**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**


(Mark
      One)




x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      fiscal year ended December 31, 2005




OR




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      transition period _____ to _____





Commission
      file number 0-27751





**WQN,
      INC.**


(Name
      of
      small business issuer in its charter)




**Delaware**
            **75-2838415**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





**509
                Madison Ave., Suite 1510, New York, New York**
            **10022**(Address
                of principal executive offices)
            (Zip
                Code)





Issuer’s
      telephone number, including area code: (212) 774-3655





Securities
      registered pursuant to Section 12(b) of the Act: None




Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01
      per share




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act o




**Note** -
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections




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




YES x NO o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained herein, and none will 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-KSB or any amendment
      to
      this Form 10-KSB. o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)




Yes o No x




The
      issuer’s revenues for its most recent fiscal year were: N/A.




The
      aggregate market value of the voting common stock held by non-affiliates of
      the
      issuer, based on the closing sales price of $1.60 per share, was $5,736,344
      as
      of December 31, 2005.




At
      May
      26, 2006, the registrant had outstanding 6,878,062 shares of par value $.01
      common stock.







**DOCUMENTS
      INCORPORATED BY REFERENCE**





Transitional
      Small Business Disclosure Format (check one):


Yes o No x







**TABLE
      OF CONTENTS**







**PART
              I**ITEM
                1.
            DESCRIPTION
                OF BUSINESS
            3ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            7ITEM
                3.
            LEGAL
                PROCEEDINGS
            7ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            9**PART
                II**ITEM
                5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            9ITEM
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
            11ITEM
                7.
            FINANCIAL
                STATEMENTS
            32ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            32ITEM
                8A.
            CONTROLS
                AND PROCEDURES
            32**PART
                III**ITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(a) OF THE EXCHANGE ACT
            33ITEM
                10.
            EXECUTIVE
                COMPENSATION
            36ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
            37ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            38ITEM
                13.
            EXHIBITS
                AND REPORTS ON FORM 8-K
            41ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            42





2




**WQN,
      INC.**





**PART
      I**


ITEM
      1. DESCRIPTION OF BUSINESS





**Forward
      Looking Statements**





This
      Form
      10-KSB includes certain statements that are not historical facts and are deemed
      to be “forward looking statements” within the meaning of Section 21E of the
      Securities Exchange Act of 1934. See Item 6 - “Management’s Discussion and
      Analysis of Financial Condition or Plan of Operation — Forward Looking
      Statements” for a further discussion of these “forward looking
      statements.”





**General**





WQN
      Inc.
      (“WQN,” “Company” or “Registrant”) is a diversified financial services company
      whose goal is to be the financial partner of choice for small businesses. Our
      strategy is to provide capital and offer an array of financial services/products
      to businesses in the small business sector. Our primary lines of business are
      asset management and finance. We anticipate expanding our lines of business
      to
      include service offerings, such as consulting and insurance, to small
      businesses. WQN’s corporate headquarters moved after the VoIP Inc. sale
      transaction and we are now located in New York, NY. WQN’s operating businesses
      in which it invests are managed on both a centralized and decentralized basis.
      WQN’s corporate headquarters is involved in overseeing general and
      administrative activities, capital allocation and strategic direction, with
      some
      lesser involvement in the day-to-day business activities of the operating
      businesses.





We
      need
      to raise additional funds if, for example, we pursue business acquisitions
      or
      experience operating losses that exceed our current expectations. If we raise
      additional funds through the issuance of equity, equity-related securities
      or
      debt securities, such securities may have rights, preferences or privileges
      senior to those of the rights of our common stock and our stockholders may
      experience additional dilution. We cannot be certain that additional financing
      will be available to us on favorable terms or at all. We believe our available
      investments will provide sufficient liquidity in the event we do not raise
      funds
      during 2006 to fulfill our current obligations. WQN’s largest obligation is its
      commitment to fund an additional $7,700,000 in SeaView that is operated by
      the
      principal officers of WQN. WQN and SeaView have executed a standstill agreement
      whereby SeaView has agreed to not call any of the Company’s capital commitment
      unless WQN has the ability to pay all of its other obligations.




Following
      the sale of its Voice-Over-Internet Protocol business to VoIP, Inc. (“VoIP”) in
      October 2005, WQN has been repositioning its operations to focus on financial
      services, specifically in consumer and commercial finance, insurance and
      insurance services and asset management. As of December 31, 2005, WQN has
      acquired interests in three business groups:




**Cross
        Country Capital Partners, L.P.** In
        November 2004, WQN invested $3 million in Cross Country Capital Partners,
        L.P.
        (“Cross Country”), a partnership managed by an affiliate of E. Denton Jones, a
        director of WQN. WQN has an approximately 66% limited partnership interest
        in
        Cross Country. The majority of the partnership assets are to be invested
        in
        private investments in public entities. The partnership investments take
        the
        form of common equity, preferred equity, convertible debt and/or equity or
        debt
        securities. Among other investments, Cross Country has substantial investments
        in VoIP, SeaView Mezzanine Fund LP (“SeaView”) and Park Ave. Assoc. LLC
        (“PAA”). Included within the 2005 Cross Country activity were losses related to
        2004 of $46,087 and $645,000 in 2005 relating to financial irregularities
        involving investments of Cross Country.  These were discovered in 2006 by
        the current management of WQN. The 2004 results have not been restated due
        to
        the immateriality of the amount involved. The 2005 loss of $645,000 was recorded
        in its entirety in the fourth quarter. However, in May 2006 Cross Country
        agreed
        to return to WQN its initial $3 million capital contribution which allowed
        the
        Company to recognize a recovery of all previous losses on its investment
        in
        Cross Country as of December 31, 2005.


3




**SeaView
      Mezzanine Fund LP.** On June
      27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
      in
      SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
      has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
      the terms of the limited partnership agreement, WQN is treated as if it were
      a
      limited partner as of December 8, 2004. WQN has a limited partnership interest
      in SeaView, which equates to an equity investment in SeaView of approximately
      28% at December 31, 2005. SeaView invests in mezzanine securities in a
      diversified portfolio of small to mid-size companies. Scott Hartman, our Chief
      Executive Officer and a director, David S. Montoya, our Chief Financial Officer
      and a director, Robert Farmer, a director, and an affiliate of E. Denton Jones,
      a director, each hold a financial interest in the general partner of
      SeaView.





**Park
      Ave. Assoc. LLC.** Effective October 31, 2005, WQN entered into a securities purchase agreement
      (the “Securities Purchase Agreement”) pursuant to which the Company subscribed
      for a 50.9% membership interest in Park Ave. Assoc. LLC (“PAA”) in exchange for
      the contribution of a capital commitment to PAA of $5,600,000 in cash to be
      funded over time. PAA was established as a real estate development company
      specializing in the acquisition and development of properties for small business
      use and for communities designed for the active adult lifestyle. An additional
      $5.4 million was to be invested over time by the other members of PAA for a
      total capitalization of $11 million. Although WQN became entitled to elect
      3 of
      the 5 members of PAA’s Board of Managers, control over PAA’s day-to-day
      activities was exercised by PAA’s chief executive officer.





Pursuant
      to the Securities Purchase Agreement, WQN made capital contributions to PAA
      aggregating approximately $3.6 million as of December 31, 2005. In the course
      of
      its review of various documents relating to certain real estate investments
      purportedly entered into by the former chief executive officer of PAA, WQN
      discovered certain irregularities. On February 2, 2006, WQN caused the Board
      of
      Managers of PAA to remove said chief executive officer and appoint Scott W.
      Hartman as the interim chief executive officer of PAA and David S. Montoya
      as
      the interim chief financial officer of PAA. The new management of PAA has met
      with various persons with whom the former chief executive officer of PAA had
      business dealings and discovered that a number of the transactions in which
      PAA
      was purportedly involved were in fact improperly conducted. See “Item 3-
      Litigation.” As a result of these discoveries, WQN has taken a write-down for
      2005 in the amount of $2,577,001. See “Item 6 - Management’s Discussion and
      Analysis or Plan of Operations”. However, in May 2006, WQN reached a settlement
      regarding the PAA transaction and WQN has received $1 million in cash and a
      note
      receivable for $1 million which is payable over 18 months. As a result of the
      settlement WQN has written down it’s PAA investment to $1 million.





**VoIP,
      Inc.** A
      substantial portion of our assets are in securities of VoIP, Inc. On October
      5,
      2005, WQN completed the sale of its Voice-Over-Internet Protocol business (the
      “Sale”) to VoIP Acquisition Company, a Delaware corporation (the “Purchaser”),
      pursuant to the Asset Purchase Agreement, dated as of August 3, 2005, by and
      among the Company, VoIP, Inc., a Texas corporation (“VoIP”) and the Purchaser
      (such Asset Purchase Agreement, the “APA”). Pursuant to the APA, the Company
      received, in connection with the Sale, total consideration of (i) a $3.7 million
      secured convertible promissory note issued by VoIP, convertible into 3,489,100
      shares of common stock of VoIP, (ii) 1,750,000 shares of VoIP’s restricted
      common stock and (iii) a warrant to purchase 5,000,000 shares of VoIP’s common
      stock at an exercise price of $0.001 per share, plus the assumption of certain
      liabilities by VoIP. If fully converted the Company would own approximately
      14.6% of VoIP, Inc. VoIP is involved in the internet telephony business. Its
      public trading symbol is VOII.OB.





In
      addition to fostering organic growth, WQN is pursuing additional acquisitions
      and developing new operational businesses in the diversified financial services
      industry to expand its portfolio of services and grow revenues.


4




**Management
      Services Agreement.** We
      entered into a management agreement with WQNI Management Group LLC (f/k/a WQNI
      Capital Advisors, LLC) (“WQNI Management”). WQNI Management is a Delaware
      limited liability company formed solely for the purpose of providing management
      services to us. Scott W. Hartman, B. Michael Adler, E. Denton Jones and David
      S.
      Montoya, who are four of our directors and certain of our officers, comprise
      all
      of the managing members of WQNI Management. Each of them, or their affiliates,
      own 25% of WQNI Management. The material elements of our management agreement
      are summarized below. The statements that follow are subject to and qualified
      in
      their entirety by reference to all of the provisions of the management
      agreement, a form of which has been incorporated by reference as an exhibit
      to
      this Form 10-KSB.




The
      management agreement defines our manager’s duties and responsibilities as
      follows: (i) to provide  us
      with
      suitable experienced professionals to enable us to conduct our operations;
      (ii)
      to provide us an office facility within the New York City metropolitan area
      to
      enable us to conduct our business operations, including furnishing such office
      with office equipment (including computers and software) and furniture suitable
      to enable us to conduct our business operations and all janitorial service,
      utility service, local and long distance telephone, high speed internet
      connections and fax service, and other similar services necessary to the conduct
      of such operations; and (iii) to seek suitable investment opportunities and
      manage our investment policy; perform our day-to-day investment and business
      operations; provide investment advice; and prepare and disseminate all necessary
      reports and financial statements to our management and board of
      directors.




Without
      the written approval of our board of directors, WQNI Management shall not
      commit, or enter into any agreement, on our behalf with respect to: (i) the
      incurrence any indebtedness for borrowed money; (ii) any investment by us,
      other
      than the investment of cash in short-term permitted investments in the ordinary
      course of business; or (iii) any other material contract.




WQNI
      Management is responsible for the payment of: (i) the compensation of all
      employees of WQNI Management; and (ii) the costs of providing services under
      the
      management agreement to us, except for those expenses described below, including
      office expenses, travel, business development, office and equipment rental,
      bookkeeping and the development, underwriting, due diligence, investigation
      and
      monitoring of investments. We pay all of our other expenses directly,
      including our legal fees, audit expenses, directors and officers insurance,
      other expenses related to being a public company and direct transaction
      expenses.




In
      consideration for the services provided to us by WQNI Management, we have agreed
      to pay to WQNI Management the following consideration: (i) one-half of one
      percent (.5%) of Total Assets (as defined below), payable on May 15, August
      15,
      November 15 and March 31, based on our financial statements at the end of the
      fiscal quarter immediately preceding the payment date (the “Base Management
      Fee”); and (ii) an incentive fee equal to 20% of the excess, if any, of our Net
      Investment Income (as defined below) for each of our fiscal quarters that
      exceeds the Priority Return (as defined below), payable on May 15, August 15,
      November 15 and March 31, based on our financial statements determined in
      accordance with generally accepted accounting principles, consistently applied,
      at the end of the fiscal quarter immediately preceding the payment date (the
      “Incentive Fee”); and (iii) an incentive fee (“Capital Gains Fee”) equal to 20%
      of our net Realized Capital Gains (Realized Capital Gains (as defined below)
      less Realized Capital Losses (as defined below)) on a cumulative basis for
      each
      of our fiscal years following October 11, 2005, minus any Unrealized Capital
      Depreciation (as defined below) at the end of such fiscal year and minus the
      aggregate amount of all Capital Gains Fees paid to WQNI Management in our prior
      fiscal years, payable on April 15 of each year based on our audited financial
      statements for our prior fiscal year; provided, however, that no Capital Gains
      Fees shall be paid to  WQNI
      Management with respect to our investment in SeaView.




As
      used
      herein, the following terms have the following meanings: (i) “Total Assets”
means the amount of our gross assets as set forth on our applicable financial
      statements at the end of the fiscal quarter immediately preceding the payment
      date, as determined in accordance with generally accepted accounting principles,
      consistently applied; provided, however, that in computing Total Assets the
      gross book value with respect to our investment in SeaView shall be excluded
      from the calculation of Total Assets; (ii) “Net Investment Income” shall mean
      our interest income, dividend income, and any other income (including any other
      fees such as commitment, origination, syndication, structuring, diligence,
      managerial assistance, monitoring, and consulting fees or other fees that we
      receive from portfolio companies or investments) which are collected during
      the
      fiscal quarter of our company; minus our operating expenses for the fiscal
      quarter (including the Base Management Fee and any interest expense, but
      excluding the Incentive Fee and the Capital Gains Fee); provided, however,
      that
      any Net Investment Income with respect to the our investment in SeaView shall
      be
      excluded from the calculation of Net Investment Income. Net Investment Income
      does not include Realized Capital Gains, Realized Capital Losses or Unrealized
      Capital Depreciation; (iii) “Priority Return” means a rate equal to 1.5% (6%
      annualized) of the our Total Assets; (iv) “Realized Capital Gains” on each of
      our investments will be calculated as the excess of the net amount realized
      from
      the sale or other disposition of such investment over the original cost of
      the
      investment (less any Unrealized Capital Depreciation with respect to such
      investment which was deducted with respect to the payment of any Capital Gains
      Fees in any prior fiscal year); (v) “Realized Capital Losses” on each of our
      investments will be calculated as the amount by which the net amount realized
      from the sale or other disposition of such investment is less than the original
      cost of such investment; and (vi) “Unrealized Capital Depreciation” on each of
      our investments will be calculated as the amount by which the original cost
      of
      such investment exceeds the fair value of such investment as of the end of
      a
      fiscal year of the Company.


5




The
      management agreement has a ten year term and is scheduled to expire on October
      11, 2015. We may not terminate the management agreement earlier except upon
      the
      occurrence of any of the following events: (i) our total assets (as defined
      in
      the management agreement) for two consecutive fiscal quarters are not at least
      equal to 60% of our total assets on October 11, 2005 which were approximately
      $15 million; (ii) E. Denton Jones, B. Michael Adler, David S. Montoya or Scott
      W. Hartman withdraw as members of the management company, other than as a result
      of death or disability; or (iii) either Mr. Hartman or Mr. Montoya voluntarily
      terminates their employment with us.




Upon
      the
      occurrence of any such triggering event, we may terminate the management
      agreement upon written notice to WQNI Management within 30 days following the
      occurrence of such event.




In
      addition, either we or WQNI Management may terminate the management agreement
      upon written notice to the breaching party following the occurrence of a
      material breach of the management agreement by the other party if either:
      (i) the material breach relates to the failure to pay amounts due under the
      management agreement and such breach continues unremedied for 10 days after
      notice; or (ii) the other party materially breaches the terms of the management
      agreement and such breach continues unremedied for 30 days after
      notice.




As
      of
      December 31, 2005, Eagle Venture Capital, LLC (“Eagle Venture”) owned
      approximately 2.6 million, or 38%, of our outstanding shares of common stock.
      Eagle Venture is primarily owned by B. Michael Adler, our founder, a director
      and former Chief Executive Officer.




In
      November 2004, we changed our name to WQN, Inc. from WorldQuest Networks, Inc.
      (see Item 3-Legal Proceedings in Part I of this Report).




**Competition**





A
      number
      of entities compete with us for acquisitions of, and investments in, small
      and
      middle market companies. We compete with public and private buyout funds,
      commercial and investment banks, commercial financing companies, and, to the
      extent they provide an alternative form of financing, hedge funds. Many of
      our
      competitors are substantially larger and have considerably greater financial,
      technical, and marketing resources than we do. For example, some competitors
      may
      have a lower cost of funds and access to funding sources that are not available
      to us. In addition, some of our competitors may have higher risk tolerances
      or
      different risk assessments, which would allow them to consider a wider variety
      of acquisitions and investments and establish more relationships than us. The
      competitive pressures we face could have a material adverse effect on our
      business, financial condition, and results of operations. Also, as a result
      of
      this competition, we may not be able to take advantage of attractive
      opportunities to obtain controlled companies and minority investments from
      time
      to time, and we can offer no assurance that we will be able to identify and
      make
      acquisitions and investments that are consistent with our objectives. We may
      lose investment opportunities if we do not match our competitors’ pricing,
      terms, and structure. If we match our competitors’ pricing, terms, and
      structure, we may experience a decreased return on our controlled companies
      and
      minority investments.




