately our financial data in our financial statements, including the
        timely
        and adequate preparation of the supporting schedules thereto and the timely
        reconciliation of general ledger accounts. This “significant deficiency” is
        primarily due to our lack of an effective computer software accounting system
        and our lack of a sufficient number of trained personnel. Ultimately, we
        were
        able adequately to prepare the financial statements and the supporting
        schedules. Additionally, Hansen, Barnett & Maxwell identified a “material
        weakness” in our ability to track our terminals in the hands of our brokers and
        our customers. Despite this “significant deficiency” and this “material
        weakness,” our management has concluded that the Company’s financial statements
        for 2005 present fairly, in all material respects, our results of operations
        and
        financial position in accordance with GAAP. The Company disclosed this
“significant deficiency” and this “material weakness” to the Company’s Audit
        Committee and Board of Directors.
 
 *Our
        Planned Remediation Efforts in 2006.* In
        2006,
        we plan to improve our ability to summarize our financial data in our financial
        statements by implementing a new computer software accounting system and
        by
        hiring and training additional personnel in our accounting department. In
        2006,
        we also plan to implement the necessary controls and processes that will
        allow
        us to track our terminals in the hands of our brokers and our customers.
        Beyond
        these specific efforts, we will generally seek to improve our internal control
        over financial reporting, with the goal to eliminate all “significant
        deficiencies” and “material weaknesses.”





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*No
        Changes in Our Internal Control over Financial Reporting in the Fourth Quarter
        of 2005.* With
        the
        exception of the following, there has been no change in our internal control
        over financial reporting during the fourth quarter, ended December 31,
        2005, that has materially affected, or is reasonably likely to materially
        affect, our internal control over financial reporting. For the quarter ended
        December 31, 2005, in order to remedy our inadequate review and accounting
        for
        impairment of assets, the Company implemented processed and procedures to
        more
        timely and adequately complete the necessary analysis of impairment of
        intangible assets and record the appropriate impairment loss.





**Item
      9B. Other Information**





Not
      applicable.








**PART
      III**





**Item
      10.** **Directors
      andExecutive Officers of the
      Registrant**





Our
      executive officers and directors and their respective ages, as of March 22,
      2006, are as follows:





**Name**
            **Age**
            **Position**Michael
                Keough
            49
            Chief
                Executive Officer, President and DirectorMark
                Robinson
            47
            Chief
                Financial Officer, Secretary and TreasurerCharles
                Callis
            49
            Vice
                President of Business Development and MarketingFred
                Schade
            40
            Vice
                President of EngineeringPieter
                Hamman
            52
            Vice
                President of Sales—Western RegionThomas
                Baker
            50
            Vice
                President of Sales—Eastern RegionGary
                Crook
            53
            DirectorHarry
                Hargens
            51
            DirectorWilliam
                Jurika
            66
            Chairman
                of the Board of DirectorsSteven
                Phillips
            51
            DirectorThomas
                Tesmer
            59
            Director








Each
      director holds office until the next annual meeting of stockholders or until
      his
      or her successor is elected and qualified. Officers are elected to service
      subject to the discretion of the board of directors.





Set
      forth
      below is a brief description of the background and business experience of our
      executive officers and directors.





Michael
      Keough joined us in December 2004. Prior to joining Q Comm, Mr. Keough
      served as Chief Executive Officer, President, and Chief Strategy Officer of
      ClearOne Communications, a publicly traded company specializing in audio, video,
      and web-based conferencing products and services. From 1998 to 2002,
      Mr. Keough served as Senior Vice President of World Wide Sales for
      Learnframe, a company that provides web-based training, and for Tempo, a company
      specializing in testing equipment for the telecom industry. Mr. Keough
      earned his Bachelor of Administration and MBA from the University of
      Washington.





Mark
      W.
      Robinson joined us in April 2005, and was named Chief Financial Officer,
      Secretary and Treasurer on May 31, 2005. Prior to joining Q Comm,
      Mr. Robinson was chief financial officer and chief operating officer of
      Clickguard Corporation which was acquired by Danka Corporation in 2003. From
      1996 to 2000, Mr. Robinson was Chief Financial Officer of Bluecurve
      Corporation, a start-up software company, which was acquired by Red Hat
      Corporation in 2000. From 1992 to 1996, Mr. Robinson was the Corporate
      Controller for Prometrix Corporation, and following the acquisition of Prometrix
      by KLA-Tencor in 1994 became the Prometrix Division Controller.
      Mr. Robinson also held accounting and financial management positions at
      Hewlett Packard and Ford Aerospace and Communications Corporation from 1983
      to
      1992. Mr. Robinson earned both an MBA and Bachelor of Administration from
      the University of Utah.





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Charles
      Callis joined us in February 2005. He brings over 17 years of executive-level
      technology sales and marketing experience. From 2002 to 2004, Mr. Callis
      was Vice President, Worldwide Sales and Marketing for ClearOne Communications
      where he built a global partner network of distributors and value-added
      resellers. From 2001 to 2002, Mr. Callis served as Vice President of Sales
      for e-learning platform company Learnframe, and from 1997 to 2001 as Vice
      President of Worldwide Sales and Alliances for Altiris, Inc. In nearly a decade
      with Novell, Inc., Mr. Callis held numerous executive positions including
      Vice President of Marketing responsible for $1.5 billion in product revenue
      and
      as Vice President of Enterprise Customers. Mr. Callis was a key executive
      in driving Novell’s European business from $25 million to over $500 million
      annually.





Fred
      Schade joined us in June 2004. Mr. Schade comes to Q Comm with over 21
      years of experience in IT and software development. Prior to joining Q Comm,
      Mr. Schade served as the CTO and Vice President of R&D for
      MediConnect.net Inc., where he was responsible for all phases of product
      development and R&D strategies. From 1997 to 1999 he was the Director of
      Software Development for NetSchools Corporation, where he directed a 170-member
      team that performed most of the company’s engineering, quality assurance,
      design, operations, maintenance and support.





Thomas
      Baker joined us in May 2005 as the Regional Sales Manger for the Northeastern
      United States and in February of 2006 was named Vice President of Sales—Eastern
      Region. Prior to joining Q Comm, Mr. Baker was National Wholesale Manger
      for RNK Telecom, a privately-held Massachusetts based Competitive Local Exchange
      Carrier (CLEC). From 1998 through 2000, Mr. Baker served as National
      Account Executive for GTE Card Services and continued in that position through
      2002 for Verizon after the merger between GTE and Bell Atlantic. Mr. Baker
      began his career in the Prepaid Telecommunications industry in 1996 as a
      Regional Sales Manager with Frontier Communications, a Rochester, New York
      provider of telecom services. Mr. Baker graduated from St. John’s
      University with a Bachelor of Science in Accounting.





Pieter
      Hamman joined us in February 2006 as the Vice President Sales—Western Region.
      Mr. Hamman was previously Chief Executive Officer and principal of Sun
      Communications (a company acquired by Q Comm International), a position he
      held
      since 2001. From 1997 to 2001, Mr. Hamman was a management consultant for
      several U.S. software companies that were engaged in establishing international
      operations in Asia. From 1994 to 1996, Mr. Hamman was Vice President—Global
      Sales and Marketing with CSK Software, Inc., a Japanese software company
      providing information integration and distribution solutions. Mr. Hamman
      was also a senior regional manager for over 15 years in North American and
      Asia
      for CSK Software, Inc. and Control Data Corporation. Mr. Hamman has a
      Bachelor of Business Science from the University of Cape Town, South
      Africa.





Gary
      Crook joined our Board of Directors in April 2004. Since 2005, Mr. Crook
      has been an independent consultant. From 2000 to 2005 he was the senior vice
      president, operations of The INTEQ Group, Inc., a pharmacy benefit management
      company. From 1995 to 2000, Mr. Crook served as the senior vice president,
      chief financial officer for SOS Staffing Services, Inc., which was a NASDAQ
      listed company providing temporary staffing and information technology
      consulting. Mr. Crook has an MBA and a Bachelor of Science degree in
      business economics from the University of Utah.





Harry
      Hargens joined our Board of Directors in August 2004. He has been active in
      the
      payments/transaction processing industry since 1981, having held senior
      management positions responsible for sales, marketing, and product development,
      at Omron, VeriFone, TransNet (now part of Paymentech), HONOR (STAR), and
      National Data (Global Payments). In
      2000,
      he founded Kryptosima LLC, the first payment gateway to enable web merchants
      to accept PIN-debit transactions. Presently, Mr. Hargens serves as Director of
      Technology for WAY Systems, a provider of wireless payment terminals and gateway
      services. Prior to WAY, Mr. Hargens served as Chief Executive Officer,
      President, and Director of InstaPay Systems Inc. He
      holds
      an MBA with honors from The University of Chicago, and a BSEE with honors from
      Illinois Institute of Technology.





William
      Jurika was appointed to our Board of Directors in April 2004 and was
      subsequently elected Chairman. Mr. Jurika is a past vice president of
      institutional sales for E. F. Hutton. Since January 2000, Mr. Jurika has
      been a private investor. From 1982 to 1998 he was CEO of Jurika & Voyles, a
      company engaged in the business of investment services. From 1998 to 2000,
      he
      was Chairman of Jurika & Voyles. Mr. Jurika is Chairman of Ascendant
      Copper, a Canadian mineral-exploration company.





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Steven
      Phillips joined our Board of Directors in April 2004. He is an attorney who
      gained a broad legal background while practicing for 15 years, the last eight
      years as a partner with Morrison & Foerster LLP in San Francisco,
      California, including experience in mergers and acquisitions, regulatory
      practice and litigation. Since May 1996, he has been assistant general counsel
      with CMS Enterprises Company, a subsidiary of CMS Energy Corporation, a holding
      company with subsidiaries that provide utility services in Michigan and operate
      international energy generation facilities. Mr. Phillips has a Juris Doctor
      from the University of California, Hastings College of Law and a Bachelor of
      Arts degree from the University of California, Santa Cruz.





Thomas
      Tesmer has been on our Board of Directors since June 2004. He has over 25 years
      in the transaction processing industry, in particular with electronic funds
      transfer and POS payments. Presently, Mr. Tesmer serves as Chief Technical
      Officer for Pipeline Data Processing, a merchant payroll processing service
      and
      software company. Most recently, he also served as Executive Vice President
      of
      Front End Systems for Heartland Payment Systems Inc, one of the largest
      independent merchant payment-processing organizations in the United States.
      He
      also was the President and CEO of Access Services Inc, a credit card merchant
      payments processing corporation.





*Key
      Employees*





John
      Hickey, director of marketing, joined Q Comm’s predecessor companies in 1993
      where he served in various positions including Vice President of Marketing
      and
      Operations. He has been a consultant to companies in direct marketing including
      iMall (now part of Excite@Home), HomeStar Communications, and Borges Lamont.
      He
      currently sits on Intele-Card News’ advisory board and is a two-time winner of
      the Intele-Card Editor’s Choice Award. He received a Bachelor of Science degree
      from Brigham Young University and a Masters in Business Administration with
      a
      specialization in Entrepreneurship from the University of Arizona.





Aaron
      Kesler, director of operations, came to Q Comm in 2003. Mr. Kesler has over
      13 years of experience in outsourced customer service centers. From 2002 to
      2003, Mr. Kesler served Teleperformance USA as International Account
      Director where he led the technical development and implementation of Chase
      Manhattan Bank services and sales centers located in New Delhi, India. From
      1999
      to 2002 he was the Director of Member Services and Business Retention at UCN,
      where he created new processes and call centers to manage the business relations
      and services required by UCN business partners. From 1992 to 1999, as National
      Account Manager for Convergys he directed more than 1,300 customer service
      representatives in delivering premier customer support services to large
      accounts like AT&T, Federal Express, and Sprint PCS.





*Committees
      of the Board of Directors*





Our
      board
      of directors has an audit committee consisting of Gary Crook, Harry Hargens
      and
      Steven Phillips, and a compensation and personnel committee consisting of
      William Jurika, Steven Phillips and Tom Tesmer. The audit committee meets with
      management and our independent registered public accounting firm to determine
      the adequacy of our internal controls and other financial reporting matters
      and
      review related party transactions for potential conflict of interest situations.
      The compensation and personnel committee reviews and recommends nominees for
      the
      board of directors. The compensation and personnel committee also reviews and
      recommends the compensation and benefits payable to our chief executive officer
      and approves supplemental compensation programs, such as bonus awards and stock
      options.





*Audit
      Committee Financial Expert*





The
      Board
      has determined that the chairman of the committee, Gary Crook, is an “audit
      committee financial expert,” as that term is defined in Item 401(h) of
      Regulation S-K, and “independent” for purposes of current and recently-adopted
      American Stock Exchange listing standards and Section 10A(m)(3) of the
      Securities Exchange Act of 1934.





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*Section
      16(a) Beneficial Ownership Reporting Compliance*


Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
        officers and directors, and persons who own more than ten percent of a
        registered class of the Company’s equity securities to file reports of ownership
        and changes in ownership with the SEC. Officers, directors and
        greater-than-ten-percent stockholders are required by SEC regulations to
        furnish
        the Company with copies of all Section 16(a) forms they file. To the best
        of our
        knowledge, based solely on review of the copies of such forms furnished to
        us,
        or written representations that no other forms were required, we believe
        that
        all Section 16(a) filings were made in a timely manner, with the exception
        of those described in the following two paragraphs.
 