6




**Environmental
      Matters**





Environmental
      contingencies are not expected to have a material adverse effect on our results
      of operations or financial condition.




**Government
      Regulations**





In
      order
      to maintain our status as a public company, we are subject to the reporting
      requirements of the federal securities laws. Compliance with these reporting
      requirements entails substantial costs. However, failure to remain in compliance
      with these reporting requirements would adversely affect our ability to maintain
      our listing on Nasdaq and our ability to take advantage of our status as a
      listed company in making future acquisitions. On April 18, 2006, we received
      a
      Nasdaq Staff Determination stating that WQN is in violation of a requirement
      for
      continued listing set forth in Marketplace Rule 4310(c)(14), which requires
      a
      Nasdaq-listed company to file its Annual Report on Form 10-KSB (“Form 10-KSB”)
      with Nasdaq on or before the date it is required to be filed with the Securities
      and Exchange Commission. WQN’s Form 10-KSB was required to be filed with the
      Securities and Exchange Commission by the close of business on April 17, 2006.
      However, WQN was not able to file such Form 10-KSB until May 30, 2006. Nasdaq
      further informed WQN that its common stock is, therefore, subject to delisting
      from Nasdaq. Filing of this Form 10-KSB satisfies the requirements of such
      delisting letter.





Since
      some of our current investments are minority interests and we may make future
      acquisitions of minority interests, we will need to take steps to avoid becoming
      subject to regulation as an “investment company” for purposes of the Investment
      Company Act of 1940. From the date of the Sale to VoIP in October 2005, we
      are
      relying on an exemption from the Investment Company Act for transient investment
      companies. However, we can only rely on that exemption for one year in any
      three-year period. Our intention is to become engaged primarily in a business
      other than investing in “investment securities” for purposes of the Investment
      Company Act by the end of that one-year period, but we cannot assure you that
      we
      will be successful. The Investment Company Act and the rules and regulations
      promulgated under the act are extremely restrictive. Compliance with the
      Investment Company Act would be very costly, and it could be difficult for
      us to
      execute our business plan if we were subject to its requirements. In addition,
      if we acquire controlling interests in additional operating businesses in the
      future, we may become subject to additional applicable federal, state and
      foreign government regulations.





**Employees**





As
      of
      December 31, 2005, we had 7 full-time employees, including 5 employees of WQNI
      Management Group, LLC, which provides management services to WQN pursuant to
      a
      management services agreement. See “Item 6- Management’s Discussion and Analysis
      or Plans of Operations - Management Services Agreement.” None of our employees
      are represented by a labor union. We have not experienced any work stoppages
      and
      consider our employee relations to be good.





ITEM
      2. DESCRIPTION OF PROPERTY





Our
      executive offices are located in New York, New York, where we are provided
      workspace of approximately 2,500 square feet under a management services
      agreement. The lease for the space expires in November 2010. We also have office
      space in Dallas, Texas at a monthly rental of approximately $10,400 which we
      partially sublet to VoIP, Inc for $5,000 per month. Such lease expires August
      31, 2006. We believe our space is adequate for our current needs. As we expand,
      we expect that suitable additional space will be available on commercially
      reasonable terms, although no assurance can be made in this regard. We also
      believe our property is adequately covered by insurance.





ITEM
      3. LEGAL PROCEEDINGS





In
      December 1996, the Company applied to the United States Patent and Trademark
      Office to register the trademarks: “WorldQuest” and “WorldQuest Networks.” We
      received a registration for the trademark “WorldQuest” from the U.S. Patent and
      Trademark Office on November 23, 1999. In October 1997, the Patent and Trademark
      Office issued a notice of publication regarding our application to register
      “WorldQuest Networks” as a trademark. In response to that notice, Qwest
      Communications filed a notice of opposition in September 1998. Qwest
      Communications instituted a cancellation proceeding in the Patent and Trademark
      Office for the registered trademark “WorldQuest.” In December 2001, a judgment
      was made in the Company’s favor whereby Qwest’s motion to cancel our
“WorldQuest” trademark was dismissed, however, Qwest filed a motion appealing
      the judgment. In December 2002, Qwest filed a separate complaint stating that
      the Company’s prepaid cash card product infringes on the Qwest trademark. In
      February 2003, the companies settled all outstanding claims whereby WorldQuest
      received a cash payment and telecommunication services (primarily long distance
      termination) from Qwest and Qwest retained all rights to the trademarks in
      question. Pursuant to the term of a settlement agreement with Qwest
      Communications arising out of a trademark dispute, on November 9, 2004 the
      Company changed its name to WQN, Inc. from WorldQuest Networks,
      Inc.




7




Effective
      October 31, 2005, WQN entered into a Securities Purchase Agreement with Park
      Ave. Assoc. LLC, a Delaware limited liability company (“PAA”) pursuant to which
      the Company subscribed for a 50.9% membership interest in PAA in exchange for
      the contribution of a capital commitment to PAA of $5.6 million in cash to
      be
      funded over time. PAA was established as a real estate development company
      specializing in the acquisition and development of properties for small business
      use and for communities designed for the active adult lifestyle. An additional
      $5.4 million was to be invested over time by the other members of PAA for a
      total capitalization of $11 million. Although WQN became entitled to elect
      3 of
      the 5 members of PAA’s Board of Managers, control over PAA’s day-to-day
      activities was exercised by PAA’s chief executive officer. The financial
      statements of the Company reflect that PAA has no assets or liabilities at
      December 31, 2005.




Pursuant
      to the Securities Purchase Agreement, WQN made capital contributions to PAA
      aggregating approximately $3.6 million as of December 31, 2005. In the course
      of
      its review of various documents relating to certain real estate investments
      purportedly entered into by the former chief executive officer of PAA, WQN
      discovered certain irregularities. On February 2, 2006, WQN caused the Board
      of
      Managers of PAA to remove said chief executive officer and appoint Scott W.
      Hartman as the interim chief executive officer of PAA and David S. Montoya
      as
      the interim chief financial officer of PAA. The new management of PAA has met
      with various persons with whom the former chief executive officer of PAA had
      business dealings and discovered that a number of the transactions in which
      PAA
      was purportedly involved were in fact improperly conducted. As a result of
      these
      discoveries, WQN has taken a write-down for 2005 in the amount of
      $2,577,001




On
      February 9, 2006, WQN commenced litigation against Mark C. Hotton, the former
      chief executive officer of PAA, and certain other persons and entities, seeking
      the return of the monies involved in the transactions that the Company alleges
      were improperly conducted at PAA. On February 14, 2006, the Supreme Court of
      the
      State of New York issued an Order to Show Cause with Temporary Restraining
      Order
      against Mr. Hotton and certain others.





On
      May
      17, 2006, WQN, Inc., a Delaware corporation, (“WQN”) and PAA (“Park Ave.
      Delaware’) entered into a Settlement Agreement (the "Settlement Agreement"), by
      and among WQN, Park Ave. Delaware (WQN and Park Ave. Delaware are collectively
      referred to as the “WQN Parties” or the “Company”), Mark C. Hotton (“Hotton”),
      154 TH Street
      Corp. (“154 TH Street”), Pioneer Ventures LLC (“Pioneer”), The Rising Child Foundation (“Rising
      Child”), Mark C. Hotton Trust (the “Hotton Trust”), Mark C. Hotton Living Trust
      (the “Hotton Living Trust”), Edward Johnson (“Johnson”), Park Ave. Assoc. LLC, a
      New Jersey limited liability company (“Park Ave. New Jersey”) (Hotton,
      154 th Street,
      Pioneer, Rising Child, the Hotton Trust, the Hotton Living Trust, Johnson and
      Park Ave. New Jersey are collectively referred to as the “Hotton Parties”) and
      certain other parties.




The
      Hotton Parties will pay to the Company the agreed upon sum of $2,000,000 as
      follows: $1,000,000 upon the release of the Eastern District Funds (defined
      below); and $1,000,000 in installments over a period of 18 months as follows:
      (i) $150,000 on or before the 6 month anniversary of the date of the Settlement
      Agreement; (ii) $150,000 dollars on or before the 9 month anniversary of the
      date of the Settlement Agreement; (iii) $150,000 on or before the 1 year
      anniversary of the date of the Settlement Agreement; (iv) $275,000 on or before
      the 15 month anniversary of the date of the Settlement Agreement; and (v)
      $275,000 on or before the 18 month anniversary of the date of the Settlement
      Agreement. “Eastern District Funds” means certain monies deposited into an
      interest bearing account with the United States District Court, Eastern District
      of New York, with respect to a lawsuit pending in such court by and among Spina,
      Hotton, WQN and certain other parties. Contemporaneous with the entry into
      the
      Settlement Agreement, certain lawsuits involving various parties to the
      Settlement Agreement were dismissed with prejudice and the parties entered
      into
      general releases with each other. The Eastern District Funds were released
      to
      WQN on May 19, 2006.





WQN
      is
      currently involved as the defendant and counter-claimant in an arbitration
      dispute styled: Dr. Alex Parsinia v. WQN, Inc. (f/k/a World Quest Networks,
      Inc.); Arbitration before the International Institute for Conflict Prevention
      and Resolution. The dispute arises from an Asset Transfer Agreement and Addendum
      thereto that WQN entered into in 2003. The transferor, Dr. Alex Parsinia, claims
      that WQN breached the Asset Transfer Agreement. WQN claims that Dr. Parsinia
      breached the agreement, converted WQN’s proprietary information, and committed
      fraud. Pursuant to the Asset Transfer Agreement and Addendum thereto, WQN and
      Dr. Parsinia will arbitrate their claims before the International Institute
      for
      Conflict Prevention and Resolution in Dallas, Texas. WQN believes the
      transferor’s claims are without merit. At this point in time the amount of
      damages, if any, is not known although management does not believe, that when
      known, it will be material.




8




WQN
      is
      also in the initial stages of responding to a second matter involving Dr.
      Parsinia. This second matter has been asserted by Hossein Haghighi in the form
      of a letter demand dated March 8, 2006. Mr. Haghighi claims that WQN is liable
      for damages he sustained as a result of a business transaction with Dr.
      Parsinia. He claims that he purchased calling cards from Dr. Parsinia of
      SuperTel that turned out to be defective and unusable. WQN has requested
      additional information from Mr. Haghighi’s attorney regarding the claim,
      however, no response has been received as of May 30, 2006. It is unclear when
      Mr. Haghighi’s claim arose and therefore, WQN’s potential liability for this
      matter is also unclear as facts pertinent to issues of liability and successor
      liability are currently unknown.





ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





The
      annual meeting of WQN’s stockholders was held on October 4, 2005. The following
      matters were submitted to our stockholders for their vote and the results of
      the
      vote taken at the meeting were as follows:





1.
      At the
      meeting, the directors named below were elected to hold office until the 2006
      annual meeting of stockholders or until their successors are elected and
      qualified. Following is a tabulation of the votes relating to the election
      of
      directors:





**Name**
            **Shares
                voted**
              **“for”**
            **Shares
                voted**
              **“against”**
            **Shares**
              **withheld**B.
                Michael Adler
            3,278,324
            -
            157,018E.
                Denton Jones
            3,273,624
            -
            161,718Robert
                A. Farmer
            3,273,484
            -
            161,858Elizabeth
                M. Buchler
            3,273,484
            -
            161,858Hal
                H. Bibee
            3,278,324
            -
            157,018Scott
                W. Hartman
            3,278,324
            -
            157,018David
                S. Montoya
            3,272,124
            -
            163,218





2.
      The
      proposal to approve the Asset Purchase Agreement by and among WQN, VoIP and
      the
      Purchaser and the sale of WQN’s Voice-Over-Internet-Protocol Business, as
      contemplated by the Asset Purchase Agreement was ratified by a vote of 3,337,042
      “for” ratification and 94,440 abstaining.





3.
      The
      proposal to approve an amendment to the Company’s 2002 Stock Option Plan to
      increase the number of shares of Common Stock reserved for issuance under the
      Plan from 750,000 to 1,250,000 was ratified by a vote of 3,191,071 “for”
ratification and 242,471 abstaining.





4.
      The
      proposal to ratify the appointment of Grant Thornton LLP as the Company’s
      independent accountants for the fiscal year ending December 21, 2005 was
      ratified by a vote of 3,356,842 “for” ratification and 76,500
      abstaining.





**PART
      II**





ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





WQN’s
      Common Stock trades on the NASDAQ National Market under the symbol “WQNI”. The
      following table sets forth the per share range of high and low sales prices
      of
      our Common Stock for the periods indicated:




9




**High**
            
            **Low*****Year
                ended December 31, 2005***First
                Quarter
            
            $
            3.80
            
            $
            1.87Second
                Quarter
            
            $
            2.27
            
            $
            1.67Third
                Quarter
            
            $
            2.10
            
            $
            1.22Fourth
                Quarter
            
            $
            2.00
            
            $
            1.30***Year
                ended December 31, 2004***First
                Quarter
            
            $
            7.65
            
            $
            3.01Second
                Quarter
            
            $
            5.38
            
            $
            2.35Third
                Quarter
            
            $
            3.70
            
            $
            1.84Fourth
                Quarter
            
            $
            3.80
            
            $
            1.98





As
      of
      March 31, 2006, there were approximately 25 stockholders of record of our Common
      Stock and approximately 650 additional beneficial owners of our Common Stock.





On
      April
      18, 2006, we received a Nasdaq Staff Determination stating that WQN is in
      violation of a requirement for continued listing set forth in Marketplace Rule
      4310(c)(14), which requires a Nasdaq-listed company to file its Annual Report
      on
      Form 10-KSB (“Form 10-KSB”) with Nasdaq on or before the date it is required to
      be filed with the Securities and Exchange Commission. WQN’s Form 10-KSB was
      required to be filed with the Securities and Exchange Commission by the close
      of
      business on April 17, 2006. However, WQN was not able to file such Form 10-KSB
      until May 30, 2006. Nasdaq further informed WQN that its common stock is,
      therefore, subject to delisting from Nasdaq. Filing of this Form 10-KSB
      satisfies the requirements of such delisting letter.





One
      of
      the independent directors of WQN, Adam Blumenthal, resigned on February 8,
      2006.
      Mr. Blumenthal stated that he was resigning because his personal business
      ventures would not permit him to devote the time and attention necessary to
      fulfill his obligations as a board member. Mr. Blumenthal’s resignation was not
      the result of any disagreement on any matter relating to the Company’s
      operations, policies or practices. As a consequence of Mr. Blumenthal’s
      resignation from WQN’s Board of Directors, the Company received written notice
      from the Nasdaq National Market (“Nasdaq”) on February 14, 2006 that the Company
      no longer complies with Nasdaq Marketplace Rule 4350(c)(1), which requires
      a
      Nasdaq-listed company to have a majority of independent directors serving on
      its
      board. Pursuant to its rules, Nasdaq has granted the Company a cure period
      until
      the earlier of February 8, 2007 or the Company’s next stockholders meeting in
      order to regain compliance with this rule. If the Company has not regained
      compliance by such date, Nasdaq may delist the Company’s common stock. The board
      has initiated a search for a new independent director and intends to appoint
      a
      suitable replacement to fill the vacancy, and regain compliance, as soon as
      practicable.





**Dividend
      Policy**





We
      have
      never paid cash dividends on our Common Stock and anticipate that we will
      continue to retain our earnings, if any, to finance the growth of our business.





**Equity
      Compensation Plan Information**





Shown
      below is information concerning all equity compensation plans and individual
      compensation arrangements in effect as of December 31, 2005.




10




**Equity
      Compensation Plan Information**




**Plan
                Category**
            **Number
                of Securities**
              **To
                Be Issued Upon**
              **Exercise
                of**
              **Outstanding
                Options**
            **Weighted
                Average**
              **Exercise
                Price of**
              **Outstanding
                Options**
            **Number
                of Securities**
              **Remaining
                Available**
              **For
                Future Issuance**
              **Under
                Equity**
              **Compensation
                Plans**Equity
                compensation plans approved by security holders
            1,602,489
            $2.90
            313,515







ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS





The
      following discussion of the financial condition and results of operations of
      WQN, Inc. should be read in conjunction with the Management’s Discussion and
      Analysis or Plan of Operation (including Risk Factors That May Affect Results
      of
      Operations and Financial Condition) and the Consolidated Financial Statements
      and the Notes thereto included in the Company’s Annual Report on Form 10-KSB for
      the year ended December 31, 2005.





***Forward-Looking
      Statements***





Certain
      statements in this report, including statements of WQN’s and management’s
      expectations, intentions, plans and beliefs, including those contained in or
      implied by “Management’s Discussion and Analysis or Plan of Operation” and the
      Notes to Condensed Consolidated Financial Statements, are “forward-looking
      statements”, within the meaning of Section 21E of the Securities Exchange Act of
      1934, as amended (the “Exchange Act”), that are subject to certain events, risks
      and uncertainties that may be outside WQN’s control. These forward-looking
      statements include statements of management’s plans and objectives for WQN’s
      future operations and statements of future economic performance, information
      regarding our expansion and possible results from expansion, our expected
      growth, our capital budget and future capital requirements, the availability
      of
      funds and our ability to meet future capital needs, the realization of our
      deferred tax assets, and the assumptions described in this report underlying
      such forward-looking statements. Actual results and developments could differ
      materially from those expressed in or implied by such statements due to a number
      of factors, including, without limitation, those described in the context of
      such forward-looking statements, our expansion and acquisition strategy, our
      ability to achieve operating efficiencies, general economic and business
      conditions, the strength and financial resources of our competitors, our ability
      to find and retain skilled personnel, the political and economic climate in
      which we conduct operations and the risk factors described from time to time
      in
      our other documents and reports filed with the Securities and Exchange
      Commission (the “Commission”).