 The
        following forms were filed late: (1) Form 4 for Harry Hargens with respect
        to
        the grant to him of 15,000 stock options on September 17, 2004; (2) Form
        4 for
        Harry Hargens with respect to the grant to him of 5,000 stock options on
        August
        22, 2005; (3) Form 4 for the Jurika Family Trust with respect to the grant
        to
        the Trust of 5,000 stock options on August 22, 2005; (4) Form 4 for William
        Jurika and Form 4 for Michelle Jurika as trustees and beneficiaries of the
        Jurika Family Trust with respect to the grant of 5,000 stock options to the
        Trust on August 22, 2005; (5) Form 4 for the Jurika Family Trust with respect
        to
        the purchase of 166,667 shares of common stock on December 19, 2005; (6)
        Form 4
        for William Jurika and Form 4 for Michelle Jurika as trustees and beneficiaries
        of the Jurika Family Trust with respect to the Trust’s purchase of 166,667
        shares of common stock on December 19, 2005; (7) Form 3 for Steven Phillips
        upon
        his appointment as director in April 2004; (8) Form 4 for Steven Phillips
        with
        respect to the grant to him of 5,000 stock options on August 22, 2005; (9)
        Form
        3 for Gary Crook upon his appointment as director in April 2004; (10) Form
        4 for
        Gary Crook with respect to the grant to him of 10,000 stock options on August
        22, 2005; (11) Form 4 for Michael Keough with respect to the grant to him
        of
        20,000 stock options on August 22, 2005; (12) Form 4 for Michael Keough
        with respect to the grant to him of 30,000 stock options on February 13,
        2006.
 
 The
        following forms have not been filed: (1) Form 3 for Mark Robinson upon his
        appointment as Chief Financial Officer, Secretary and Treasurer on July 1,
        2005;
        (2) Form 4 for Mark Robinson with respect to the grant to him of 60,000 stock
        options on August 22, 2005; (3) Form 4 for Mark Robinson with respect to
        the grant to him of 40,000 stock options on February 13, 2006; (4) Form 3
        for
        Thomas Tesmer upon his appointment as director in June 2004; (5) Form 4 for
        Thomas Tesmer with respect to the grant to him of 15,000 stock options on
        June
        22, 2004; (6) Form 4 for Thomas Tesmer with respect to the grant to him of
        5,000
        stock options on August 22, 2005. No Form 5s were required to be filed by
        any of
        the Company’s officers and directors during 2005.




*Code
      of Ethics*





We
      have
      adopted a code of ethics that applies to our principal executive officer,
      principal financial officer and other persons performing similar functions,
      as
      well as all of our other employees and directors. This code of ethics is posted
      on our website at www.qcomm.com .





**Item
      11. Executive** **Compensation**





*Summary
      compensation* .
      The
      following table sets forth information regarding compensation awarded to, earned
      by, or paid to our Chief Executive Officer and our other most highly compensated
      executive officers whose compensation exceeded $100,000 in 2005 for all services
      rendered to us in all capacities during the last three completed fiscal years.





**Annual
                Compensation**
            
            **Long-term**
              **Compensation****Name
                and principal position**
            
            **Year**
            
            **Salary**
            
            **Commission**
              **and
                Bonus**
            
            **Securities**
              **Underlying**
              **Options**Michael
                  Keough, President and Chief Executive Officer
                  (1)
            
            
            2005
            
            $
            245,069
            
            $
            3,892
            
            
            170,000
            (2)2004
            
            $
            15,385
            (1)
            
            -
            
            
            -2003
            
            
            -
            
            
            -
            
            
            -Terry
                Kramer, Chief Executive Officer, President and Director
                (3)
            
            
            2005
            
            
            -
            
            
            -
            
            
            -2004
            
            $
            201,731
            
            
            -
            
            
            255,000
            (3)2003
            
            $
            17,500
            (1)
            
            -
            
            
            45,000
            (3)Mark
                Robinson, Chief Financial Officer, Secretary and Treasurer
                (4)
            
            
            2005
            
            $
            107,551
            (4)
            
            -
            
            
            60,000
            (5)2004
            
            
            -
            
            
            -
            
            
            -2003
            
            
            -
            
            
            -
            
            
            -Michael
                Openshaw, Chief Financial Officer, Secretary and Treasurer Director
                (6)
            
            
            2005
            
            $
            62,500
            (6)
            $
            12,374
            
            
            -2004
            
            $
            125,000
            
            
            7,668
            (7)
            
            -2003
            
            $
            110,586
            
            
            30,000
            
            
            40,000
            (8)Darin
                W. Hunsaker, Vice President of Sales (9)
            
            
            2005
            
            $
            125,000
            
            $
            56,682
            
            
            35,000
            (10)2004
            
            $
            120,192
            
            $
            36,390
            
            
            35,000
            (10)2003
            
            
            -
            
            
            -
            
            
            -








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**Annual
                Compensation**
            
            **Long-term
                Compensation****Name
                and principal position**
            
            **Year**
            
            **Salary**
            
            **Commission**
              **and
                Bonus**
            
            **Securities
                Underlying Options**Charles
                Callis, Vice President of Business Development and Marketing
                (11)
            
            
            2005
            
            $
            122,669
            (11)
            
            -
            
            
            50,000
            (12)2004
            
            
            -
            
            
            -
            
            
            -2003
            
            
            -
            
            
            -
            
            
            -Fred
                Schade, Vice President of Engineering (13)
            
            
            2005
            
            $
            122,108
            
            $
            6,529
            
            
            12,500
            (14)2004
            
            
            68,750
            (13)
            
            -
            
            
            -2003
            
            
            -
            
            
            -
            
            
            -Thomas
                Baker, Vice President of Sales—Eastern Region (15)
            
            
            2005
            
            $
            23,581
            (15)
            $
            17,874
            
            
            5,000
            (16)2004
            
            
            -
            
            
            -
            
            
            -2003
            
            
            -
            
            
            -
            
            
            -





(1)
            Michael
                Keough was hired in December 2004.(2)
            As
                of December 31, 2005, 3,333 options were vested.(3)
            Terry
                Kramer was hired in November 2003. He resigned effective December 31,
                2004, and 127,500 unvested stock options expired on that date. Vested
                stock options expire 90 days after termination of employment.
                Mr. Kramer exercised 127,500 options in January 2005.(4)
            Mark
                Robinson was hired in April 2005.(5)
            As
                of December 31, 2005, 14,999 options were vested.(6)
            Michael
                Openshaw was hired April 1, 2001, and resigned in May
                2005.(7)
            Represents
                1,667 shares granted June 30, 2004, valued at $0.40 per
                share.(8)
            As
                of December 31, 2005, 20,000 shares were vested but have since been
                forfeited.(9)
            Darin
                W. Hunsaker was hired in February 2004 and resigned on February 28,
                2006.(10)
            As
                of December 31, 2005, 18,750 options were vested.(11)
            Charles
                Callis was hired in February 2004.(12)
            As
                of December 31, 2005, 14,583 options were vested.(13)
            Fred
                Schade was hired in June 2004.(14)
            As
                of December 31, 2005, 23,957 options were vested.(15)
            Tom
                Baker was hired in May 2005.(16)
            As
                of December 31, 2005, 1,250 options were
                vested.


_____________________________






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*Options
      held by Named Executives*





The
      following tables provide information with respect to stock options granted
      during the year ended December 31, 2005 to each of the executives named in
      the summary compensation table above and the number and aggregate value of
      unexercised options held by those executives as of December 31, 2005. The
      per share exercise price of all options was equal to, or above, the estimated
      fair market value of a share of common stock on the date of grant.





**Number
                of**
              **Securities**
              **Underlying**
              **Options**
            
            **Percent
                of**
              **Total
                Options**
              **Granted
                to**
              **Employees
                in**
              **2005**
            
            **Exercise**
              **Price**
            
            **Expiration**
              **date**
            
            **Value
                of In-the-**
              **Money
                Options**
              **as
                of**
              **December 31,**
              **2005**Mike
                Keough
            150,000
            
            46.2%
            
            $      
                 3.59
            
            1/14/15(1)
            
            -Mike
                Keough
            20,000
            
            6.2%
            
            $  
                     3.30
            
            8/22/15(2)
            
            -Mark
                Robinson
            60,000
            
            18.5%
            
            $  
                     3.30
            
            8/22/15(2)
            
            -Charles
                Callis
            37,500
            
            11.7%
            
            $  
                     4.65
            
            1/31/15(2)
            
            -Charles
                Callis
            12,500
            
            3.8%
            
            $  
                     3.30
            
            6/26/15(2)
            
            -Fred
                Schade
            12,500
            
            3.8%
            
            $  
                     3.30
            
            6/26/15(2)
            
            -





(1)
            These
                options are earned annually over 2005 and 2007 based on continued
                employment and expire 90 days after termination of employment.(2)
            These
                options are earned quarterly over 2004 and 2005 based on the continued
                employment and expire 90 days after termination of employment.








**2005
                Year-End Option Values****Number
                of Shares Underlying**
              **Unexercised
                Options at**
              **December 31,
                2005 (#)**
            
            **Value
                of Unexercised**
              **In-the-Money
                Options**
              **At
                December 31, 2005 ($)****Name**
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Mike
                Keough
            3,333(1)
            
            166,667(2)
            
            -
            
            -Mark
                Robinson
            14,999(3)
            
            45,001(3)
            
            -
            
            -Charles
                Callis
            14,583(4)
            
            35,417(4)
            
            -
            
            -Fred
                Schade
            23,957(4)
            
            26,043(4)
            
            -
            
            -Darin
                Hunsaker
            18,750(5)
            
            31,250(5)
            
            -
            
            -








(1)
            Includes
                150,000 options with an exercise price of $3.59 per share. See footnote
                1
                in the preceding table.(2)
            Includes
                150,000 options with an exercise price of $3.59 per share, and 20,000
                options with an exercise price of $3.30 per share. See footnote 1
                in the
                preceding table.(3)
            Includes
                60,000 options with an exercise price of $3.30 per share. See footnote
                1
                in the preceding table.(4)
            Includes
                37,500 options with an exercise price of $4.65 per share and 12,500
                options with an exercise price of $3.30 per share. See footnote 1
                in the
                preceding table.(5)
            Includes
                35,000 options with an exercise price of $6.50 per share and 15,000
                options with an exercise price of $4.65. See footnote 1 in the preceding
                table.


_____________________________








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*Compensation
      of Directors*





Our
      outside directors receive a quarterly payment of $4,125 and are reimbursed
      for
      travel costs. Committee chairs receive an additional $1,250 per quarter.





*Employment
      Agreements*





We
      have
      entered into employment agreements with Michael Keough and Mark Robinson.





Mr. Keough’s
      agreement, which terminates December 31, 2006, pays him an annual salary of
      no less than $250,000. The agreement may be extended for successive one-year
      periods. If we terminate the agreement without cause, or if Mr. Keough
      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. Under
      the
      terms of his employment contract, Mr. Keough was also granted an option to
      purchase 150,000 shares of common stock at the market price per share on the
      date of grant in January 2005. Subsequent to the effective date of this
      employment agreement, Mr. Keough was granted an option to purchase and
      additional 20,000 shares of common stock at the $3.30 market price per share
      in
      August 2005.





Mr. Robinson’s
      agreement, which terminates December 6, 2006, pays him an annual salary of
      no less than $155,000. The agreement may be extended for successive one-year
      periods. If we terminate the agreement without cause, or if Mr. Robinson
      terminates the agreement for good reason, Mr. Robinson 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. Under
      the
      terms of the agreement, Mr. Robinson was also granted an option to purchase
      60,000 shares of common stock at the market price per share on the date of
      grant
      in August 2005.





*Compensation
      Committee Interlocks and Insider Participation*





All
      compensation decisions during 2005 for each of the executive officers named
      in
      this report were made the Compensation and Personnel Committee, consisting
      of
      Messrs. Jurika (Chairman), Phillips and Tesmer. No member of the
      Compensation and Personnel Committee is or was formerly an officer or employee
      of the Company. No interlocking relationship exists between our Board of
      Directors and its Compensation and Personnel Committee and the board of
      directors and compensation committee of any other company.





*Compensation
      and Personnel Committee*




Our
      Compensation and Personnel Committee was established in March 2004. Prior to
      that time, the functions of the Compensation and Personnel Committee were
      performed by a committee of a different name. The Compensation and Personnel
      Committee’s current composition consists of Messrs. Jurika (Chairman),
      Phillips and Tesmer. Each member of our Compensation and Personnel Committee
      is
      independent within the meaning of the rules of Amex and SEC and no member
      receives directly or indirectly any consulting, advisory or other compensatory
      fees that would be prohibited under the SEC’s audit committee independence
      standards. The primary purposes of the Compensation and Personnel Committee
      are
      to (a) determine, or recommend to the Board of Directors for determination,
      the compensation of our chief executive officer, (b) review and recommend
      the compensation and benefits payable to our other officers, (c) review our
      policy relating to employee compensation and benefits, (d) administer our
      stock option plans and (e) select, or recommend to the Board of Directors,
      director nominees for annual meetings of shareholders.





The
      Compensation and Personnel Committee does not set specific, minimum
      qualifications that director nominees must meet in order for the committee
      to
      recommend them to the Board of Directors, but rather believes that each nominee
      should be evaluated based on his or her individual merits, taking into account
      our needs and the composition of the Board of Directors. Members of the
      Compensation and Personnel Committee discuss and evaluate possible candidates
      in
      detail, and suggest individuals to explore in more depth. Outside consultants
      may also be employed to help in identifying candidates. Once a candidate is
      identified whom the committee wants to consider seriously and move toward
      nomination, the Chairperson of the Compensation and Personnel Committee enters
      into a discussion with that nominee. The policy of the Compensation and
      Personnel Committee provides that nominees recommended by shareholders be
      evaluated in the same manner as other nominees. Shareholders who wish to submit
      nominees for director for consideration by the Compensation and Personnel
      Committee for election at our 2005 Annual Meeting of shareholders may do so
      by
      submitting in writing such nominees’ names, in compliance with the procedures
      and along with the other information required by our Bylaws, to Mark Robinson,
      Corporate Secretary at Q Comm International, Inc., 510 East Technology Avenue,
      Orem, Utah 84097.