***Overview***





WQN
      Inc.
      (“WQN,” “Company” or “Registrant”) is a diversified financial services company
      whose goal is to be the financial partner of choice for small businesses. Our
      strategy is to provide capital and offer an array of financial services/products
      to businesses in the small business sector. Our primary lines of business are
      asset management and finance. We anticipate expanding our lines of business
      to
      include service offerings, such as consulting and insurance, to small
      businesses. WQN’s corporate headquarters moved after the VoIP Inc. sale
      transaction and we are now located in New York, NY. When WQN expands its
      operating businesses they will be managed on both a centralized and
      decentralized basis. WQN’s corporate headquarters will be involved in overseeing
      general and administrative activities, capital allocation and strategic
      direction, with some lesser involvement in the day-to-day business activities
      of
      the operating businesses.





Following
      the sale of its Voice-Over-Internet Protocol business in October 2005, WQN
      has
      been repositioning its operations to focus on financial services, specifically
      in consumer and commercial finance, insurance, insurance services and asset
      management. As of December 31, 2005, WQN has acquired interests in three
      business groups:




11




**Cross
      Country Capital Partners, L.P.** In
      November 2004, WQN invested $3 million in Cross Country Capital Partners, L.P.
      (“Cross Country”), a partnership managed by an affiliate of E. Denton Jones, a
      director of WQN. WQN has an approximately 66% limited partnership interest
      in
      Cross Country. The majority of the partnership assets are to be invested in
      private investments in public entities. The partnership investments will take
      the form of common equity, preferred equity, convertible debt and/or equity
      or
      debt securities. Among other investments, Cross Country has substantial
      investments in VoIP, SeaView and PAA. Included within the 2005 loss
      relating to the investment in Cross Country is $46,087 relating to 2004 and
      $645,000 relating to 2005 arising from financial improprieties involving
      investments of Cross Country in 2004 and 2005.  These financial
      improprieties were discovered in 2006 by the current management of WQN. The
      2004
      results have not been restated due to the immateriality of the amount
      involved.





On
      May
      17, 2006, WQN and PAA (PAA collectively with WQN, the “WQN Parties”) entered
      into an agreement (the “Cross Country Agreement”), with E. Denton Jones
      (“Jones”) and Cross Country (Jones and Cross Country are collectively referred
      to as the “Jones Parties”). Pursuant to the Cross Country Agreement, WQN
      completely withdrew its investment in Cross Country Capital Partners, LP. Cross
      Country will transfer to WQN as the return of its capital (“Return of Capital”),
      the sum of two million eight hundred fifty thousand dollars ($2,850,000). The
      Return of Capital shall be made to WQN in the following manner: (i) by the
      payment on the earlier of the closing of the Enabling Mortgages (as defined
      in
      the Cross Country Agreement) and August 16, 2006, of the sum of $200,000 in
      cash; and (ii) by the transfer within ten (10) business days of date of the
      Cross Country Agreement, of restricted shares of VOIP, Inc. common stock (the
      “Stock”); the number of shares of the Stock shall be equal to the quotient
      whereby (i) the numerator is $2,650,000 and (ii) the denominator is the volume
      weighted average price of the Stock for the five (5) trading days preceding
      the
      date of the Cross Country Agreement. The terms of the Cross Country Agreement
      also provide that the parties enter into general releases with each other.
      E.
      Denton Jones is a director of WQN. Prior to May 17, 2006 Cross Country had
      returned $150,000 in cash to WQN.





**SeaView
      Mezzanine Fund LP.** On June
      27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
      in
      SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
      has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
      the terms of the limited partnership agreement, WQN is treated as if it were
      a
      limited partner as of December 8, 2004. WQN has a limited partnership interest
      in SeaView, which equates to an equity investment in SeaView of approximately
      28% at December 31, 2005. SeaView invests in mezzanine securities in a
      diversified portfolio of small to mid-size companies. Scott Hartman, our Chief
      Executive Officer and a director, David S. Montoya, our Chief Financial Officer
      and a director, Robert Farmer, a director, and an affiliate of E. Denton Jones,
      a director, each hold a financial interest in the general partner of
      SeaView.





**Park
      Ave. Assoc. LLC.** Effective October 31, 2005, WQN entered into a Securities Purchase Agreement
      with Park Ave. Assoc. LLC, a Delaware limited liability company (“PAA”) pursuant
      to which the registrant subscribed for a 50.9% membership interest in PAA in
      exchange for the contribution of a capital commitment to PAA of $5.6 million
      in
      cash to be funded over time. PAA was established as a real estate development
      company specializing in the acquisition and development of properties for small
      business use and for communities designed for the active adult lifestyle. An
      additional $5.4 million was to be invested over time by the other members of
      PAA
      for a total capitalization of $11 million. Although WQN became entitled to
      elect
      3 of the 5 members of PAA’s Board of Managers, control over PAA’s day-to-day
      activities was exercised by PAA’s chief executive officer.




Pursuant
        to the Securities Purchase Agreement, WQN made capital contributions to PAA
        aggregating approximately $3.6 million as of December 31, 2005. In the course
        of
        its review of various documents relating to certain real estate investments
        purportedly entered into by the former chief executive officer of PAA, WQN
        discovered certain irregularities. On February 2, 2006, WQN caused the Board
        of
        Managers of PAA to remove said chief executive officer and appoint Scott
        W.
        Hartman as the interim chief executive officer of PAA and David S. Montoya
        as
        the interim chief financial officer of PAA. The new management of PAA has
        met
        with various persons with whom the former chief executive officer of PAA
        had
        business dealings and discovered that a number of the transactions in which
        PAA
        was purportedly involved were in fact improperly conducted. As a result of
        these
        discoveries, WQN has taken a write-down for 2005 in the amount of
        $2,577,001.


On
      February 9, 2006, WQN commenced litigation against Mark C. Hotton, the former
      chief executive officer of PAA, and certain other persons and entities, seeking
      the return of the monies involved in the transactions that the Company alleges
      were improperly conducted at PAA. On February 14, 2006, the Supreme Court of
      the
      State of New York issued an Order to Show Cause with Temporary Restraining
      Order
      against Mr. Hotton and certain others.





12


On
      May
      17, 2006, WQN, Inc., a Delaware corporation, (“WQN”) and PAA (“Park Ave.
      Delaware’) entered into a Settlement Agreement (the "Settlement Agreement"), by
      and among WQN, Park Ave. Delaware (WQN and Park Ave. Delaware are collectively
      referred to as the “WQN Parties” or the “Company”), Mark C. Hotton (“Hotton”),
      154 TH Street
      Corp. (“154 TH Street”), Pioneer Ventures LLC (“Pioneer”), The Rising Child Foundation (“Rising
      Child”), Mark C. Hotton Trust (the “Hotton Trust”), Mark C. Hotton Living Trust
      (the “Hotton Living Trust”), Edward Johnson (“Johnson”), Park Ave. Assoc. LLC, a
      New Jersey limited liability company (“Park Ave. New Jersey”) (Hotton,
      154 th Street,
      Pioneer, Rising Child, the Hotton Trust, the Hotton Living Trust, Johnson and
      Park Ave. New Jersey are collectively referred to as the “Hotton Parties”) and
      certain other parties.




The
      Hotton Parties will pay to the Company the agreed upon sum of $2,000,000 as
      follows: $1,000,000 upon the release of the Eastern District Funds (defined
      below); and $1,000,000 in installments over a period of 18 months as follows:
      (i) $150,000 on or before the 6 month anniversary of the date of the Settlement
      Agreement; (ii) $150,000 dollars on or before the 9 month anniversary of the
      date of the Settlement Agreement; (iii) $150,000 on or before the 1 year
      anniversary of the date of the Settlement Agreement; (iv) $275,000 on or before
      the 15 month anniversary of the date of the Settlement Agreement; and (v)
      $275,000 on or before the 18 month anniversary of the date of the Settlement
      Agreement. “Eastern District Funds” means certain monies deposited into an
      interest bearing account with the United States District Court, Eastern District
      of New York, with respect to a lawsuit pending in such court by and among Spina,
      Hotton, WQN and certain other parties. Contemporaneous with the entry into
      the
      Settlement Agreement, certain lawsuits involving various parties to the
      Settlement Agreement were dismissed with prejudice and the parties entered
      into
      general releases with each other. The Eastern District Funds were released
      to
      WQN on May 19, 2006.





13




**VoIP,
      Inc.** A
      substantial portion of our assets are in securities of VoIP, Inc. On October
      5,
      2005, WQN completed the sale of its Voice-Over-Internet Protocol business (the
      “Sale”) to VoIP Acquisition Company, a Delaware corporation (the “Purchaser”),
      pursuant to the Asset Purchase Agreement, dated as of August 3, 2005, by and
      among the Company, VoIP, Inc., a Texas corporation (“VoIP”) and the Purchaser
      (such Asset Purchase Agreement, the “APA”). Pursuant to the APA, the Company
      received, in connection with the Sale, total consideration of (i) a $3.7 million
      secured convertible promissory note issued by VoIP, convertible into 3,489,100
      shares of common stock of VoIP, Inc., (ii) 1,750,000 shares of VoIP’s restricted
      common stock and (iii) a warrant to purchase 5,000,000 shares of VoIP’s common
      stock at an exercise price of $0.001 per share, plus the assumption of certain
      liabilities by VoIP. VoIP is involved in the internet telephony business. If
      fully converted the Company would own approximately 14.6% of VoIP, Inc. VoIP
      is
      involved in the internet telephony business. Its public trading symbol is
      VOII.OB.





In
      addition to fostering organic growth, WQN is pursuing additional acquisitions
      and developing new operational businesses in the diversified financial services
      industry to expand its portfolio of services and grow revenues.





**Management
      Services Agreement.** We
      entered into a management agreement with WQNI Management Group LLC (f/k/a WQNI
      Capital Advisors, LLC) (“WQNI Management”). WQNI Management is a Delaware
      limited liability company formed solely for the purpose of providing management
      services to us. Scott W. Hartman, B. Michael Adler, E. Denton Jones and David
      S.
      Montoya, who are four of our directors and certain of our officers, comprise
      all
      of the managing members of WQNI Management. Each of them, or their affiliates,
      own 25% of WQNI Management. The material elements of our management agreement
      are summarized below. The statements that follow are subject to and qualified
      in
      their entirety by reference to all of the provisions of the management
      agreement, a form of which has been incorporated by reference as an exhibit
      to
      this Form 10-KSB.




The
      management agreement defines our manager’s duties and responsibilities as
      follows: (i) to provide  us
      with
      suitable experienced professionals to enable us to conduct our operations;
      (ii)
      to provide us an office facility within the New York City metropolitan area
      to
      enable us to conduct our business operations, including furnishing such office
      with office equipment (including computers and software) and furniture suitable
      to enable us to conduct our business operations and all janitorial service,
      utility service, local and long distance telephone, high speed internet
      connections and fax service, and other similar services necessary to the conduct
      of such operations; and (iii) to seek suitable investment opportunities and
      manage our investment policy; perform our day-to-day investment and business
      operations; provide investment advice; and prepare and disseminate all necessary
      reports and financial statements to our management and board of
      directors.




Without
      the written approval of our board of directors, WQNI Management shall not
      commit, or enter into any agreement, on our behalf with respect to: (i) the
      incurrence any indebtedness for borrowed money; (ii) any investment by us,
      other
      than the investment of cash in short-term permitted investments in the ordinary
      course of business; or (iii) any other material contract.




WQNI
      Management is responsible for the payment of: (i) the compensation of all
      employees of WQNI Management; and (ii) the costs of providing services under
      the
      management agreement to us, except for those expenses described below, including
      office expenses, travel, business development, office and equipment rental,
      bookkeeping and the development, underwriting, due diligence, investigation
      and
      monitoring of investments. We pay all of our other expenses directly, including
      our legal fees, audit expenses, directors and officers insurance, other expenses
      related to being a public company and direct transaction expenses.




In
      consideration for the services provided to us by WQNI Management, we have agreed
      to pay to WQNI Management the following consideration: (i) one-half of one
      percent (.5%) of Total Assets (as defined below), payable on May 15, August
      15,
      November 15 and March 31, based on our financial statements at the end of the
      fiscal quarter immediately preceding the payment date (the “Base Management
      Fee”); and (ii) an incentive fee equal to 20% of the excess, if any, of our Net
      Investment Income (as defined below) for each of our fiscal quarters that
      exceeds the Priority Return (as defined below), payable on May 15, August 15,
      November 15 and March 31, based on our financial statements determined in
      accordance with generally accepted accounting principles, consistently applied,
      at the end of the fiscal quarter immediately preceding the payment date (the
      “Incentive Fee”); and (iii) an incentive fee (“Capital Gains Fee”) equal to 20%
      of our net Realized Capital Gains (Realized Capital Gains (as defined below)
      less Realized Capital Losses (as defined below)) on a cumulative basis for
      each
      of our fiscal years following October 11, 2005, minus any Unrealized Capital
      Depreciation (as defined below) at the end of such fiscal year and minus the
      aggregate amount of all Capital Gains Fees paid to WQNI Management in our prior
      fiscal years, payable on April 15 of each year based on our audited financial
      statements for our prior fiscal year; provided, however, that no Capital Gains
      Fees shall be paid to  WQNI
      Management with respect to our investment in SeaView.




14




As
      used
      herein, the following terms have the following meanings: (i) “Total Assets”
means the amount of our gross assets as set forth on our applicable financial
      statements at the end of the fiscal quarter immediately preceding the payment
      date, as determined in accordance with generally accepted accounting principles,
      consistently applied; provided, however, that in computing Total Assets the
      gross book value with respect to our investment in SeaView shall be excluded
      from the calculation of Total Assets; (ii) “Net Investment Income” shall mean
      our interest income, dividend income, and any other income (including any other
      fees such as commitment, origination, syndication, structuring, diligence,
      managerial assistance, monitoring, and consulting fees or other fees that we
      receive from portfolio companies or investments) which are collected during
      the
      fiscal quarter of our company; minus our operating expenses for the fiscal
      quarter (including the Base Management Fee and any interest expense, but
      excluding the Incentive Fee and the Capital Gains Fee); provided, however,
      that
      any Net Investment Income with respect to the our investment in SeaView shall
      be
      excluded from the calculation of Net Investment Income. Net Investment Income
      does not include Realized Capital Gains, Realized Capital Losses or Unrealized
      Capital Depreciation; (iii) “Priority Return” means a rate equal to 1.5% (6%
      annualized) of the our Total Assets; (iv) “Realized Capital Gains” on each of
      our investments will be calculated as the excess of the net amount realized
      from
      the sale or other disposition of such investment over the original cost of
      the
      investment (less any Unrealized Capital Depreciation with respect to such
      investment which was deducted with respect to the payment of any Capital Gains
      Fees in any prior fiscal year); (v) “Realized Capital Losses” on each of our
      investments will be calculated as the amount by which the net amount realized
      from the sale or other disposition of such investment is less than the original
      cost of such investment; and (vi) “Unrealized Capital Depreciation” on each of
      our investments will be calculated as the amount by which the original cost
      of
      such investment exceeds the fair value of such investment as of the end of
      a
      fiscal year of the Company.




The
      management agreement has a ten year term and is scheduled to expire on October
      11, 2015. We may not terminate the management agreement earlier except upon
      the
      occurrence of any of the following events: (i) our total assets (as defined
      in
      the management agreement) for two consecutive fiscal quarters are not at least
      equal to 60% of our total assets on October 11, 2005 which were approximately
      $15 million; (ii) E. Denton Jones, B. Michael Adler, David S. Montoya or Scott
      W. Hartman withdraw as members of the management company, other than as a result
      of death or disability; or (iii) either Mr. Hartman or Mr. Montoya voluntarily
      terminates their employment with us.




Upon
      the
      occurrence of any such triggering event, we may terminate the management
      agreement upon written notice to WQNI Management within 30 days following the
      occurrence of such event.




In
      addition, either we or WQNI Management may terminate the management agreement
      upon written notice to the breaching party following the occurrence of a
      material breach of the management agreement by the other party if either:
      (i) the material breach relates to the failure to pay amounts due under the
      management agreement and such breach continues unremedied for 10 days after
      notice; or (ii) the other party materially breaches the terms of the management
      agreement and such breach continues unremedied for 30 days after
      notice.




In
      November 2004, we changed our name to WQN, Inc. from WorldQuest Networks, Inc.
      (see Item 3-Legal Proceedings in Part I of this Report).





*Risk
      Factors:* See
“—Risk Factors” below for discussion of the impact of certain market risks,
      financial risks and other uncertainties on our business.




15




***2005
      Developments***





**Management
      Changes**





On
      October 5, 2005, in connection with the sale of its Voice-Over-Internet Protocol
      business, B. Michael Adler stepped down as Chief Executive Officer of WQN but
      agreed to continue as a director of WQN. Also on October 5, 2005, Scott W.
      Hartman was named the Chief Executive Officer of the Company and David S.
      Montoya was named Chief Financial Officer of the Company following the
      resignation of Michael Miller.





**Material
      Definitive Agreements**





We
      have
      entered into an employment agreement (the “Hartman Employment Agreement”),
      effective October 5, 2005 following the completion of the sale of the
      Voice-Over-Internet Protocol business of WQN, with Scott W. Hartman (“Hartman”)
      to serve as our Chief Executive Officer for a term of three years. We granted
      Mr. Hartman a 10-year stock option to purchase 220,000 shares of our common
      stock under our 2001 Stock Option Plan. One-third of the stock options vested
      on
      the effective date of the Hartman Employment Agreement and one-third will vest
      on each of the first and second anniversary of the effective date.




We
      have
      entered into an employment agreement (the “Montoya Employment Agreement”) with
      David S. Montoya (“Montoya”) to serve as our Chief Financial Officer for a term
      of three years. We granted Mr. Montoya a 10-year stock option to purchase
      220,000 shares of our common stock under our 2001 Stock Option Plan. One-third
      of the stock options vested on the effective date of the Montoya Employment
      Agreement and one-third will vest on each of the first and second anniversary
      of
      the effective date.