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REPORT
      OF
      COMPENSATION AND PERSONNEL COMMITTEE


REGARDING
      EXECUTIVE COMPENSATION





*The
      following report of the Compensation and Personnel Committee shall not be deemed
      to be incorporated by reference by any general statement that incorporates
      this
      annual report into any other filing under the Securities Act of 1933, as
      amended, or the Securities Exchange Act of 1934, as amended, except to the
      extent that Q Comm specifically incorporates this annual report by reference.
      This annual report shall also not be deemed to have been filed under those
      Acts.*





Our
      executive compensation consists of three components: base salary, annual
      incentive compensation in the form of cash bonuses and stock options, each
      of
      which is intended to complement the others and, together, to satisfy Q Comm’s
      compensation objectives. The Compensation and Personnel Committee’s policies
      with respect to each of the three components are discussed below:





*Base
      Salary* .
      The
      Compensation and Personnel Committee considers several factors in determining
      base salaries for our executive officers, including industry information
      regarding comparative positions, responsibilities of the executive officers,
      length of service with Q Comm, and corporate and individual performance. Such
      factors are applied by the Compensation and Personnel Committee on a subjective
      basis and without application of set criteria. When determining base salaries,
      Q
      Comm examines the base salaries at companies of similar size and with similar
      employee bases. Also, the Compensation and Personnel Committee believes that
      Q Comm’s competitors for executive talent include a broad range of
      companies, and not just those companies in a peer group established to compare
      shareholder returns. Thus, the industry information used by the Compensation
      and
      Personnel Committee are not entirely derived from the same peer group as used
      in
      the Comparison of Five Year Cumulative Total Return graph included in this
      report.





*Bonuses* .
      Cash
      bonuses paid to our executive officers are based on performance objectives
      against the Company’s goals that are established at the beginning of the year,
      subject to modifications to reflect unusual or unforeseen circumstances. These
      goals are largely financial goals based on objective standards such as net
      revenue and earnings as compared to targets.





*Stock
      Options* .
      Stock
      options provide additional incentives to our executive officers to maximize
      long-term shareholder value. The options that have been granted vest over a
      defined period to encourage these executive officers to continue their
      employment with Q Comm. Q Comm also grants stock options to many employees,
      commensurate with their potential contributions to Q Comm. Such factors are
      applied on a subjective basis by the Compensation and Personnel Committee and
      without use of specific objectives or formulas.





*Chief
      Executive Officer Compensation* .
      Michael
      Keough was the Chief Executive Officer of Q Comm through December 31, 2005.
      For fiscal year 2005, Mr. Keough received base salary compensation based
      upon industry averages for comparative positions, responsibilities, length
      of
      service and corporate and individual performance.





Submitted
      by the Compensation and Personnel Committee





William
      Jurika, Chairman


Steven
      Phillips


Thomas
      Tesmer





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*Company
      Stock Price Performance*




The
      following graph shows a comparison of the cumulative total shareholder return
      on
      Q Comm common stock over the past five fiscal years with the cumulative
      total return of the Russell 2000 Stock Index and Q Comm’s peer group, based on
      line-of-business, comprised of Euronet Worldwide, First Data Corp, Global ePoint
      Inc, and Hypercom Corp. The graph assumes $100 is invested in Q Comm’s
      common stock and in each of the two indices at the closing market quotation
      on
      December 31, 2000 and that dividends are reinvested.







2000
              
              2001
              
              2002
              
              2003
              
              2004
              
              2005Q
                  Comm
              
              $
              100
              
              $
              387.80
              
              $
              175.61
              
              $
              103.90
              
              $
              61.95
              
              $
              48.78Russell
                  2000
              
              $
              100
              
              $
              100.63
              
              $
              78.96
              
              $
              115.72
              
              $
              135.25
              
              $
              69.68Peer
                  Group
              
              $
              100
              
              $
              185.65
              
              $
              76.93
              
              $
              110.49
              
              $
              127.90
              
              $
              129.16




*Limitation
      of Directors’ Liability and Indemnification*





Our
      articles of incorporation limit the liability of individual directors for
      specified breaches of their fiduciary duty. The effect of this provision is
      to
      eliminate the liability of directors for monetary damages arising out of their
      failure, through negligent or grossly negligent conduct, to satisfy their duty
      of care, which requires them to exercise informed business judgment. The
      liability of directors under the federal securities laws is not affected. A
      director may be liable for monetary damages only if a claimant can show receipt
      of financial benefit to which the director is not entitled, intentional
      infliction of harm on us or on our stockholders, a violation of section
      16-10a-842 of the Utah Revised Business Corporation Act (dealing with unlawful
      distributions to stockholders effected by vote of directors), and any amended
      or
      successor provision thereto, or an intentional violation of criminal law.





Our
      articles of incorporation also provide that we will indemnify each of our
      directors or officers, and their heirs, administrators, successors and assigns
      against any and all expenses, including amounts paid upon judgments, counsel
      fees, and amounts paid or to be paid in settlement before or after suit is
      commenced, actually and necessarily incurred by such persons in connection
      with
      the defense or settlement of any claim, action, suit or proceeding, in which
      they, or any of them are made parties, or which may be asserted against them
      or
      any of them by reason of being, or having been, directors or officers of the
      corporation, except in relation to such matters in which the director or officer
      is adjudged to be liable for his or her own negligence or misconduct in the
      performance of his or her duty. We have also entered into indemnification
      agreements with our directors and our senior executive officers. Under these
      agreements, we have agreed to indemnify each of them for all expenses,
      judgments, fines and settlement amounts they actually and reasonably incur
      in
      connection with any proceeding, actual or threatened, to which they are party,
      relating to any action taken by them or their failure to take any action in
      their capacity as an officer or director. We have also agreed to advance these
      expenses if they provide us with written affirmation of their good faith belief
      that they have met the standard of conduct required under the Utah Revised
      Business Corporation Act and other applicable law.





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We
      maintain a directors’ and officers’ insurance policy in the amount of
      $5,000,000.




There
      is
      no pending litigation or proceeding involving any of our directors, officers,
      employees or agents in which we are required or permitted to provide
      indemnification. We are also not aware of any other threatened litigation or
      proceeding that may result in a claim for such indemnification.





Insofar
      as indemnification for liabilities arising under the Securities Act may be
      permitted for directors, officers or controlling persons under our articles
      of
      incorporation, we have been informed that, in the opinion of the SEC,
      indemnification is against public policy as expressed in the Securities Act
      and
      is unenforceable.





**Item
      1** **2.
      Security Ownershipof Certain Beneficial Owners and
      Management and Related Stockholder Matters**





*Securities
      Authorized for Issuance under Equity Compensation Plans*





To
      attract and retain the personnel necessary for our success, in 2000 we adopted
      a
      stock option plan and reserved 133,333 shares of stock for future grants under
      that plan. Only employees are eligible for grants under this plan. In February
      2003 and May 2004, we adopted stock option plans under which we may grant
      options covering up to 100,000 and 500,000 shares of common stock, respectively,
      to our employees, directors and consultants. The Compensation and Personnel
      Committee established by the Board of Directors administers all plans. In
      addition, each plan provides that the maximum term for options granted under
      the
      plan is 10 years and that the exercise price for the options may not be less
      than the fair market value of the common stock on the date of grant. Options
      granted to stockholders owning more than 10% of our outstanding common shares
      must be exercised within five years from the date of grant and the exercise
      price must be at least 110% of the fair market value of the common stock on
      the
      date of the grant. As of December 31, 2005, we had issued options covering
      131,833 shares of common stock under the 2000 stock option plan with a weighted
      average exercise price of $8.23; we had issued options covering 50,000 shares
      of
      common stock under the 2003 stock option plan with a weighted average exercise
      price of $6.50; we had issued options covering 305,500 shares of common stock
      under the 2004 stock option plan with a weighted average exercise price of
      $4.61.