We
      have
      entered into a definitive management agreement (the “Management Agreement”),
      effective October 5, 2005, with WQNI Management Group, LLC (f/k/a WQNI Capital
      Advisors, LLC) (“Advisors”), a newly formed Delaware limited liability company
      in which Scott W. Hartman, B. Michael Adler, E. Denton Jones and David S.
      Montoya have a direct material interest, pursuant to which Advisors will provide
      us with office facilities and day-to-day management services. See “Management
      Services Agreement” above. Advisors is not a registered investment advisor as of
      December 31, 2005 and does not intend to become one. We will pay management
      fees
      to Advisors based on a percentage of our assets plus incentive fees based on
      a
      percentage of our investment income and capital gains. The term of the
      Management Agreement is ten years. In 2005, we paid Advisors $70,208 pursuant
      to
      the Management Agreement.





On
      May
      17, 2006, WQN and PAA (PAA collectively with WQN, the “WQN Parties”) entered
      into an agreement (the “Cross Country Agreement”), with E. Denton Jones
      (“Jones”) and Cross Country (Jones and Cross Country are collectively referred
      to as the “Jones Parties”). Pursuant to the Cross Country Agreement, WQN
      completely withdrew its investment in Cross Country Capital Partners, LP. Cross
      Country will transfer to WQN as the return of its capital (“Return of Capital”),
      the sum of two million eight hundred fifty thousand dollars ($2,850,000). The
      Return of Capital shall be made to WQN in the following manner: (i) by the
      payment on the earlier of the closing of the Enabling Mortgages (as defined
      in
      the Cross Country Agreement) and August 16, 2006, of the sum of $200,000 in
      cash; and (ii) by the transfer within ten (10) business days of date of the
      Cross Country Agreement, of restricted shares of VOIP, Inc. common stock (the
      “Stock”); the number of shares of the Stock shall be equal to the quotient
      whereby (i) the numerator is $2,650,000 and (ii) the denominator is the volume
      weighted average price of the Stock for the five (5) trading days preceding
      the
      date of the Cross Country Agreement. The terms of the Cross Country Agreement
      also provide that the parties enter into general releases with each other.
      E.
      Denton Jones is a director of WQN. Prior to May 17, 2005, Cross Country had
      previously distributed $150,000 in cash to WQN.




**SeaView
      Mezzanine Fund Investment**





On
      June
      27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
      in
      SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
      has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
      the terms of the limited partnership agreement, WQN is treated as if it were
      a
      limited partner as of December 8, 2004. WQN has a limited partnership interest
      in SeaView, which equates to an equity investment in SeaView of approximately
      28% at December 31, 2005. SeaView invests in mezzanine securities in a
      diversified portfolio of small to mid-size companies. Scott Hartman, our Chief
      Executive Officer and a director, David S. Montoya, our Chief Financial Officer
      and a director, Robert Farmer, a director, and an affiliate of E. Denton Jones,
      a director, each hold a financial interest in the general partner of SeaView.
      If
      we do not have adequate funds to meet these commitments when they called, we
      may
      be subject to financial penalties, including the loss of our investment in
      SeaView. WQN and SeaView have executed a standstill agreement whereby SeaView
      has agreed to not call any of the Company’s capital commitment unless WQN has
      the ability to pay all of its other obligations.





16


**North
      Fork Bank Revolving Credit Agreement**





On
      November 10, 2005, WQN, Inc. secured a revolving credit agreement (“RCA”) from
      North Fork Bank for up to $10,000,000 for purposes of working capital. Loans
      under the RCA have a term of one or two years, at the option of our company,
      from the date of drawdown. WQN, Inc. also holds the option to select an interest
      rate that equals North Fork Bank’s floating prime or 150 basis points over
      30-Day LIBOR. At December 31, 2005, approximately $3.6 million had been drawn
      from this RCA, which amount was collateralized by a pledge of approximately
      $3.8
      million in cash held in a North Fork Bank account. On March 2, 2006, WQN repaid
      the outstanding balance on the RCA by utilizing the pledged cash. As a result,
      WQN will not be able to make further drawdowns on the RCA unless it is able
      to
      post additional collateral. The purpose of this line of credit was to establish
      an ongoing relationship with the bank.




17




**Sale
      of Assets**





On
      October 5, 2005, WQN completed the sale of its Voice-Over-Internet Protocol
      business (the “Sale”) to VoIP Acquisition Company, a Delaware corporation (the
“Purchaser”), pursuant to the Asset Purchase Agreement, dated as of August 3,
      2005, by and among the Company, VoIP, Inc., a Texas corporation (“VoIP”) and the
      Purchaser (such Asset Purchase Agreement, the “APA”). Pursuant to the APA, the
      Company received, in connection with the Sale, total consideration of (i) a
      $3.7
      million secured convertible promissory note issued by VoIP, convertible into
      3,489,100 shares of common stock of VoIP, Inc., (ii) 1,750,000 shares of VoIP’s
      restricted common stock and (iii) a warrant to purchase 5,000,000 shares of
      VoIP’s common stock at an exercise price of $0.001 per share, plus the
      assumption of certain liabilities by VoIP. The total consideration received
      from
      VoIP was valued at approximately $9.7 million and resulted in a gain on the
      sale
      of approximately $7.3 million for the Company.





In
      connection with the sale, B. Michael Adler stepped down as Chief Executive
      Officer of WQN. Mr. Adler will remain on the Board of Directors. Also, on
      October 5, 2005, Scott W. Hartman was named the Chief Executive Officer of
      WQN
      and David S. Montoya was named Chief Financial Officer of WQN.





**Transient
      Investment Company**





As
      a
      result of the Sale to VoIP, we are currently relying on an exemption from the
      Investment Company Act for transient investment companies. However, we can
      only
      rely on that exemption for one year in any three-year period. Our intention
      is
      to become engaged primarily in a business other than investing in “investment
      securities” for purposes of the Investment Company Act by the end of that
      one-year period, but we cannot assure you that we will be successful. The
      Investment Company Act and the rules and regulations promulgated under it are
      extremely restrictive. Compliance with the Investment Company Act would be
      very
      costly, and it could be difficult for us to execute our business plan if we
      were
      subject to its requirements.





***2006
      Developments***





**Non-compliance
      with Nasdaq Listing Standard and Possible Delisting from
      Nasdaq**





On
      April
      18, 2006, we received a Nasdaq Staff Determination stating that WQN is in
      violation of a requirement for continued listing set forth in Marketplace Rule
      4310(c)(14), which requires a Nasdaq-listed company to file its Annual Report
      on
      Form 10-KSB (“Form 10-KSB”) with Nasdaq on or before the date it is required to
      be filed with the Securities and Exchange Commission. WQN’s Form 10-KSB was
      required to be filed with the Securities and Exchange Commission by the close
      of
      business on April 17, 2006. However, WQN was not able to file such Form 10-KSB
      until May 30, 2006. Nasdaq further informed WQN that its common stock is,
      therefore, subject to delisting from Nasdaq. Filing of this Form 10-KSB
      satisfies the requirements of such delisting letter.





One
      of
      the independent directors of WQN, Adam Blumenthal, resigned on February 8,
      2006.
      Mr. Blumenthal stated that he was resigning because his personal business
      ventures would not permit him to devote the time and attention necessary to
      fulfill his obligations as a board member. Mr. Blumenthal’s resignation was not
      the result of any disagreement on any matter relating to the Company’s
      operations, policies or practices. As a consequence of Mr. Blumenthal’s
      resignation the Company received written notice from the Nasdaq National Market
      (“Nasdaq”) on February 14, 2006 that the Company no longer complies with Nasdaq
      Marketplace Rule 4350(c)(1), which requires a Nasdaq-listed company to have
      a
      majority of independent directors serving on its board. Pursuant to its rules,
      Nasdaq has granted the Company a cure period until the earlier of February
      8,
      2007 or the Company’s next stockholders meeting in order to regain compliance
      with this rule. If the Company has not regained compliance by such date, Nasdaq
      may delist the Company’s common stock. The board has initiated a search for a
      new independent director and intends to appoint a suitable replacement to fill
      the vacancy, and regain compliance, as soon as practicable.





Previously,
      WQN had received a written notice from Nasdaq on October 25, 2005 stating that
      E. Denton Jones no longer qualified as an independent director. The Board
      replaced Mr. Jones with Hal Bibee on the nominating and compensation committees
      effective October 31, 2005. Mr. Bibee is considered independent under Nasdaq’s
      corporate governance standards. Mr. Jones remains a Board member. As a result
      of
      these actions, the Company regained compliance with the nominating and
      compensation committee independence requirements.


18


***Critical
      Accounting Policies***





Financial
      Reporting Release No. 60 recommends that all companies include a discussion
      of
      critical accounting policies used in the preparation of their financial
      statements. The Company’s significant accounting policies are summarized in Note
      2 of its consolidated financial statements included in the Company’s Annual
      Report on Form 10-KSB for the year ended December 31, 2005. While all these
      significant accounting policies impact its financial condition and results
      of
      operations, the Company views certain of these policies as critical. Policies
      determined to be critical are those policies that have the most significant
      impact on the Company’s financial statements and require management to use a
      greater degree of judgment and/or estimates. Actual results may differ from
      those estimates. The Company believes that given current facts and
      circumstances, it is unlikely that applying any other reasonable judgments
      or
      estimate methodologies would cause a material effect on the Company’s
      consolidated results of operations, financial position or liquidity for the
      periods presented in this report. The accounting policies identified as critical
      are as follows:





**Valuation
      of Investments**





Our
      investments in partnerships are valued on the equity method and impairments
      are
      recorded when the carrying value exceeds the fair value of the investment.
      The
      underlying partnerships account for their investments at fair value. Securities
      owned by the partnerships that are traded on national securities exchanges
      are
      valued at the average closing price on the valuation date. For investments
      that
      are not traded, management of the partnerships determine fair value by taking
      into account such factors as the investees current and projected financial
      condition, operating results, subsequent capital funding and various valuation
      methods. Securities traded on national securities exchanges are valued at the
      average closing price on the valuation date. Our investments in securities
      that
      are not listed but for which a public market exists are valued at the average
      closing price on the valuation date. In determining fair value of restricted
      securities, management may reasonably consider such factors as discounts for
      illiquidity, timing of the registration of such securities and various valuation
      methods.





**Income
      Taxes**





As
      of
      December 31, 2005, we had approximately $22,022,000 of net operating loss carry
      forwards for federal income tax purposes, which expire beginning in 2019. We
      have not recognized an income tax benefit for our losses because of uncertainty
      regarding future realization and we have provided a full valuation allowance
      on
      our deferred tax assets.





**Results
      of Operations**




***Year
      Ended December 31, 2005 Compared to Year Ended December 31, 2004***





The
      Company completed the sale of its internet telephony business to VoIP on October
      5, 2005 and began operating as a diversified financial services operating and
      holding company. As such, year over year analysis is limited because we were
      not
      focused on our new business model until after October 5, 2005, the closing
      of
      the VoIP transaction. Subsequent to the closing of the VoIP transaction, the
      Company has had limited business activities as it implements its business
      plan.





***Revenue***




The
      Company did not generate any revenue from its diversified financial services
      operations for the years ended December 31, 2004 and 2005. The reason for the
      absence of revenue is that the Company began its new strategy of becoming a
      financial services company only during the fourth quarter of 2005.


19


**Selling,
      General and Administrative**





Selling,
      general and administrative expenses decreased approximately 33% to $814,225
      for
      the year ended December 31, 2005 from $1,209,286 for the year ended December
      31,
      2004. This $395,060 decrease is due primarily to lower operating costs
      associated with the Company’s limited business activities.





***Interest
      Income/Interest Expense***





Interest
      income consists of interest earned on cash and cash equivalents and notes and
      interest expense consists of interest paid on borrowings. Interest earned on
      cash and cash equivalents and notes was $236,010 for the year ended December
      31,
      2005 and $292,709 for the year ended December 31, 2004. The decrease of $56,699
      (approximately 19%) is due primarily to reduced interest income earned on the
      Company’s note receivable from the sale of buyindiaonline.com, Inc. as the note
      was paid down. Interest expense for the 2005 period totaled $30,381 compared
      to
      $5,000 in the comparable 2004 period. The increase of $25,381 (approximately
      500%) is due primarily to interest owed on the Company’s revolving credit
      agreement with North Fork Bank which was entered into in 2005.





***Gain
      from Investment In Partnership of Cross Country Capital Partners
      LP***


The
        Company accounts for its approximately 66% limited partnership interest in
        Cross
        Country Capital Partners LP under the equity method of accounting and for
        the
        year ended December 31, 2005 recorded income from its investment of
        $55,757.


***Loss
      from Investment In Partnership of SeaView Mezzanine Fund
      LP***





The
      Company accounts for its approximately 28% limited partnership interest in
      SeaView Mezzanine Fund LP under the equity method of accounting and for the
      year
      ended December 31, 2005 recorded a loss from its investment of $707,365 due
      to
      management fees and other costs of SeaView.





***Gain
      from Investment In VoIP, Inc.***





The
      Company accounts for its investment in securities of VoIP, Inc. as available
      for
      sale securities. Under this method the assets are adjusted to their fair value
      on the balance sheet at each reporting period and the corresponding change
      is
      recorded as a component of other comprehensive income. From October 5, 2005
      to
      December 31, 2005 the Company recorded an unrealized gain from its investment
      in
      VoIP, Inc. securities of $1,849,500.





***Loss
      from Investment in Park Ave. Assoc. LLC***





The
      Company accounts for its 50.9% membership interest in Park Ave. Assoc. LLC
      using
      the equity method of accounting and for the year ended December 31, 2005
      recorded a loss from its investment of $2,577,001. See “Item 3- Legal
      Proceedings.”


20


***Loss
      from Continuing Operations***


We
        recorded a loss from continuing operations of $3,837,205 for the year ended
        December 31, 2005 compared to a loss of $977,334 for the year ended December
        31,
        2004. The increase of $2,859,871 is due primarily to the losses of
        $3,284,366 on our investments in SeaView and PAA.




***Income/(Loss)
      from Discontinued Operations***





We
      recorded income from discontinued operations of $2,582,273 primarily as a result
      of the gain of $7,285,363 less tax expense of $1,523,347 on the sale of our
      internet telephony business in October 2005, offset by the costs of the
      operation of the internet telephony business (see Discontinued Operations in
      Note 3 to the financial statements). For the year ended December 31, 2005 we
      incurred expenses with respect to the asset sale to VoIP of approximately
      $255,000 primarily for: legal fees ($120,000), investment banking fees
      ($75,000), severance and other personnel costs ($60,000). The Company had a
      loss
      from discontinued operations of $2,196,637 in 2004.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2005, we had approximately $3.8 million of cash and cash
      equivalents and working capital of approximately $73,000. We generated negative
      cash flow from operating activities of approximately $278,000 for the year
      ended
      December 31, 2005, compared with negative cash flow from operating activities
      of
      approximately $922,000 during the year ended December 31, 2004. Net cash used
      in
      operating activities for the 2005 and 2004 periods primarily consisted of net
      operating losses as well as changes in working capital.




Net
      cash
      used in investing activities was approximately $5.9 million for the year ended
      December 31, 2005 compared to $3.0 million for the year ended December 31,
      2004.
      In 2005, the increase in net cash used in investing activities was primarily
      attributable to a $3.6 million investment into Park Ave. Assoc. LLC and a $2.3
      million investment in a limited partnership interest of SeaView Mezzanine Fund
      LP.





In
      November 2004, the Company invested $3 million in Cross Country, a partnership
      managed by an affiliate of E. Denton Jones, a director of the Company. The
      majority of the partnership assets are to be invested in “Private Investments in
      Public Entities”. The partnership investments will take the form of common
      equity, preferred equity, convertible debt and/or equity or debt securities.
      Although the partnership will endeavor to engage in hedging transactions in
      order to mitigate downside risk, there can be no assurance that the
      partnership’s investments will be successful and, as a result, the Company may
      lose all or some of its investment. The partnership agreement contains certain
      restrictions, including limits on the Company’s ability to withdraw capital from
      the partnership and limits on the transferability of the Company’s interests in
      the partnership.





On
      May
      17, 2006, WQN and PAA (PAA collectively with WQN, the “WQN Parties”) entered
      into an agreement (the “Cross Country Agreement”), with E. Denton Jones
      (“Jones”) and Cross Country (Jones and Cross Country are collectively referred
      to as the “Jones Parties”). Pursuant to the Cross Country Agreement, WQN
      completely withdrew its investment in Cross Country Capital Partners, LP. Cross
      Country will transfer to WQN as the return of its capital (“Return of Capital”),
      the sum of two million eight hundred fifty thousand dollars ($2,850,000). The
      Return of Capital shall be made to WQN in the following manner: (i) by the
      payment on the earlier of the closing of the Enabling Mortgages (as defined
      in
      the Cross Country Agreement) and August 16, 2006, of the sum of $200,000 in
      cash; and (ii) by the transfer within ten (10) business days of date of the
      Cross Country Agreement, of restricted shares of VOIP, Inc. common stock (the
      “Stock”); the number of shares of the Stock shall be equal to the quotient
      whereby (i) the numerator is $2,650,000 and (ii) the denominator is the volume
      weighted average price of the Stock for the five (5) trading days preceding
      the
      date of the Cross Country Agreement. The terms of the Cross Country Agreement
      also provide that the parties enter into general releases with each other.
      E.
      Denton Jones is a director of WQN. Prior to May 17, 2006, Cross Country had
      returned $150,000 in cash to WQN. As a result of the agreement with Cross
      Country to return the capital balances, WQN has recognized a recovery of all
      previous losses on its investment in Cross Country as of December 31,
      2005.