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The
      following table sets forth, as of December 31, 2005, information concerning
      our 2000, 2003 and 2004 stock option plans, as well as information relating
      to
      other equity compensation plans that we have adopted.





**Number
                of**
              **securities
                to be**
              **issued
                upon exercise**
              **of
                outstanding**
              **options
                and**
              **warrants**
            
            **Weighted
                average**
              **exercise
                price of**
              **outstanding
                options**
              **and
                warrants**
            
            **Number
                of**
              **securities
                remaining**
              **available
                for future issuance under**
              **equity**
              **compensation
                plans**Equity
                compensation plans approved by stockholders(1)
            
            594,000
            
            $       4.52
            
            139,333Equity
                compensation plans not approved by stockholders(2)
            
            373,334(3)
            
            $      
                8.34
            
            -Total
            
            967,334
            
            $12.86
            
            139,333





(1)
            The
                2000, 2003 and 2004 stock option plans.(2)
            Includes
                options granted to employees, consultants and underwriters outside
                our
                stock option plans and stock bonuses.(3)
            Includes
                options covering 330,000 shares of common stock granted to consultants
                and
                underwriters, and options covering 43,334 shares of common stock
                granted
                to employees outside our stock option plan. The options granted to
                consultants vested immediately, those granted to underwriters vested
                after
                one year. The options granted to consultants and underwriters and
                are for
                terms that range from three to five years from the date of grant.
                The
                options granted to our employees expire at the end of five years
                from date
                of grant. All of the employees’ options have vested.


_____________________________





*Security
      Ownership of Certain Beneficial Owners and Management*





The
      following table sets forth information regarding the beneficial ownership of
      shares of our common stock as of March 22, 2006, by:





·
            each
                person, or group of affiliated persons, known by us to be the beneficial
                owner of more than 5% of our outstanding common
                stock;


·
            each
                of our directors;


·
            each
                executive officer named in the summary compensation table below;
                and


·
            all
                of our directors and executive officers as a
                group.





As
      of
      March 22, 2006, there were 6,914,795 shares of our common stock
      outstanding. Except as otherwise indicated, the persons listed below have sole
      voting and investment power with respect to all of the common stock owned by
      them. When option or warrants are stated to be “currently exercisable,” this
      means that the holder has the right to exercise those options or warrants as
      of
      March 22, 2006, or within a period of sixty days thereafter.





**Name
                and Address of**
              **Beneficial
                Owner(1)**
            
            **Shares
                of Common Stock**
              **Beneficially
                Owned(2)**
            
            **Percent
                of Common Stock**
              **Beneficially
                Owned**William
                Jurika(3)
            
            1,507,717
            
            21.8%Michelle
                Jurika(4)
            
            1,199,517
            
            17.3%Jurika
                Family Trust, U/A 1989(5)
            
            1,199,517
            
            17.3%JMK
                Investment Partners, L.P.(6)
            
            308,200
            
            4.5%Pike
                Capital Partners, LP(7)
            
            2,634,634
            
            38.1%Harry
                Hargens
            
            6,250
            
            *Steven
                Phillips
            
            6,250
            
            *






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**Name
                and Address of**
              **Beneficial
                Owner(1)**
            
            **Shares
                of Common Stock**
              **Beneficially
                Owned(2)**
            
            **Percent
                of Common Stock**
              **Beneficially
                Owned**Thomas
                Tesmer
            
            6,250
            
            *Gary
                Crook
            
            7,500
            
            *Michael
                Keough
            
            55,000
            
            *Mark
                Robinson
            
            23,332
            
            *Charles
                Callis
            
            20,416
            
            *Fred
                Schade
            
            29,791
            
            *Darin
                Hunsaker
            
            20,000
            
            *All
                directors and executive officers as a group (ten persons)
            
            1,682,506
            
            24.3%


_____________________________





*
      Less
      than 1%





(1)
            Except
                as otherwise noted in the footnotes below, all addresses are c/o
                Q Comm
                International, Inc., 510 East Technology Ave, Building C, Orem, Utah
                84097.





(2)
            According
                to the rules and regulations of the SEC, shares that a person has
                a right
                to acquire within 60 days of the date of this report are deemed to
                be
                outstanding for the purpose of computing the percentage ownership
                of that
                person but are not deemed outstanding for the purpose of computing
                the
                percentage ownership of any other
                person.





(3)
            Mr. William
                Jurika holds the option to acquire 20,000 shares of common stock,
                of which
                5,000 shares are currently exercisable. He indirectly holds 1,507,717
                shares of common stock through both the Jurika Family Trust U/A 1989
                and
                JMK Investment Partners, L.P. He shares voting and investment power,
                as a
                co-trustee of the Jurika Family Trust, U/A 1989, which directly holds:
                (i) 714,837 shares of common stock; and (ii) warrants to acquire
                479,680 shares of common stock (which are currently exercisable).
                He
                shares voting and investment power, as a managing member of JMK Investment
                Partners, LLC, the General Partner of JMK Investment Partners, L.P.,
                which
                directly holds 308,200 shares of common
                stock.





(4)
            Mrs. Michelle
                Jurika owns no shares directly. She indirectly holds 1,119,517 shares
                of
                common stock through the Jurika Family Trust U/A 1989. She shares
                voting
                and investment power as a co-trustee of the Jurika Family Trust,
                U/A 1989,
                which directly holds: (i) 714,837 shares of common stock; and
                (ii) warrants to acquire 479,680 shares of common stock (which are
                currently exercisable).





(5)
            The
                address of the Jurika Family Trust U/A 1989 is 2101 Webster Street,
                Suite
                1550, Oakland, California 94612. This trust directly holds 1,199,517
                shares of common stock, including: (i) 714,837 shares of common
                stock; and (ii) warrants to acquire 479,680 shares of common stock
                (which are currently exercisable).





(6)
            The
                address of JMK Investment Partners, L.P. is 2030 Franklin Street,
                Suite
                210, Oakland, California 94612. This partnership directly holds 308,200
                shares of common stock.





(7)
            Pike
                Capital Partners, LP directly holds 2,634,634 shares of common stock.
                The
                address of Pike Capital Partners, LP is 275 Madison Avenue, Suite
                418, New
                York, NY 10016.





**Item
      13. Certain** **Relationshipsand
      Related Transactions**





We
      have
      adopted a policy that the audit committee must review all transactions with
      any
      officer, director or 5% stockholder.





On
      December 18, 2005, the Company sold 833,334 of restricted common stock at
      $3.00 per share to Pike Capital, LP, which holds 5% or more of the Company’s
      common stock.





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On
      December 18, 2005, the Company sold 166,667 of restricted common stock at
      $3.00 per share to the Jurika Family Trust through a private placement. The
      Jurika Family Trust owns 5% or more of the Company’s common stock. The Jurika
      Family Trust is controlled by William Jurika, our Chairman of the Board and
      one
      of our largest shareholders.