On
      June
      27, 2005, the Company entered into a Subscription Agreement, dated effective
      as
      of December 8, 2004, in which we committed to invest up to $10,000,000 in
      SeaView Mezzanine Fund LP, a limited partnership private equity fund and
      invested $2,300,000 as of December 31, 2005. Under the terms of the limited
      partnership agreement, WQN is treated as if it were a limited partner as of
      December 8, 2004. Upon executing the subscription, we joined the SeaView
      Mezzanine Fund LP Agreement of Limited Partnership as a limited partner. SeaView
      invests in mezzanine securities in a diversified portfolio of small to mid-size
      companies. Generally, the limited partnership agreement runs for a 10 year
      term
      and the remainder of our commitment is callable by SeaView over the next 5
      years. Scott Hartman, our Chief Executive Officer and a director, David S.
      Montoya, our Chief Financial Officer and a director, Robert Farmer, a director,
      and an affiliate of E. Denton Jones, a director, each hold a financial interest
      in the general partner of SeaView. **** The
      Company accounts for its limited partnership interest in SeaView under the
      equity method of accounting and for the year ended December 31, 2005 recorded
      a
      loss from its equity investment of $707,365. WQN and SeaView have executed
      a
      standstill agreement whereby SeaView has agreed to not call any of the Company’s
      capital commitment unless WQN has the ability to pay all of its other
      obligations.


21





On
      November 4, 2005, WQN entered into a Securities Purchase Agreement pursuant
      to
      which the Company subscribed for a 50.9% membership interest in Park Ave. Assoc.
      LLC (“PAA”) in exchange for the contribution of a capital commitment to PAA of
      $5,600,000 in cash. PAA was established as a real estate development company
      specializing in the acquisition and development of properties for small business
      use and for communities designed for the active adult lifestyle. An additional
      $5.4 million was to be invested over time by the other members of PAA for a
      total capitalization of $11 million. Although WQN became entitled to elect
      3 of
      the 5 members of PAA’s Board of Managers, control over PAA’s day-to-day
      activities was exercised by PAA’s chief executive officer.





Pursuant
      to the Securities Purchase Agreement, WQN made capital contributions to PAA
      aggregating approximately $3.6 million. In the course of its review of various
      documents relating to certain real estate investments purportedly entered into
      by the former chief executive officer of PAA, WQN discovered certain
      irregularities. On February 2, 2006, WQN caused the Board of Managers of PAA
      to
      remove said chief executive officer and appoint Scott W. Hartman as the interim
      chief executive officer of PAA and David S. Montoya as the interim chief
      financial officer of PAA. The new management of PAA has met with various persons
      with whom the former chief executive officer of PAA had business dealings and
      discovered that a number of the transactions in which PAA was purportedly
      involved were in fact improperly conducted. See “Item 3- Litigation.” As a
      result of these discoveries, WQN has taken a write-down for 2005 in the amount
      of $2,577,001 related to its investment in PAA. In addition, since Cross Country
      was also an investor in PAA, a portion of the activity that WQN recorded on
      its
      investment in Cross Country in 2005 was attributable to PAA.





For
      the
      year ended December 31, 2005, the Company generated cash from financing
      activities of $21,580 related to the exercise of stock options.





Our
      remaining obligations for 2006 would require approximately $2,000,000 to fund
      and we will meet these obligations through the following:





·
            On
                May 23 2006 we received a $1,000,000 payment following the release
                of the
                Eastern District Funds (see Item 3- “Legal Proceedings”). We have cash of
                approximately $500,000 as of May 30, 2006. Additionally we received
                $1,000,000 in notes receivable in the settlement which are payable
                to us
                over an 18 month period, which for accounting purposes at December
                31,
                2005 we have provided a valuation
                allowance.


·
            We
                have 1,750,000 shares of VoIP at May 30, 2006 and will receive additional
                VoIP shares valued at $2.65 million from the settlement with CCCP
                in July
                2006. Although these shares are not registered as of May 30, 2006
                we can
                sell those shares to other investors in a private transaction to
                generate
                cash if necessary. WQN has received an offer to purchase its VoIP
                shares
                in a private transaction for an amount that should provide sufficient
                liquidity to pay its obligations in
                2006.





WQN’s
      largest obligation is its commitment to fund an additional $7,700,000 in SeaView
      Mezzanine Fund L.P. (“SeaView”), a private equity limited partnership that is
      operated by the principal officers of WQN. WQN and SeaView have executed a
      standstill agreement whereby SeaView has agreed to not call any of the Company’s
      capital commitment unless WQN has the ability to pay all of its other
      obligations.





We
      need
      to raise additional funds if, for example, we pursue business acquisitions
      or
      experience operating losses that exceed our current expectations. If we raise
      additional funds through the issuance of equity, equity-related securities
      or
      debt securities, such securities may have rights, preferences or privileges
      senior to those of the rights of our common stock and our stockholders may
      experience additional dilution. We cannot be certain that additional financing
      will be available to us on favorable terms or at all. We believe our available
      investments in VoIP will be sold in 2006 or 2007 and will provide sufficient
      liquidity in the event we do not raise funds during 2006 to fulfill our current
      obligations.





**Income
      Taxes**





As
      of
      December 31, 2005, we had approximately $22,022,000 of net operating loss
      carry-forwards for federal income tax purposes, which expire beginning in 2019.
      We have not recognized an income tax benefit for our losses because of
      uncertainty regarding future profitability; therefore, at December 31, 2005,
      we
      have provided a full valuation allowance on our deferred tax assets of
      approximately $10,814,000. Limitations on the utilization of these
      carry-forwards may result if we experience a change of control, as defined
      in
      the Internal Revenue Code of 1986, as amended, as a result of changes in the
      ownership or our common stock.





**Recent
      Accounting Pronouncements**





In
      December 2004, FASB issued statement of Financial Accounting Standards
      No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be
      effective in our first quarter of fiscal 2006.  This standard sets forth
      the revised rules for the accounting treatment of employee stock options and
      other share-based payments.  SFAS 123(R) requires the adoption a fair
      value-based method for measuring the compensation expense related to employee
      stock awards; this will lead to additional compensation expense. We currently
      use the intrinsic value method to measure compensation expense for stock-based
      awards to our employees. Under this standard, we do not recognize any
      compensation related to stock option grants we issue under our stock option
      plans unless the exercise price of the options granted is less that the quoted
      market price of the common stock issuable upon exercise of the options. Note
      2
      to our Consolidated Financial Statements in this report provides our pro forma
      net loss and loss per share as if we had used a fair value-based method
      prescribed under SFAS 123 to measure the compensation expense for employee
      stock awards during fiscal 2005 and 2004. The Company will use the modified
      prospective method for adoption of SFAS 123R and expects unvested options
      outstanding at December 31, 2005 to result in expense of $462,898 for each
      of
      2006 and 2007.


22


**Off-Balance
      Sheet Arrangements**





The
      Company did not have any off-balance sheet arrangements at December 31, 2004.
      For the year ended December 31, 2005, the Company has a commitment of
      $10,000,000 to SeaView, of which the Company has funded $2,300,000. The
      remainder of the commitment may be called down over the next four years. WQN
      and
      SeaView have executed a standstill agreement whereby SeaView has agreed to
      not
      call any of the Company’s capital commitment unless WQN has the ability to pay
      all of its other obligations.





**Risk
      Factors That May Affect Results of Operations and Financial
      Condition**





**We
      have a history of losses and we anticipate future losses and negative cash
      flow.**





Since
      inception, we have incurred operating losses, and as of December 31, 2005,
      we
      had an accumulated deficit of $26,902,873. We recorded net income of $279,950
      for the year ended December 31, 2005 and incurred a net loss of $3,173,971
      for
      the year ended December 31, 2004. We generated negative cash flow of
      approximately $6,095,000 and $7,990,000 during 2005 and 2004 respectively.




Our
      revenues may not grow and we will need to increase our revenues significantly
      to
      become profitable or our investments will need to significantly increase in
      value, however, if our revenues do not increase as much as we expect or if
      our
      expenses increase at a greater pace then revenues, we may not achieve
      profitability or, if we became profitable, we may not be able to sustain or
      increase profitability on a quarterly or annual basis. We may incur additional
      costs and expenses in 2006 related to:





·the
                hiring of additional personnel as we grow;
                and





·evaluating
                and completing potential acquisitions of other
                companies.





**We
      have a limited operating history under our current business strategy and we
      may
      be unable to achieve profitability.**




We
      need
      to raise additional funds if, for example, we pursue business acquisitions
      or
      experience operating losses that exceed our current expectations. If we raise
      additional funds through the issuance of equity, equity-related securities
      or
      debt securities, such securities may have rights, preferences or privileges
      senior to those of the rights of our common stock and our stockholders may
      experience additional dilution. We cannot be certain that additional financing
      will be available to us on favorable terms or at all. We believe our available
      investments will provide sufficient liquidity in the event we do not raise
      funds
      during 2006 to fulfill our current obligations. Our remaining obligations for
      2006 would require approximately $2,000,000 to fund and we will meet these
      obligations through the following:





·
            On
                May 23 2006 we received a $1,000,000 payment following the release
                of the
                Eastern District Funds (see Item 3- “Legal Proceedings”). We have cash of
                approximately $500,000 as of May 30, 2006. Additionally we received
                $1,000,000 in notes receivable in the settlement which are payable
                to us
                over an 18 month period, which for accounting purposes at December
                31,
                2005 we have provided a valuation
                allowance


·
            We
                have 1,750,000 shares of VoIP at May 30, 2006 and will receive additional
                VoIP shares valued at $2.65 million from the settlement with CCCP
                in July
                2006. Although these shares are not registered as of May 30, 2006
                we can
                sell those shares to other investors in a private transaction to
                generate
                cash if necessary. WQN has received an offer to purchase its VoIP
                shares
                in a private transaction for an amount that should provide sufficient
                liquidity to pay its obligations in
                2006.





WQN’s
      largest obligation is its commitment to fund an additional $7,700,000 in SeaView
      Mezzanine Fund L.P. (“SeaView”), a private equity limited partnership that is
      operated by the principal officers of WQN. WQN and SeaView have executed a
      standstill agreement whereby SeaView has agreed to not call any of the Company’s
      capital commitment unless WQN has the ability to pay all of its other
      obligations.





We
      were
      incorporated in October 1996. Although we commenced operations in May 1998,
      we
      materially changed our business plan and model following the sale of our
      telephony business and related assets to VoIP, Inc. in October 2005. We derived
      substantially all of our operating revenue from this business and related
      assets. In connection with the sale of our telephony business, we decided to
      become primarily a diversified financial services company whose goal is to
      be
      the financial partner of choice for small businesses. Our strategy is to provide
      capital and offer an array of financial services/products to businesses in
      the
      small business sector. Our primary lines of business are asset management,
      finance and insurance. We cannot provide any assurance that our acquisition
      and
      operation of controlled companies or our minority investments will be successful
      or that we will not lose all or some of those investments. Accordingly, we
      do
      not yet have a history of operations as a diversified operating and holding
      company upon which you can evaluate our business and prospects and we can
      provide you no assurance that we will be able to successfully implement or
      sustain our new business strategy.


23
  **We
      may be required to meet our capital commitments at a time when we do not have
      adequate funds.**




Our
      capital commitments to SeaView are callable at any time at the option of
      SeaView. Our total commitment to SeaView is $10,000,000. Our current outstanding
      commitment to SeaView is $7.7 million. If we do not have adequate funds to
      meet
      these commitments when they are called, then we may be subject to financial
      penalties, including the loss of our investment in SeaView. WQN and SeaView
      have
      executed a standstill agreement whereby SeaView has agreed to not call any
      of
      the Company’s capital commitment unless WQN has the ability to pay all of its
      other obligations.




**Our
      new business strategy is substantially dependent upon our ability to
      successfully identify acquisition opportunities.**




Our
      ability to grow through acquisitions, a critical component of our strategy,
      is
      dependent upon, and may be limited by, the availability of suitable acquisition
      opportunities and our access to capital. In addition, growth through
      acquisitions involves risks that could have a material adverse effect on our
      results of operations, including difficulties in integrating the operations
      and
      personnel of acquired companies and the potential loss of key employees and
      customers of acquired companies.




In
      connection with our efforts to deploy our new business model and become a
      diversified operating and holding company, we have made commitments to invest
      $10.0 million in SeaView and $5.6 million in PAA. We have previously made a
      $3.0
      million investment in Cross Country and acquired substantial ownership of VoIP.
      We have not finalized other acquisition or investment opportunities or made
      any
      other commitments. As of December 31, 2005, we have funded only $3.6 million
      of
      our investment to PAA and $2.3 million of our commitment to SeaView, a portion
      of which funds have been reinvested. Because the other parties in PAA did not
      fund their respective commitments, we do not believe the Company will be
      required to fund the remaining $2.0 million investment in PAA and currently
      there is no intent of the Company to fund this commitment. SeaView has made
      one
      investment to date, a $5.0 million mezzanine loan to a company that provides
      marketing services to other businesses, and Cross Country has made investments
      in PAA and VoIP. Generally, the companies that we seek to acquire or in which
      we
      acquire minority positions are small and midsize companies whose financial
      resources and access to traditional sources of capital are limited. Furthermore,
      such businesses often depend for their success on the management talents and
      efforts of one person or a small group of persons, and the death, disability
      or
      resignation of one or more of these persons could have a material adverse impact
      on the related company. You should expect our potential business opportunities
      to be highly speculative and risky. Furthermore, in businesses in which we
      are
      not a majority owner, including SeaView, the ultimate decisions regarding how
      our funds are re-invested may not be made by members of our management
      team.




**In
      the event of the underperformance of our manager, we may be unable to remove
      our
      manager, which could limit our ability to improve our performance and could
      adversely affect the market price of our shares.**




WQNI
      Management Group LLC acts as our manager and, as such, is responsible for
      providing us with experienced professionals, general office space and services,
      and the day-to-day operations of our company, including the identification
      of
      investment opportunities. The management agreement will expire in October 2015
      and may only be terminated earlier by us if:




·
            our
                manager materially breaches the terms of the management agreement
                and such
                breach continues un-remedied for 30 days after notice;·
            our
                total assets (as defined in the management agreement) for two consecutive
                fiscal quarters are not at least equal to 60% of our total assets
                on
                October 11, 2005;





·
            E.
                Denton Jones, B. Michael Adler, David S. Montoya or Scott W. Hartman
                withdraw as members of the management company, other than as a result
                of
                death or disability; or·
            either
                Mr. Hartman or Mr. Montoya voluntarily terminates their employment
                with
                us.




If
      we
      were unable to remove our manager in circumstances where the market performance
      of our shares does not meet expectations, then the market price of our shares
      could be negatively affected.





24




**We
      will operate as a diversified financial services operating and holding company,
      which may divert our management’s attention.**




As
      a
      diversified financial services operating and holding company, our management
      must address particular concerns raised by such a business model, including
      diversifying our business in a manner designed to offer an advantage to our
      investors, structuring our operations to minimize inefficiencies and focusing
      on
      the adverse and undue effect that any underperforming controlled companies
      and
      minority investments as compared to the successful controlled companies and
      minority investments may have on the price of our common stock. In addition,
      we
      will also dedicate substantial resources to pursuing potential acquisition
      and
      investment opportunities. Such dedication of our internal resources may limit
      our ability to focus on the management and operation of the businesses in which
      we have an interest. Furthermore, if we complete any such acquisitions, we
      cannot assure you that such transactions would have been made at the best price
      or that such transactions may not otherwise be unsuccessful. Accordingly, if
      we
      cannot successfully manage these issues, then the value of our controlled
      companies and minority investments may decline, which would likely diminish
      the
      value of our common stock.




**The
      value of our acquisitions and investments may decline. To the extent that the
      value of any such acquisition or investment increases, we may not be able to
      capitalize on such gains.**




As
      a
      diversified financial services operating and holding company, we intend to
      make
      acquisitions of, and direct and indirect equity investments in, small and middle
      market companies in which we generally intend to have an active management
      role.
      Our interests in these companies may not appreciate in value and, in fact,
      may
      depreciate in value. Because we will only have capital sufficient to make a
      limited number of acquisitions or investments, the aggregate returns realized
      by
      us may be substantially adversely affected by the unfavorable performance of
      one
      or a small number of such acquisitions or investments or a substantial
      write-down of any one acquisition or investment. Furthermore, any increase
      in
      value by a controlled company or minority investment may not necessarily be
      reflected in an increase in the value of our common stock, particularly if
      such
      gain is offset by losses in other controlled companies and minority investments
      or if our ability to sell our interest in such controlled company and minority
      investment is limited. In addition to the lack of a market for the interests
      in
      the private companies in which our funds will be invested, we may be subject
      to
      legal and contractual restrictions on our ability to resell such controlled
      companies and minority investments. As discussed above, various conflicts of
      interest between our company and other investors in the investment funds could
      also make it difficult for us to capitalize on any increase in value.
      Accordingly, we may not be able to realize gains from our controlled companies
      and minority investments.




**Our
      historic financial statements do not include information related to our current
      business and may include accounting policies and principles for us and our
      subsidiaries that differ from those that we will use in the
      future.**




Our
      audited financial statements as of and for the years ended December 31, 2004
      and
      2005 include consolidated results of operations and cash flows for the period
      during which we still owned our telephony business and related assets. Once
      we
      determine what operating businesses we will purchase or start we may be required
      to apply new accounting principles. However, if we do not become an operating
      company within one year from the sale of our Voice-Over-Internet-Protocol
      business we may be required to account for our transactions as an investment
      company. The Investment Company Act and the rules and regulations promulgated
      under the act are extremely restrictive. Compliance with the Investment Company
      Act would be very costly, and it could be difficult for us to execute our
      business plan if we were subject to its requirements.




**Our
      controlled companies and minority investments generally will be in private
      companies about which very little public information is
      available.**




Our
      controlled companies and minority investments will consist primarily of
      privately held companies. There is generally little or no publicly available
      information about such companies, and we must rely on the diligence of our
      employees and the consultants we hire to obtain the information necessary for
      our decision to acquire or invest in them. There can be no assurance that our
      diligence efforts will uncover all material information necessary to make a
      fully informed decision.


25
  **As
      a diversified financial services operating and holding company, our financial
      performance will be subject to the various risks and uncertainties attributable
      to our controlled companies and minority investments.**




We
      do not
      have fixed guidelines for industry diversification; rather, the companies to
      which we commit capital will make decisions regarding the industries and types
      of businesses in which our commitments are invested. As a result, our
      acquisitions and investments could potentially be concentrated in relatively
      few
      industries. Such a lack of diversification would make our performance
      particularly vulnerable to a downturn in any such industry. Conversely, if
      our
      controlled companies and minority investments operate in a wide-range of
      industries, our management team will need to expand its knowledge and expertise
      to be able to manage successfully such a broad group, which could divert
      management attention from other matters or limit our ability to manage
      successfully our controlled companies and minority investments. As we can give
      no assurance as to which approach will be taken, we cannot provide additional
      information that should be considered regarding particular risks in any such
      industry or that could result from over diversification.




**We
      have minority investments in some companies and may acquire similar minority
      interests in future investments, and consequently cannot exercise significant
      influence over their business or the level of their distributions to us, which
      could adversely affect our results of operations and our ability to generate
      cash and make distributions.**




We
      have
      made minority and non-controlling investments in SeaView, Cross Country and
      VoIP
      and have limited legal rights to influence the management of those businesses
      or
      any other businesses in which we make minority investments. While each of those
      entities is managed by one or more persons who also serve as directors of our
      company, these entities are autonomous and may have different objectives than
      we
      have and may not make distributions to us at levels that we anticipate. Our
      inability to exercise significant influence over the operations, strategies
      and
      policies of the businesses in which we have, or may acquire in the future,
      a
      minority interest means that decisions could be made that could adversely affect
      our results and our ability to generate cash.




**We
        may have conflicts of interest with the investment funds to which we commit
        capital and currently have invested with third parties.**
  Our
        interests may differ from those of the other investors who commit capital
        to
        same investment funds. In the case of PAA, in which we have a controlling
        interest, we may be required under contract, the PAA organizational documents
        or
        Delaware law to take actions that benefit PAA and its other investors, even
        if
        such actions may not be in the best interests of our stockholders. In the
        case
        of SeaView, we do not have a controlling interest, but our Chief Executive
        Officer and our Chief Financial Officer are founders of SeaView and along
        with
        Mr. Farmer and Mr. Jones hold interests in its general partner. E. Denton
        Jones,
        a director of our company, is the founder and general partner of Cross Country.
        As a result of these and other conflicts, their respective duties as partners
        or
        officers of SeaView, VoIP and Cross Country could differ from their duties
        as
        directors, officers and employees of our company. In either case, such conflicts
        may limit our ability to take action, or to cause action to be taken, with
        respect to the investment of our funds and our controlled companies and minority
        investments unless such action would not also be in the best interests of
        those
        companies or their respective equity holders.




In
      addition, our officers and directors are not required to, and may choose not
      to,
      commit their efforts full time to our affairs, which may result in a conflict
      of
      interest in allocating their time between our operations and other businesses,
      which could have a negative impact on our ability to achieve our goals. Because
      these officers and directors are also involved in companies that are looking
      for
      investments, our officers and directors may offer acquisition or investment
      opportunities to their other affiliates without offering the same investment
      to
      us. Our officers and directors also receive compensation through their
      management agreements with some of our controlled companies and minority
      investments and through their management agreements with us. The basis for
      such
      compensation may create incentives that differ from our goals, thereby creating
      additional conflicts of interest.


26
  **Our
      new business model requires that we identify and hire additional management
      personnel.**




Once
      acquisitions of controlled companies and minority investments have been made,
      we
      will seek to provide those companies with managerial, structural and financial
      advice. We anticipate, however, that many members of the management teams of our
      controlled companies and minority investments will remain in place and, as
      such,
      we will be dependent upon their ability to execute our business plan. To the
      extent that we believe that our team, or the team of the respective controlled
      company or minority investment, is missing certain skill sets, it will be
      necessary for us to locate personnel having the desired qualifications. We
      can
      give no assurance that we will be able to identify and hire such personnel
      or
      that, if hired, such personnel will perform as expected.




**Our
      controlled companies and minority investments may be highly
      leveraged.**




Our
      controlled companies and minority investments may have outstanding borrowings.
      Leverage may have important adverse consequences to these companies and to
      us as
      an acquirer or investor. These companies may be subject to restrictive financial
      and operating covenants. The leverage may impair the companies’ ability to
      finance their future operations and capital needs. As a result, these companies
      may be limited in their flexibility to respond to changing business and economic
      conditions and to business opportunities. In the event that these companies
      are
      unable to meet their debt obligations, then their assets first would be applied
      toward discharging such debt. In such an event, it is highly unlikely that
      any
      funds would remain following the liquidation of their assets for distribution
      to
      their equity holders, including us, in which case we would lose the value of
      our
      acquisition or investment.




**We
      have sustained substantial operating losses under our prior business model
      and
      we may continue to sustain losses under our new business
      model.**




Under
      our
      prior business model, we experienced net losses applicable to holders of our
      common stock of $3.2 million the year ended December 31, 2004 and losses from
      continuing operations for 2005 of $3.8 million. The nature and extent of any
      future losses applicable to holders of our common stock will depend on the
      success of our financial and business strategies, our ability to implement
      our
      new business plan and on other factors, some of which may be beyond our control.
      We cannot assure you that under our new business plan we will eliminate net
      losses applicable to holders of our common stock and achieve profitable
      operations.




**We
      may not be successful in implementing our growth plans.**




We
      face
      the risks, expenses and uncertainties frequently encountered by emerging
      companies that invest in evolving markets and companies. Furthermore, we are
      subject to additional risks and uncertainties concerning our minority
      investments’ ability to choose successful investments. Successfully achieving
      our growth plan depends upon, among other things, our ability to reduce losses
      and position ourselves to achieve positive cash flow; build skilled management
      teams to provide the requisite advice to our controlled companies and minority
      investments and obtain satisfactory returns from those acquisitions and
      investments.




**Our
      lenders have rights that are senior to those of our
      stockholders.**




We
      borrow
      funds from lenders to provide a portion of our capital for our capital
      commitments and our operations. As of December 31, 2005, we had outstanding
      borrowings of approximately $3.8 million. Our ability to achieve our investment
      objectives may depend in part on our ability to achieve loans on favorable
      terms, and we can give no assurance that loans on such terms can be obtained.
      Furthermore, in the event that we were unable to meet our payment obligations
      when they come due or otherwise breach our covenants under our borrowing
      arrangements, then our lenders will have claims on our assets that are superior
      to the claims of holders of our common stock. Accordingly, our loans increase
      the risks associated with an investment in our common stock.




27


**Our
      revolving credit agreement restricts our use of our cash and contains other
      restrictive and financial covenants that limit our operating
      flexibility.**




Borrowings
      under our revolving credit agreement (“RCA”) are secured by our cash, which is
      placed in a separate cash collateral account. If the cash serving as collateral
      were to drop below our borrowing base, then we would be in default under the
      credit facility and the lender could exercise its remedies under applicable
      law,
      including with respect to our cash that is serving as collateral. Accordingly,
      we are restricted from using any cash on hand in an amount approximately equal
      to any borrowings that are outstanding under our credit facility. As of December
      31, 2005, our borrowings under our revolving credit agreement were approximately
      $3.6 million and the amount of our cash collateralizing those borrowings was
      approximately $3.8 million. On March 2, 2006, WQN repaid the outstanding balance
      on the RCA by utilizing the cash collateralizing those borrowings. Unless we
      post sufficient cash to collateralize any future borrowings, we will not be
      able
      to utilize the RCA in the future. Our revolving credit agreement also contains
      restrictions on our ability to:




·
            incur
                additional debt;·
            create
                liens or pledges with respect to our
                assets;





·
            make
                further investments, loans or advances or other purchases of
                securities;·
            sell
                our assets;





·
            merge
                or otherwise dispose of our business;·
            enter
                new lines of business;





·
            enter
                into more transactions with affiliates; or·
            change
                our name, fiscal year or accounting
                policies.





Our
      revolving credit agreement also requires us to take certain actions, including
      providing our lender with our quarterly financial statements within 30 days
      following the end of each fiscal quarter as opposed to the 45 days typically
      afforded to public companies of our size under the Exchange Act.




Any
      failure to comply with the restrictions of our revolving credit agreement or
      any
      subsequent financing arrangements may result in an event of default. Such
      default may allow our creditors to accelerate the repayment of the related
      debt
      and may result in the acceleration of any other debt to which a cross-default
      provision applies. In addition, these creditors may be able to terminate any
      commitments they had made to provide us with further funds.




**We
      may not have sufficient resources to continue operations without seeking
      additional capital, which may be difficult to obtain.**




We
      have
      limited cash resources, and these resources continue to diminish. Under our
      prior business plan, we recorded a net loss of $3.2 million and consumed $4.2
      million of our cash in operating activities during the year ended December
      31,
      2004 and we recorded a loss of $3.3 million and consumed $300,000 of our cash
      in
      operating activities from continuing operations during the year ended December
      31, 2005. In addition we require cash resources to meet our operational
      requirements, including paying management fees to WQNI Management Group LLC,
      the
      managing members of which are officers, directors and large stockholders of
      our
      company. We believe our investments will provide sufficient liquidity to meet
      our obligations during the next year. However, if we acquire another business
      we
      may need to raise additional funds.  If
      we
      raise additional funds through the issuance of equity, equity-related securities
      or debt securities, such securities may have rights, preferences or privileges
      senior to those of the rights of our common stock and our stockholders may
      experience additional dilution. We cannot be certain that additional financing
      will be available to us on favorable terms or at all. We believe our available
      investments will provide sufficient liquidity in the event we do not raise
      funds
      during 2006 to fulfill our current obligations. WQN’s largest obligation is its
      commitment to fund an additional $7,700,000 in SeaView that is operated by
      the
      principal officers of WQN. WQN and SeaView have executed a standstill agreement
      whereby SeaView has agreed to not call any of the Company’s capital commitment
      unless WQN has the ability to pay all of its other obligations.  Achieving
      our financial goals involves acquiring, and investing capital in, other
      companies to achieve satisfactory returns. Implementing this strategy will
      require additional capital as well. The illiquidity of our controlled companies
      and minority investments may make it difficult for us to obtain cash equal
      to
      the value at which we record our investments if the need arises. Considering
      our
      recent financial performance, it is likely to be very difficult for us to obtain
      additional equity or debt financing. Any terms of such a financing would likely
      be highly dilutive and unfavorable to our current stockholders. Accordingly,
      our
      inability to raise additional capital would adversely affect the success of
      our
      business plan and, as a result, the value of your common stock.





28




**A
      substantial portion of our assets are comprised of securities issued by VoIP,
      Inc. As a result, our financial condition is substantially dependent upon the
      market price for VoIP common stock, over which we have no control.**




We
      received 1,750,000 shares of VoIP’s restricted common stock and securities
      currently convertible into or exercisable for 8,489,100 shares of common stock
      of VoIP as consideration for the sale of our telephony business and related
      assets to VoIP. As of the closing of the sale on October 6, 2005, and based
      on
      the closing sale price of $1.04 per share for VoIP’s common stock on such date,
      the VoIP securities held by us had a value on a fully converted basis of
      approximately $10.6 million. As of December 31, 2005, the closing sale price
      of
      VoIP’s common stock was $1.31 per share and, based on such price, our holdings
      in VoIP had a value on fully converted basis of approximately $14 million.
      However, the common stock and the securities that we hold that are convertible
      into common stock of VoIP have not been registered for resale under the
      Securities Act and, therefore, our ability to sell such shares is extremely
      limited. Because we are an affiliate of VoIP under applicable securities laws,
      our ability to sell VolP common stock is subject to further limitation.
      Furthermore, on a fully converted basis, our interests in VoIP represent
      approximately 14.6% of VoIP’s outstanding common stock and any attempt to sell a
      substantial portion of such shares could cause the market price for VoIP’s stock
      to decline.




Historically,
      the market price of VoIP common stock, as traded on the Over-the-Counter
      Bulletin Board, or OTCBB, under the symbol VOII, has been highly volatile.
      The
      value of our investment in VoIP stock could also decline due to the impact
      of
      any of the following factors upon the market price of VoIP’s shares:




·
            failure
                of VoIP to meet sales goals or operating budget;·
            decline
                in demand for VoIP’s common stock;


·
            revenues
                and operating results of VoIP failing to meet expectations of securities
                analysts or investors in any quarter;·
            downward
                revisions in securities analysts’ estimates or changes in general market
                conditions;


·
            technological
                innovations by competitors or in competing technologies;·
            investor
                perception of VoIP’s industry or prospects; or


·
            general
                economic trends.





Market
      fluctuations are often unrelated to operating performance and therefore would
      be
      beyond the control of VoIP management. Because our financial condition is
      substantially dependent upon VoIP, you should carefully consider the risks
      related to VoIP’s business, including:




·
            VoIP
                has a history of losses and negative cash flows from operations and
                VoIP
                anticipates such losses and negative cash flows may
                continue;·
            VoIP
                has a limited operating history upon which it can be
                evaluated;


·
            if
                VoIP is not able to expand its revenue base as contemplated by its
                business model, then VoIP may never achieve
                profitability;·
            VoIP’s
                business model is based upon revenue from unproven
                markets;


·
            VoIP’s
                results of operations and financial condition may be adversely affected
                by
                goodwill and asset impairment charges; and·
            VoIP
                expects to need additional capital to continue its
                operations.·
            In
                July 2006 we will receive additional shares valued at approximately
                $2,650,000 in conjunction with our settlement with our return of
                capital
                from Cross Country Capital
                Partners.




**We
      will continue to incur the expenses of complying with public company reporting
      requirements and our ability to comply with such requirements will be
      substantially dependent on other companies over which we may not have control.**




We
      have
      an obligation to continue to comply with the applicable reporting requirements
      of federal and state securities laws, including but not limited to, the
      Securities Exchange Act of 1934, as amended, even though compliance with such
      reporting requirements is economically burdensome. In addition, our revolving
      credit agreement requires that we complete our quarterly financial statements
      within 30 days following the end of each fiscal quarter, rather than the 45
      days
      afforded to us under the Exchange Act. This heightened requirement may also
      cause us to incur additional expense and place additional demands on our
      management team.




29




Our
      reporting obligations are also dependent upon us timely receiving the necessary
      financial information from our majority-owned subsidiary, PAA. As we make
      additional acquisitions, we expect to be further dependent upon the ability
      of
      such other companies to provide us with the requisite financial information.
      In
      the event that any of our subsidiaries do not timely provide us with their
      financial information, then we will be unable to timely file our financial
      reports, which would potentially cause us to be subject to delisting from
      Nasdaq, sanctions from the SEC and loss of eligibility to use the short-form
      registration statement, which loss would impair our ability to access the
      capital markets efficiently. If any such financial information that we are
      provided is inaccurate, then our financial statements would also contain
      inaccuracies. Furthermore, because our revolving credit agreement provides
      us
      only with 30 days to provide our quarterly information while such other
      companies, including VoIP, have 45 days to prepare such information, it may
      be
      difficult for us to comply with this obligation and could lead to a breach
      of
      our revolving credit agreement. The occurrence of any such event could cause
      the
      price of our common stock to decline sharply.




**We
      depend on our key personnel.**




We
      depend
      upon the continued services of our senior management for our success, including
      Scott W. Hartman, David S. Montoya and E. Denton Jones. The loss of a member
      of
      our senior management could have a material adverse effect on our business,
      financial condition and results of operations. We cannot assure you that we
      will
      be able to retain our senior management or our other key personnel. Moreover,
      these members of our senior management have existing conflicts of interest
      and
      may have additional future conflicts of interests.




**Our
      stock may be delisted from Nasdaq if we do not meet the requirements for
      continued listing.**




On
      April
      18, 2006, we received a Nasdaq Staff Determination stating that WQN is in
      violation of a requirement for continued listing set forth in Marketplace Rule
      4310(c)(14), which requires a Nasdaq-listed company to file its Annual Report
      on
      Form 10-KSB (“Form 10-KSB”) with Nasdaq on or before the date it is required to
      be filed with the Securities and Exchange Commission. WQN’s Form 10-KSB was
      required to be filed with the Securities and Exchange Commission by the close
      of
      business on April 17, 2006. However, WQN was not able to file such Form 10-KSB
      until May 30, 2006. Nasdaq further informed WQN that its common stock is,
      therefore, subject to delisting from Nasdaq. Filing of this Form 10-KSB
      satisfies the requirements of such delisting letter. In addition we currently
      operate under a delisting notice because our board does not meet the Nasdaq
      continued listing requirement of having a majority of independent directors
      and
      we have been given until February 8, 2007 to regain compliance. We must add
      one
      independent director to our board in order to be in compliance with this rule.
      Our common stock may also be delisted if we fail to meet Nasdaq’s minimum $1 bid
      per share requirement or any other Nasdaq quantitative continued listing
      requirement. In the event that we are unable to maintain the standards for
      continued listing, our shares would be subject to delisting from
      Nasdaq




In
      addition, Nasdaq has advised us that they are monitoring our company to ensure
      that we do not fall within the definition of a “shell company.” Under the SEC
      Rules, a “shell company” has no more than nominal operations and no more than
      nominal assets (or no more than assets consisting solely of cash and cash
      equivalents or, in addition, nominal other assets). Commentators have further
      described this type of entity as a “living dead” company, or a former operating
      company with minimal or limited operations. While we do not believe that our
      company falls within this category, if Nasdaq were to subsequently determine
      that we are a shell company, then our shares would be subject to delisting
      from
      Nasdaq.