On
      July 7, 2005, the Company sold 270,000 of restricted common stock at $3.07
      per share to Pike Capital, LP, which holds 5% or more of the Company’s common
      stock.





On
      July 7, 2005, the Company issued a promissory note in the amount of
      $614,000 to
      the
      Jurika Family Trust .
      This
      promissory note has an interest rate of 5% per year and is payable in full
      on or
      before July 7, 2007. In connection with the issuance of this note, we also
      issued warrants to the Jurika Family Trust for 230,000 shares of common stock
      exercisable for a period of five years at a price of $3.51 per share. Jurika
      Family Trust holds 5% or more of the Company’s common stock. The Jurika Family
      Trust is controlled by William Jurika, our Chairman of the Board and one of
      our
      largest shareholders.





On
      April 5, 2005, the Company sold 100,000 of restricted common stock at $5.00
      per share to Pike Capital, LP, which holds 5% or more of the Company’s common
      stock.





On
      April 5, 2005, the Company sold 100,000 of restricted common stock at $5.00
      per share to Jurika Family Trust through a private placement. The Jurika Family
      Trust owns 5% or more of the Company’s common stock. The Jurika Family Trust is
      controlled by William Jurika, our Chairman of the Board and one of our largest
      shareholders.





On
      March 25, 2005, the Company received $500,000 in cash from William Jurika,
      our Chairman of the Board and one of our largest shareholders, in exchange
      for
      the issuance of a note. This 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 together with $972 in interest.





On
      June 16, 2005, the Company sold 270,000 of restricted common stock at $3.07
      per share to Pike Capital, LP, which holds 5% or more of the Company’s common
      stock.





On
      August 22, 2005, the Company issued an option to purchase 5,000 shares of
      common stock to William Jurika, our Chairman of the Company’s Board and one of
      our largest shareholders, at a market price on that date of $3.30. The shares
      represented by this option become purchasable in three installments on the
      anniversary date of the date of grant in 2006, 2007 and 2008. This option
      expires after August 22, 2010.





On
      August 22, 2005, the Company issued an option to purchase 10,000 shares of
      common stock to Gary Crook, a Director on the Company’s Board and Chairman of
      the Company’s Audit Committee, at a market price on that date of $3.30. The
      shares represented by this option become purchasable in three installments
      on
      the anniversary date of the date of grant in 2006, 2007 and 2008. This option
      expires after August 22, 2010.





On
      August 22, 2005, the Company issued an option to purchase 5,000 shares of
      common stock to Steve Phillips, a Director on the Company’s Board and a member
      of the Company’s Audit Committee, at a market price on that date of $3.30. The
      shares represented by this option become purchasable in three installments
      on
      the anniversary date of the date of grant in 2006, 2007 and 2008. This option
      expires after August 22, 2010.





On
      August 22, 2005, the Company issued an option to purchase 5,000 shares of
      common stock to Tom Tesmer, a Director on the Company’s Board and a member of
      the Company’s Compensation and Personnel Committee, at a market price on that
      date of $3.30. The shares represented by this option become purchasable in
      three
      installments on the anniversary date of the date of grant in 2006, 2007 and
      2008. This option expires after August 22, 2010.


On
        August 22, 2005, the Company issued an option to purchase 5,000 shares of
        common stock to Harry Hargens, a Director on the Company’s Board and a member of
        the Company’s Audit Committee, at a market price on that date of $3.30. The
        shares represented by this option become purchasable in three installments
        on
        the anniversary date of the date of grant in 2006, 2007 and 2008. This option
        expires after August 22, 2010.
 
 The
        Company has entered into various compensation arrangements with its officers
        and
        directors, as described in Item 11 of this report.


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 Table
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**Item
      14. Principal Accountant Fees and
      Services**





*Principal
      Accountant Fees*





The
      aggregate fees billed by our principal accounting firms, Hansen, Barnett &
Maxwell, Tanner LC, and Pritchett, Siler & Hardy, P.C., are as
      follows:


**January
                  1, 2005**
                **through**
                **December
                  31,**
                **2005**
              
              **January
                  1, 2004**
                **through**
                **December
                  31,**
                **2004**
              
              **January
                  1, 2003**
                **through**
                **December
                  31,**
                **2003**Audit
                  fees
              
              $
              81,000
              
              $
              216,239
              
              $
              24,942Audit
                  related fees (1)
              
              
              89,871
              
              
              58,776
              
              
              12,576Total
                  audit and audit related fees
              
              
              170,871
              
              
              275,015
              
              
              37,518Tax
                  fees (2)
              
              
              13,735
              
              
              13,275
              
              
              446All
                  other fees
              
              
              -
              
              
              -
              
              
              -Total
                  fees
              
              $
              184,606
              
              $
              288,290
              
              $
              37,964





(1)
            Audit-related
                fees were for reviews of the Company’s filings for Forms 10-QSB, 10-Q,
                10-Q/A and Form 8-K for the years ended 2003, 2004 and
                2005.


(2)
            Tax
                fees were for services related to preparation of tax returns for
                the years
                ended 1999, 2000, 2001, 2002, 2003 and
                2004.


The
        aggregate fees billed by our principal accounting firm, Hansen, Barnett &
Maxwell, are as follows:
 
 **September
                  30, 2005 through December 31, 2005**
              
              **January
                  1, 2004 through December 31, 2004**
              
              **January
                  1, 2003 through December 31, 2003**Audit
                  fees
              
              $
              81,000
              
              $
              -
              
              $
              -Audit
                  related fees (1)
              
              
              24,000
              
              
              -
              
              
              -Total
                  audit and audit related fees
              
              
              105,000
              
              
              -
              
              
              -Tax
                  fees
              
              
              -
              
              
              -
              
              
              -All
                  other fees
              
              
              -
              
              
              -
              
              
              -Total
                  fees
              
              $
              105,000
              
              $
              -
              
              $
              -
 (1)
                Audit-related
                    fees were for reviews of the Company’s filings for Forms 10-Q and 8-K for
                    the year
                    ended 2005.


The
      aggregate fees billed by our principal accounting firm, Tanner LC, are as
      follows:




**January
                    1, 2005**
                  **through**
                  **December
                    31,**
                  **2005**
                
                **October
                    1, 2004 through December 31, 2004**
                
                **January
                    1, 2003 through December 31, 2003**Audit
                    fees
                
                $
                -
                
                $
                196,500
                
                $
                -Audit
                    related fees (1)
                
                
                62,391
                
                
                52,607
                
                
                -Total
                    audit and audit related fees
                
                
                62,391
                
                
                249,107
                
                
                -Tax
                    fees (2)
                
                
                11,780
                
                
                3,450
                
                
                -All
                    other fees
                
                
                -
                
                
                -
                
                
                -Total
                    fees
                
                $
                74,171
                
                $
                252,557
                
                $
                -
 (1)
                Audit-related
                    fees were for reviews of the Company’s filings for Forms 10-Q, 10-Q/A
                    and Form 8-K for 2004 and
                    2005.
 (2)
                Tax
                    fees were forservicesrelated to preparation of tax returns for the year ended
                    2004.


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The
      aggregate fees billed by our principal accounting firm, Pritchett, Siler &
Hardy, are as follows:





**September
                1, 2005**
              **through
                December 31, 2005**
            
            **January
                1, 2004 through**
              **September
                30, 2004**
            
            **January
                1, 2003 through December 31, 2003**Audit
                fees
            
            $
            -
            
            $
            19,739
            
            $
            24,942Audit
                related fees (1)
            
            
            3,480
            
            
            6,169
            
            
            12,576Total
                audit and audit related fees
            
            
            3,480
            
            
            25,908
            
            
            37,518Tax
                fees (2)
            
            
            1,955
            
            
            9,825
            
            
            446All
                other fees
            
            
            -
            
            
            -
            
            
            -Total
                fees
            
            $
            5,435
            
            $
            35,733
            
            $
            37,964





(1)
            Audit-related
                fees were for reviews of the Company’s filings for Forms 10-QSB, 10-Q,
                10-Q/A and Form 8-K for 2004.


(2)
            Tax
                fees were for services related to preparation of tax returns for
                the year
                ended 1999, 2000, 2001, 2002 and
                2003.




All
      Audit-Related Fees, Tax Fees and Other Fees set forth in the tables directly
      above were approved by the Audit Committee as required by SEC regulations.
      Pursuant to the pre-approval policy of the Audit Committee, each of the
      permitted non-audit services in the tables directly above has been pre-approved
      by the Audit Committee or the Audit Committee’s Chairman pursuant to delegated
      authority by the Audit Committee, other than de minimus non-audit services
      for
      which the pre-approval requirements are waived in accordance with the rules
      and
      regulations of the SEC.





*Audit
      Committee Pre-Approved Policies and Procedures*




The
      Audit
      Committee charter provides that the Audit Committee will pre-approve audit
      services and non-audit services to be provided by our independent auditors
      before the accountant is engaged to render these services. The Audit Committee
      should consult with management in the decision-making process, but may not
      delegate this authority to management. The Audit Committee may delegate its
      authority to pre-approve services to one or more committee members, provided
      that the designees present the pre-approvals to the full committee at the next
      committee meeting.





**PART
      IV**





**Item
      15. Exhibits andFinancial Statement
      Schedules**





(a)
      and
      (c) Documents filed:  Financial statements and financial statement
      schedules filed as part of this report are listed in the index included in
      Item
      8 of this report.





(b)
      Exhibits:





**Exhibit
                No.**
            **Description**3.1(i)
            Articles
                of Incorporation (1)3.1(ii)
            Amendment
                to Articles of Incorporation (2)3.2
            Amended
                and Restated Bylaws (2)4.1
            Specimen
                Stock Certificate (2)4.2
            Form
                of warrant agreement, including form of warrant (2)4.3
            Form
                of unit certificate (2)








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 Table
            of Contents








4.4
            Form
                of representative’s warrant (2)10.1
            2000
                Stock Option Plan (2)10.2
            2003
                Stock Option Plan (2)10.3
            Securities
                Purchase Agreement, dated February 10, 2003 (2)10.4
            Form
                of 12% Secured Convertible Debentures due March 31, 2004
                (2)10.5
            Form
                of Stock Purchase Warrant (2)10.6
            Form
                of Lock-Up Agreement executed by all officers, directors and 5%
                shareholders (2)10.7
            Form
                of Lock-Up Agreements for 12% Secured Convertible Debenture holders
                (2)10.8
            Employment
                Agreement between Q Comm International, Inc. and Paul C. Hickey
                (2)10.9
            Employment
                Agreement between Q Comm International, Inc. and Terry D. Kramer
                (3)10.10
            Employment
                Agreement between Q Comm International, Inc. and Michael K. Openshaw
                (3)10.11
            Employment
                Agreement between Q Comm International, Inc. and Michael D.
                Keough(4)10.12
            Employment
                Agreement between Q Comm International, Inc. and Mark W.
                Robinson(5)10.13
            Securities
                Purchase Agreement, dated May 20, 2003 (2)10.14
            Form
                of 12% Unsecured Promissory Note, due August 31, 2004, dated
                May 20, 2003 (2)10.15
            Form
                of Stock Purchase Warrant, dated May 20, 2003 (2)10.16
            Service
                Agreements between Q Comm International, Inc. and each of Cellcards
                of
                Illinois, Iowa Wireless and Hargray Wireless (2)10.17
            Agreement
                between Q Comm International, Inc. and PreCash Corporation
                (2)10.18
            WGR
                Ltd. Agreement (2)****10.19
            Marceco
                Ltd. Agreement (2)10.20
            Success
                Concepts Enterprises Inc. Agreement (2)****10.21
            510
                East Technology Avenue Lease (3)10.22#
            Agreement
                between Q Comm International, Inc. and Cricket Communications, Inc.
                (4)10.23
            2004
                Stock Option Plan (7)10.24
            9350
                South 150 East, Suite 840, Sandy, Utah****Lease*14
            Code
                of Ethics (2)








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            of Contents








16
            Letter
                from Tanner LC to the Securities and Exchange Commission, dated
                October 11, 2005 regarding change in certifying accountant
                (6)21
            Subsidiary
                schedule (3)23.1
            Consent
                of Hansen, Barnett &
                Maxwell*23.2
            Consent
                of Pritchett, Siler & Hardy,
                P.C. (this report is revised from the one previously filed with the
                Company's Form 10-KSB for the year ended December 31,
                2003)*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.(5)
            Previously
                filed as an exhibit to Form 10-KSB/A on August 10, 2005 and
                incorporated herein by reference.(6)
            Previously
                filed on October 11, 2005, as an exhibit in the Company’s Current
                Report on Form 8-K and incorporated herein by reference.(7)
            Previously
                filed on May 3, 2004, as Appendix C to Schedule 14a 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.








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 Table
            of Contents







**SIGNATU****RES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the registrant has duly caused this Annual Report on Form
      10-K
      for the year ended December 31, 2005, to be signed on its behalf by the
      undersigned, thereunto duly authorized, on March 31, 2006.





Q
      COMM
      INTERNATIONAL, INC.





By:
            /s/
                Michael D.
                KeoughMichael
                D. Keough,Chief
                Executive Officer, President and
                Director





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Annual Report
      on Form 10-K has been signed below by the following persons on behalf of the
      registrant and in the capacities indicated, on March 31, 2006.





**Name:**
            
            **Title:**/s/
                Michael D.
                Keough
              Michael
                D. Keough
            
            Chief
                Executive Officer, President and Director (Principal Executive
                Officer)/s/
                Mark W.
                Robinson
              Mark
                W. Robinson
            
            Chief
                Financial Officer, Secretary and Treasurer (Principal Accounting
                Officer)/s/
                William
                Jurika
            
            Chairman
                of the BoardWilliam
                Jurika/s/
                Gary
                Crook
            
            DirectorGary
                Crook/s/
                Harry
                Hargens
            
            DirectorHarry
                Hargens/s/
                Steven
                Phillips
            
            DirectorSteven
                Phillips/s/
                Thomas
                Tesmer
            
            DirectorThomas
                Tesmer













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