If
      our
      common stock was delisted from Nasdaq, then we expect that our common stock
      would be traded on the OTCBB. The OTCBB is a regulated quotation service that
      displays real-time quotes, last-sale prices and volume information in
      over-the-counter equity securities. If our common stock was listed on the OTCBB,
      your ability to resell your shares of our common stock and our general
      reputation among investors could be adversely impacted as the OTCBB is
      considered to be a less efficient market. Furthermore, our ability to raise
      additional capital, and therefore our ability to pursue our business objectives,
      may be adversely affected if our common stock was delisted from
      Nasdaq.





30




**If
      we are classified as an investment company, we could be subject to restrictive
      and costly regulation.**




The
      interests that we hold in VoIP, Cross Country, SeaView and PAA represent a
      significant portion of our assets. Because of our substantial investment in
      these companies, and because of any future investments in other companies,
      it is
      possible that we could be classified as an “investment company” under the
      Investment Company Act of 1940. As a result of the Sale to VoIP, we are
      currently relying on an exemption from the Investment Company Act for transient
      investment companies. However, we can only rely on that exemption for one year
      in any three-year period. Our intention is to become engaged primarily in a
      business other than investing in “investment securities” for purposes of the
      Investment Company Act by the end of that one-year period, but we cannot assure
      you that we will be successful. The Investment Company Act and the rules
      and regulations promulgated under the act are extremely restrictive. Compliance
      with the Investment Company Act would be very costly, and it could be difficult
      for us to execute our business plan if we were subject to its
      requirements.




**We
      operate in a highly competitive market for investment
      opportunities.**




A
      number
      of entities will compete with us for acquisitions of, and investments in, small
      and middle market companies. We will compete with public and private buyout
      funds, commercial and investment banks, commercial financing companies, and,
      to
      the extent they provide an alternative form of financing, hedge funds. Many
      of
      our competitors are substantially larger and have considerably greater
      financial, technical, and marketing resources than we do. For example, some
      competitors may have a lower cost of funds and access to funding sources that
      are not available to us. In addition, some of our competitors may have higher
      risk tolerances or different risk assessments, which would allow them to
      consider a wider variety of acquisitions and investments and establish more
      relationships than us. The competitive pressures we face could have a material
      adverse effect on our business, financial condition, and results of operations.
      Also, as a result of this competition, we may not be able to take advantage
      of
      attractive opportunities to obtain controlled companies and minority investments
      from time to time, and we can offer no assurance that we will be able to
      identify and make acquisitions and investments that are consistent with our
      objectives. We may lose investment opportunities if we do not match our
      competitors’ pricing, terms, and structure. If we match our competitors’
pricing, terms, and structure, we may experience a decreased return on our
      controlled companies and minority investments.




**We
      do not expect to pay cash dividends on our common stock.**




We
      have
      never paid a cash dividend on our common stock and do not expect to pay cash
      dividends in the foreseeable future. Rather, we intend to retain earnings and
      increase capital in furtherance of our overall business objectives.




**A
      single director of our company owns approximately 38.0% of our outstanding
      common stock and all of our officers and directors together beneficially own
      approximately 48.3% of our outstanding common stock**




B.
      Michael Adler, a director of our company and our former chief executive officer,
      currently is the beneficial owner of 2,621,478 shares of our common stock,
      which
      represents approximately 38.0% of the outstanding shares of our common stock.
      As
      a result, Mr. Adler has the ability, to a significant extent, to affect the
      outcome of all matters required to be submitted to our stockholders for
      approval, including decisions relating to the election of our directors and
      our
      ability to be acquired and other significant corporate
      transactions.




Collectively,
      including Mr. Adler, all of our officers and directors beneficially own
      4,167,847 shares of our common stock, which represents 48.3% of our outstanding
      common stock. Accordingly, our officers and directors collectively have the
      ability to a significant extent to affect the outcome of all matters required
      to
      be submitted to our stockholders.




31




**Our
      quarterly operating results are subject to significant fluctuations and our
      future operating results are unpredictable.**





Our
      operating results are unpredictable and have fluctuated significantly on a
      quarterly basis. We expect to continue to experience significant fluctuations
      in
      our quarterly results of operations due to a variety of factors, many of which
      are outside of our control. As a result, period-to-period comparisons of our
      results of operations are not necessarily meaningful and should not be relied
      upon as indications of future performance.




**We
      may not be able to raise needed additional capital in the future.**





We
      require substantial capital to fund our business. Our working capital
      requirements and cash flow provided by operating activities can vary from
      quarter to quarter depending on revenues, operating expenses, capital
      expenditures and other factors. We need to raise additional funds if, for
      example, we pursue business acquisitions or experience operating losses that
      exceed our current expectations. If we raise additional funds through the
      issuance of equity, equity-related securities or debt securities, such
      securities may have rights, preferences or privileges senior to those of the
      rights of our common stock and our stockholders may experience additional
      dilution. We cannot be certain that additional financing will be available
      to us
      on favorable terms or at all. We believe our available investments will provide
      sufficient liquidity in the event we do not raise funds during 2006 to fulfill
      our current obligations. WQN’s largest obligation is its commitment to fund an
      additional $7,700,000 in SeaView that is operated by the principal officers
      of
      WQN. WQN and SeaView have executed a standstill agreement whereby SeaView has
      agreed to not call any of the Company’s capital commitment unless WQN has the
      ability to pay all of its other obligations.




We
      may
      also need to raise additional funds sooner than anticipated to:




-
            fund
                more rapid expansion;





-
            develop
                new or enhanced services or products; and





-
            respond
                to competitive pressures.





If
      additional funds are raised through the issuance of equity or convertible debt
      securities, the rights and ownership in our company by existing stockholders
      may
      be reduced.





We
      cannot
      assure stockholders that additional financing will be available on terms
      favorable to us or at all. If adequate funds are not available, or are not
      available on acceptable terms, we may not be able to fund planned expansion,
      take advantage of available opportunities, develop or enhance services or
      products or respond to competitive pressures. Such inabilities could have a
      material adverse effect on our business, financial condition and operating
      results.




**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





The
      financial statements required by this item begin at Page F-1
      hereof.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None.





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





Management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, has
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of
      the period covered by this report. Based upon that evaluation, the Chief
      Executive Officer and Chief Financial Officer concluded that, as a result of
      the
      material weaknesses in the internal controls over financial reporting for the
      Company’s investment in Park Ave. Assoc. LLC (“PAA”) and certain other financial
      reporting matters, described below, the Company’s internal controls were not
      effective to ensure that information required to be disclosed in the reports
      that the Company files and submits under the Exchange Act is (i) recorded,
      processed, summarized and reported as and when required and (ii) accumulated
      and
      communicated to the Company’s management, including its principal executive
      officer and principal financial officer, as appropriate to allow timely
      decisions regarding disclosure.




32




During,
      and shortly following, the fiscal quarter ended December 31, 2005, we
      experienced significant losses from our investment in PAA as a result of actions
      committed by its chief executive officer and from our investment in CCCP.
      Management identified these actions, which we believe were improper, within
      weeks after year-end and determined that they reflected a material weakness
      in
      internal controls over the review of appropriate documents to support certain
      transactions. Additionally, management identified certain insufficient controls
      over the accounting for certain assets and gains and the preparation of
      financial statements. These weaknesses are expected to be corrected through
      additional staffing and training.





During
      and after the first quarter of 2006, the Company took a number of corrective
      actions to address the material weaknesses discussed above, including the
      termination of the former chief executive office of PAA and the appointment
      of
      an interim chief executive officer and interim chief financial officer.
      Additionally, during the first quarter, the Company has undertaken the internal
      hiring of additional accounting professionals and retained the services of
      accounting and tax consultants. The Company believes that adequate steps have
      been taken by management to reduce the risk of ineffective disclosure controls
      and procedures, including controls surrounding investments, on a going-forward
      basis.





**PART
      III**





**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT.**





WQN
      has
      adopted a Code of Ethics and Business Conduct that applies to directors,
      officers and employees, including WQN’s principal executive officer, principal
      financial officer and principal accounting officer. WQN’s Code of Ethics and
      Business Conduct can be obtained free of charge by contacting the company at
      212-774-3656. Changes to and waivers granted with respect to WQN’s Code of
      Ethics and Business Conduct related to officers identified above, and other
      executive officers and directors of WQN that we are required to disclose
      pursuant to applicable rules and regulations of the SEC will be posted on our
      website at http://www.wqn.com.






The
      following table provides information as of May 30, 2006, with respect to our
      directors:




**Name**
            
            **Age**
            
            **Position**
            
            **Served
                    as Executive**
                **Officer
                  or**
              **Director
                Since**Robert
                A. Farmer(1)
                (2) (3)
            
            67
            
            Chairman
                of the Board, Director
            
            2000Scott
                W. Harman
            
            43
            
            Chief
                Executive Officer, Director
            
            2005David
                S. Montoya
            
            41
            
            Chief
                Financial Officer, Director
            
            2005B.
                Michael Adler
            
            58
            
            Director
            
            1996E.
                Denton Jones(1)(3)
            
            54
            
            Director
            
            1999Elizabeth
                H. Buchler(1)
                (2) (3)
            
            56
            
            Director
            
            2000Hal
                H. Bibee(2)
                (3)
            
            53
            
            Director
            
            2004Charles
                P. Miller
            
            45
            
            Director
            
            2006







(1)
            
            Member
                of the Compensation Committee.(2)
            
            Member
                of the Audit Committee.(3)
            
            Member
                of the Nominating Committee.




33


**Robert
      A. Farmer** has
      been
      our Chairman of the Board since March 2004. Mr. Farmer has been Chief
      Executive Officer and Chairman of the Board of Advanced Multimedia Group, Inc.,
      a privately held Internet incubator and consulting firm, since
      November 1999. From August 1994 until March 1999 he was Consul General
      of the United States to Bermuda. Mr. Farmer has been a director of WQN
      since August 2000.




**Scott
      W. Hartman** has been
      our Chief Executive Officer since October 2005. Prior to joining WQN Inc.,
      Scott
      Hartman co-founded SeaView Mezzanine Fund, LP in 2002. Mr. Hartman previously
      co-founded and acted as Managing Director of Unique Partners, a LBO firm located
      in Southern California. Prior to co-founding Unique, Mr. Hartman was CEO of
      Nucor World Industries, a privately held investment firm that specialized in
      acquiring and managing small businesses. Prior to Nucor, Mr. Hartman served
      as
      Vice President of Business Development for City National Bank. Additionally,
      Mr.
      Hartman is a past Chairman of Hawker Pacific Aerospace, a publicly traded
      company, and led the company through the initial public offering process. Mr.
      Hartman has acted as CEO/President of six different companies in the
      manufacturing and business service industries. Mr. Hartman sits on the Board
      of
      Directors for Southern Africa Enterprise Development Fund (SAEDF) and Unity
      International Group.




**David
      S. Montoya** has
      served as our Chief Financial Officer since October 2005. Prior to joining
      WQN,
      Inc., Mr. Montoya was a partner in SeaView Capital, LLC from 2001and co-founded
      SeaView Mezzanine Fund, LP in 2002. Prior to joining SeaView, he served as
      a
      principal at Silicon Alley Venture Partners (“SAVP”), a venture capital fund in
      New York City. Prior to joining SAVP, Mr. Montoya was the Director of
      Investments and Finance at the New York City Investment Fund ("NYCIF"), a
      private investment fund created by Henry Kravis and Jerry Speyer. Prior to
      joining NYCIF, he was an attorney specializing in mergers and acquisitions
      at
      Skadden, Arps, Slate, Meagher and Flom LLP, the owner of an investment advisory
      firm, and an accountant at Ernst & Young LLP, working in the financial
      services audit group and the M&A tax group. Mr. Montoya has more than
      fifteen years and $15 billion of investment and transactional experience that
      includes working with a diverse group of portfolio companies such as Cosential,
      Right Track Recording, StarMedia and TheStreet.com.  Mr.
      Montoya received his undergraduate degree in Finance from St. John's University,
      his MBA from Columbia University Graduate School of Business and his JD from
      New
      York University School of Law. Mr. Montoya is also a CPA.




**B. Michael
        Adler** is
        the
        founder of WQN and was our Chairman of the Board from our inception in 1996
        through March 2004. Mr. Adler served as our Chief Executive Officer
        and President from March 2004 until October 2005. Mr. Adler also served as
        our Chief Executive Officer from 1996 to 2001. Mr. Adler was a director of
        Intellicall, Inc., a publicly traded public access communications company,
        until
        its merger with Wireless WebConnect!, Inc. on March 30, 2001.
        Mr. Adler founded Intellicall in 1984 and served as Chairman or Vice
        Chairman of the Board from its inception until November 1993. From
        November 1993 until July 1999, Mr. Adler was the Chairman of the
        Board of The Payphone Company Limited, a company that installs and owns a
        wireless pay phone network in Sri Lanka. For approximately the last eight
        years,
        he has been the Chief Executive Officer of Eagle Venture Capital, LLC, a
        Delaware limited liability company, formerly known as WorldQuest Networks,
        LLC
        and he was Chief Executive Officer of VoIP, Inc. until May 2006.
  **E. Denton
        Jones** has
        been
        a private investor since August 2002. Prior to that, Mr. Jones was
        Chairman of the Board and Chief Executive Officer of New York City
        Telecommunications Company, Inc., a privately held telecommunications company,
        since he co-founded it in June 1993. Mr. Jones has been involved in
        the telecommunications industry since 1984 and owned or operated several
        privately held telecommunications companies during that time prior to
        co-founding New York City Telecommunications. These companies were Altus
        Communications, Inc., MSC Services, Inc., MSC National, Inc. and NYLT, Inc.
        (formerly known as New York Local Telephone, Inc.). He has been a director
        of
        WQN since July 1999.
  **Elizabeth
        H. Buchler**has
        been
        the owner and principal broker of Real Estate Showcase, a real estate sales
        and
        management firm since 1985. She has been active in the real estate business
        since 1971 and has served as an officer for the Louisiana Real Estate Commission
        and various state and local realtor boards. She has been a director of WQN
        since
        December 2000.
  **Hal
        H. Bibee** has
        been
        our chairman of the audit committee since October 2004. He has been
        involved with telecommunications since 1984. Since 2003, Mr. Bibee has been
        Chief Financial Officer and partner of Parkway Properties, which develops
        and
        operates state-of-the art storage facilities. In 2000, he became chief executive
        officer of INTELLICAD, LLC, an engineering, design, drafting, and consulting
        telecommunications firm that specializes in the design of hybrid fiber/coax
        and
        fiber to the unit telecommunications systems. In 1998, Mr. Bibee became a
        general partner of ASETZ, a diversified real estate development and investment
        company. Additionally, in 1998 he served as Chief Executive Officer for
        FiberLink, LLC, an engineering, construction, and consulting telecommunications
        firm that specializes in constructing telecommunications systems to compete
        with
        existing CATV providers. From 1995 to 2000, Mr. Bibee was Chief Executive
        Officer of Better Choice TV, Inc., which was formed to pursue the acquisition
        and development of wireless telecommunications systems. He has been a director
        of WQN since October 2004 and he was President of VoIP, Inc. until May
        2006.


**Charles
        P. Miller** has
        been
        a partner in the law firm of Patton Boggs LLP since 1997. He is currently
        the
        chairman of the business department for the firm. Mr. Miller concentrates
        his
        practice in financial institutions, mergers and acquisitions, project finance,
        public and private telecommunications and technology companies. From 1995-1997
        Mr. Miller was a partner in the law firm of Scher & Miller LLP in Dallas,
        Texas. From 1990 -1994, Mr. Miller was the general counsel and executive
        vice
        president of a publicly traded telecommunications company headquartered in
        Dallas, Texas. Mr. Miller graduated from West Virginia University College
        of
        Law, J.D., Order of the Coif, in 1986 and from West Virginia University,
        B.A., *cum
        laude* ,
        in
        1983. He has been a director of WQN since January 2006.


34




***Board
      of Directors and Committees of the Board***




Our
      Board
      of Directors has a Compensation Committee, an Audit Committee and a Nominating
      Committee. During 2005, the Board of Directors held 9 meetings, the Audit
      Committee held 11 meetings, the Compensation Committee held 1 meeting and the
      Nominating Committee held 1 meeting. No director attended fewer than 75% percent
      of the meetings held by the Board or the committees on which he or she served
      during the 2005 fiscal year.




*Compensation
      Committee* .
      The
      Compensation Committee is responsible for recommending to the Board of Directors
      all officer salaries, management incentive programs and bonus payments. Its
      current members are Messrs. Jones and Farmer and Ms. Buchler.




*Audit
      Committee* .
      The
      Audit Committee recommends the firm to be appointed as independent public
      accountants to audit WQN’s financial statements and to perform services related
      to the audit; reviews the scope and results of the audit with the independent
      public accountants; reviews the Company’s year-end operating results with
      management and the independent public accountants; considers the adequacy of
      WQN’s internal accounting and control procedures; reviews the non-audit services
      to be performed by the independent public accountants, if any; and evaluates
      the
      accountants’ independence. The Audit Committee is governed by a written charter
      approved by the Board. Its members are Mr. Farmer, Mr. Bibee and
      Ms. Buchler. Mr. Bibee is an independent director (as defined in the
      Nasdaq Market Rules and in Item 7(d)(3)(iv) of Schedule 14A under the
      Exchange Act) and a “financial expert” within the meaning of Item 401(e) of
      Regulation S-B.




*Nominating
      Committee* .
      The
      Nominating Committee identifies and recommends director nominees to be elected
      by the Company’s stockholders in connection with each annual meeting. The
      Nominating Committee is also responsible for recommending to the Board
      membership on standing Board committees and for identifying and recommending
      director appointees to take office between annual meetings.




The
      Nominating Committee evaluates each candidate, including incumbents, based
      on
      the same criteria. In reviewing potential candidates for the Board, the
      committee considers each nominee’s personal and professional integrity,
      experience, skills, ability and willingness to devote the time and effort
      necessary to be an effective Board member. The Nominating Committee will also
      consider the Board’s having an appropriate mix of backgrounds, skills and
      qualifications, the qualities and skills that the committee believes are
      necessary for one or more of the Company’s directors to possess and standards
      for the overall structure and composition of the Company’s Board.




The
      Nominating Committee is governed by a written charter approved by the Board
      which is attached as Appendix B. Its current members are
      Messrs. Jones, Bibee and Farmer and Ms. Buchler. Each member of the
      Nominating Committee is independent for purposes of the Nasdaq Marketplace
      Rules.




*Director
      Compensation* .
      We pay
      our directors annual compensation of $35,000 for their services. We pay our
      Chairman of the Board and Chairman of the Audit Committee annual compensation
      of
      $60,000 for their services. In addition, directors receive a fee of $1,000
      for
      each meeting attended. Directors attending any committee meeting receive an
      additional fee of $1,000 for each committee meeting attended, unless the
      committee meeting is held on the day of a meeting of the Board of Directors,
      in
      which case they receive no additional compensation for attending the committee
      meeting. Directors are also reimbursed for reasonable costs and expenses
      incurred for attending any director or committee meetings. Each new director
      will be granted options to purchase 25,000 shares of common stock under our
      stock option plans concurrently with his or her initial election to the Board.
      Each director shall automatically receive an option to purchase up to 35,000
      shares following each annual meeting of the stockholders of the Company, if
      immediately after such meeting, he or she will continue to serve on the Board
      and has served on the Board for at least the preceding six months.




**Communications
      with Directors**




The
      Board
      maintains a process for stockholders to communicate with the Board of Directors
      or any Board member. Stockholders who desire to communicate with the Board
      should send any communication to the Company’s Secretary, c/o WQN, Inc., 509
      Madison Avenue, Suite 1510, New York, NY 10022. Any communication must state
      the
      number of shares of Common Stock beneficially owned by the stockholder making
      the communication. The Secretary will forward such communication to the full
      Board of Directors or to any individual director or directors to whom the
      communication is directed, unless the communication is threatening or illegal,
      uses inappropriate expletive language or is similarly inappropriate, in which
      case the Secretary has the authority to discard the communication or take
      appropriate legal action regarding the communication.




35


**Section 16(a)
      Beneficial Ownership Reporting Compliance**






Based
      solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to
      us
      pursuant to Rule 16a-3(e) promulgated under the Securities Exchange Act of
      1934
      (the “Exchange Act”), or upon written representations received by us, we are not
      aware of any failure by any officer, director or beneficial owner of more than
      10% of our common stock to timely file with the Securities and Exchange
      Commission any Form 3, 4 or 5 relating to 2005, other than nine Form 4 reports
      covering a total of 19 transactions which were filed late by Mr.
      Adler.




**ITEM
      10. EXECUTIVE COMPENSATION**




***Summary
      Compensation Table***




The
      following table sets forth information concerning the annual and long-term
      compensation earned by our Chief Executive Officer and each executive officer
      who had an annual salary and bonus during fiscal 2005 exceeding $100,000. We
      refer to these individuals collectively as the Named Executive Officers.




**Long
                Term****Annual
                Compensation**
            
            **Compensation****Other**
            
            **Securities**
            
            **Payouts
                and****Annual**
            
            **Underlying**
            
            **All
                Other****Name
                and principal position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Compensation
                ($)**
            
            **Options**
            
            **Compensation
                ($)**Scott
                W. Hartman(1)
            
            2005
            
            1
            
            —
            
            —
            
            255,000
            
            —CEO,
                DirectorB.
                Michael Adler
            
            2005
            
            175,288
            
            —
            
            —
            
            —
            
            —Director,
                Secretary
            
            2004
            
            175,000
            
            125,000
            
            —
            
            —
            
            —2003
            
            175,000
            
            —
            
            —
            
            —
            
            —Victor
                E. Grijalva(2)
            
            2005
            
            100,177
            
            —
            
            —
            
            —
            
            —VP,
                CFO, Secretary and
            
            2004
            
            150,000
            
            75,000
            
            —
            
            75,000
            
            —Treasurer
            
            2003
            
            150,000
            
            —
            
            —
            
            —
            
            —(1)Mr. Hartman joined the company on October 5, 2005.(2)Mr. Grijalva resigned from the company on July 1,
                2005.




***Employment
      Agreements***




WQN
      has
      entered into an employment agreement (the “Hartman Employment Agreement”),
      effective October 5, 2005 following the completion of the sale of the
      Voice-Over-Internet Protocol business of WQN, with Scott W. Hartman (“Hartman”)
      to serve as our Chief Executive Officer for a term of three years. We granted
      Mr. Hartman a 10-year stock option to purchase 220,000 shares of our common
      stock under our 2001 Stock Option Plan. One-third of the stock options have
      vested on the effective date of the Hartman Employment Agreement and one-third
      on each of the first and second anniversary of the effective date.




WQN
      has
      entered into an employment agreement (the “Montoya Employment Agreement”) with
      David S. Montoya (“Montoya”) to serve as our Chief Financial Officer for a term
      of three years. We granted Mr. Montoya a 10-year stock option to purchase
      220,000 shares of our common stock under our 2001 Stock Option Plan. One-third
      of the stock options will vest on the effective date of the Montoya Employment
      Agreement and one-third on each of the first and second anniversary of the
      effective date




***Management
      Agreement***




WQN
      has
      entered into a definitive management agreement (the “Management Agreement”),
      effective October 5, 2005, with WQN Management Group, LLC (“Advisors”), a newly
      formed Delaware limited liability company in which Scott W. Hartman, B. Michael
      Adler, E. Denton Jones and David S. Montoya have a direct material interest,
      pursuant to which Advisors will provide us with office facilities and day-to-day
      management services. We will pay management fees to Advisors based on a
      percentage of our assets plus incentive fees based on a percentage of our
      investment income and capital gains. The term of the Management Agreement is
      ten
      years.




36


***Option
      Grants***






The
      following table provides certain summary information concerning shares of common
      stock represented by stock options granted to each of the Named Directors during
      fiscal year 2005.




**Percentage
                of Total****Number
                of Securities**
            
            **Options
                Granted to**
            
            **Exercise**
            
            **Expiration****Underlying
                Options**
            
            **Employees
                in Fiscal Year**
            
            **Price**
            
            **Date**B.
                Michael Adler
            
            
            35,000
            
            
            3.6
            %
            
            1.88
            
            
            10/2015Scott
                W. Hartman
            
            
            220,000
            
            
            22.7
            %
            
            1.41
            
            
            08/201535,000
            
            
            3.6
            %
            
            1.88
            
            
            10/2015Victor
                E. Grijalva(1)
            
            
            —
            
            
            —(1)Mr. Grijalva resigned from the company on July 1, 2005




***Fiscal
      Year-End Option Values***






The
      following table provides information concerning the shares of common stock
      represented by outstanding stock options held by each of the Named Executive
      Officers on December 31, 2005. No options were exercised by the Named
      Executive Officers during 2005.




**Number
                of Securities****Underlying
                Unexercised**
            
            
            **Value
                of Unexercised****Options
                at**
            
            
            **In-the-Money
                Options at**
            
            
            **Shares****December
                31, 2005**
            
            
            **December
                    31, 2005 (1)**
            
            
            **Acquired
                on**
            
            
            **Value****Exercisable**
            
            
            **Unexercisable**
            
            
            **Exercisable**
            
            
            **Unexercisable**
            
            
            **Exercise**
            
            
            **Realized**B.
                Michael Adler
            
            
            31,667
            
            
            
            23,333
            
            
            $
            —
            
            
            $
            —Scott
                W. Hartman
            
            
            85,000
            
            
            
            170,000
            
            
            
            13,933
            
            
            
            27,867Victor
                E. Grijalva(1)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —(1)Mr. Grijalva resigned from the company on July 1, 2005







(1)
            
            Value
                is based on the closing sales price of $1.60 per share on
                December 31, 2005, the last trading day in 2005.




**ITEM
      11. PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




The
      table
      below provides certain information regarding the ownership of our common stock
      as of March 31, 2006, by each stockholder known to us to own beneficially
      more than five percent of our outstanding common stock, each current director
      and nominee, and all directors and nominees as a group, based on information
      provided to us by such persons. Except as otherwise stated, each such person
      has
      sole investment and voting power with respect to the shares set forth in the
      table. The address for all our Directors is 14911 Quorum Drive, Suite 140,
      Dallas, Texas 75254.




Eagle
      Venture Capital, LLC is the record and beneficial owner of 2,456,478 shares.
      B.
      Michael Adler owns a controlling interest in Eagle Venture and is deemed to
      beneficially own these shares. The share ownership for Mr. Adler also
      includes vested options to purchase 11,667 shares, unvested options to purchase
      23,333 shares and 100,000 shares owned by Adler Family Trust. World Quest
      Communications, Inc. is the record and beneficial owner of 300,000 shares.
      WorldQuest Communications, Inc. is owned 100% by the E. Denton Jones Family
      Trust and E. Denton Jones is deemed to beneficially own these shares. The
      ownership for Mr. Jones also reflects 1,000 shares owned by a company with
      respect to which he shares investment and dispositive power, as well as a vested
      option to purchase 56,666 shares and unvested options to purchase 93,334 shares.
      The share ownership for Robert A. Farmer includes vested options to purchase
      64,999 shares and unvested options to purchase 110,667 shares. Elizabeth H.
      Buchler’s beneficial ownership includes vested options to purchase 50,000
      shares, unvested options to purchase 30,000 shares, vested options to purchase
      30,000 shares from Eagle Venture and 5,000 shares owned by Ms. Buchler’s
      spouse. Hal H. Bibee’s beneficial ownership includes vested options to purchase
      51,337 shares and unvested options to purchase 103,333 shares. Scott W.
      Hartman’s beneficial ownership includes vested options to purchase 85,000 shares
      and unvested options to purchase 170,000 shares. David Montoya’s beneficial
      ownership includes vested options to purchase 85,000 shares and unvested options
      to purchase 170,000 shares. Charles P. Miller’s beneficial ownership includes
      vested options to purchase 11,667 shares and unvested options to purchase 23,333
      shares.




37




**Shares****beneficially**
            
            **Percentage
                of****Name**
            
            
            
            **owned**
            
            **shares
                owned**Scott
                W. Hartman
            
            
            Director,
                CEO
            
            
            255,000
            
            
            1.22
            %David
                S. Montoya
            
            
            Director,
                CFO
            
            
            255,000
            
            
            1.22
            %B.
                Michael Adler
            
            
            Director
            
            
            2,591,478
            
            
            37.27
            %E.
                Denton Jones
            
            
            Director
            
            
            451,000
            
            
            5.16
            %Robert
                A. Farmer
            
            
            Director
            
            
            226,500
            
            
            1.68
            %Elizabeth
                H. Buchler
            
            
            Director
            
            
            116,369
            
            
            1.25
            %Hal
                H. Bibee
            
            
            Director
            
            
            155,000
            
            
            *Charles
                P. Miller
            
            
            Director
            
            
            35,000
            
            
            *Lloyd
                Miller
            
            
            
            
            
            789,755
            
            
            11.48
            %All
                executive officers and Directors as a group (8)
            
            
            
            
            
            4,085,347
            
            
            46.09
            %







*
            
            Less
                than 1%




***Summary
      of Equity Compensation Plan***






Shown
      below is information concerning all equity compensation plans and individual
      compensation arrangements in effect as of the end of the last fiscal year.




**Equity
                Compensation Plan Information****Number
                of****Securities****Number
                of**
            
            
            
            
            
            
            **Remaining****Securities
                To Be**
            
            
            **Weighted**
            
            
            **Available
                For****Issued
                Upon**
            
            
            **Average
                Exercise**
            
            
            **Future
                Issuance****Exercise
                of**
            
            
            **Price
                of**
            
            
            **Under
                Equity****Outstanding**
            
            
            **Outstanding**
            
            
            **Compensation****Plan
                Category**
            
            **Options**
            
            
            **Options**
            
            
            **Plans**Equity
                compensation plans approved by security holders
            
            
            1,602,489
            
            
            $
            2.90
            
            
            
            647,511




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      Company’s founder and former Chief Executive Officer holds a controlling
      interest in Eagle Venture Capital, which owns approximately 2.6 million
      outstanding shares of the common stock of the Company as of December 31,
      2005.




On
      June
      27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
      in
      SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
      has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
      the terms of the limited partnership agreement, WQN is treated as if it were
      a
      limited partner as of December 8, 2004. WQN has an approximately 28% limited
      partnership interest in SeaView. SeaView invests in mezzanine securities in
      a
      diversified portfolio of small to mid-size companies. Scott Hartman, our Chief
      Executive Officer and a director, David S. Montoya, our Chief Financial Officer
      and a director, Robert Farmer, a director, and an affiliate of E. Denton Jones,
      a director, each hold a financial interest in the general partner of
      SeaView.





38


In
      November 2004, WQN invested $3 million in Cross Country Capital Partners, L.P.
      (“Cross Country”), a partnership managed by an affiliate of E. Denton Jones, a
      director of WQN. WQN has an approximately 82% limited partnership interest
      in
      Cross Country. The majority of the partnership assets are to be invested in
      private investments in public entities. The partnership investments will take
      the form of common equity, preferred equity, convertible debt and/or equity
      or
      debt securities. Among other investments, Cross Country has substantial
      investments in VoIP and PAA.





On
      May
      17, 2006, WQN and PAA (PAA collectively with WQN, the “WQN Parties”) entered
      into an agreement (the “Cross Country Agreement”), with E. Denton Jones
      (“Jones”) and Cross Country Capital Partners LP (“Cross Country”) (Jones and
      Cross Country are collectively referred to as the “Jones Parties”). Pursuant to
      the Cross Country Agreement, WQN completely withdrew its investment in Cross
      Country Capital Partners, LP. Cross Country will transfer to WQN as the return
      of its capital (“Return of Capital”), the sum of two million eight hundred fifty
      thousand dollars ($2,850,000). The Return of Capital shall be made to WQN in
      the
      following manner: (i) by the payment on the earlier of the closing of the
      Enabling Mortgages (as defined in the Cross Country Agreement) and August 16,
      2006, of the sum of $200,000 in cash; and (ii) by the transfer within ten (10)
      business days of date of the Cross Country Agreement, of restricted shares
      of
      VOIP, Inc. common stock (the “Stock”); the number of shares of the Stock shall
      be equal to the quotient whereby (i) the numerator is $2,650,000 and (ii) the
      denominator is the volume weighted average price of the Stock for the five
      (5)
      trading days preceding the date of the Cross Country Agreement. The terms of
      the
      Cross Country Agreement also provide that the parties enter into general
      releases with each other. E. Denton Jones is a director of WQN.




We
      entered into a management agreement with WQNI Management Group LLC (f/k/a WQNI
      Capital Advisors, LLC) (“WQNI Management”) in October 2005. WQNI Management is a
      Delaware limited liability company formed solely for the purpose of providing
      management services to us. Scott W. Hartman, B. Michael Adler, E. Denton Jones
      and David S. Montoya, who are four of our directors and certain of our officers,
      comprise all of the managing members of WQNI Management. Each of them, or their
      affiliates, own 25% of WQNI Management. The material elements of our management
      agreement are summarized below. The statements that follow are subject to and
      qualified in their entirety by reference to all of the provisions of the
      management agreement, a form of which has been incorporated by reference as
      an
      exhibit to this Form 10-KSB.




The
      management agreement defines our manager’s duties and responsibilities as
      follows: (i) to provide  us
      with
      suitable experienced professionals to enable us to conduct our operations;
      (ii)
      to provide us an office facility within the New York City metropolitan area
      to
      enable us to conduct our business operations, including furnishing such office
      with office equipment (including computers and software) and furniture suitable
      to enable us to conduct our business operations and all janitorial service,
      utility service, local and long distance telephone, high speed internet
      connections and fax service, and other similar services necessary to the conduct
      of such operations; and (iii) to seek suitable investment opportunities and
      manage our investment policy; perform our day-to-day investment and business
      operations; provide investment advice; and prepare and disseminate all necessary
      reports and financial statements to our management and board of
      directors.




Without
      the written approval of our board of directors, WQNI Management shall not
      commit, or enter into any agreement, on our behalf with respect to: (i) the
      incurrence any indebtedness for borrowed money; (ii) any investment by us,
      other
      than the investment of cash in short-term permitted investments in the ordinary
      course of business; or (iii) any other material contract.




WQNI
      Management is responsible for the payment of: (i) the compensation of all
      employees of WQNI Management; and (ii) the costs of providing services under
      the
      management agreement to us, except for those expenses described below, including
      office expenses, travel, business development, office and equipment rental,
      bookkeeping and the development, underwriting, due diligence, investigation
      and
      monitoring of investments. We pay all of our other expenses directly, including
      our legal fees, audit expenses, directors and officers insurance, other expenses
      related to being a public company and direct transaction expenses.




In
      consideration for the services provided to us by WQNI Management, we have agreed
      to pay to WQNI Management the following consideration: (i) one-half of one
      percent (.5%) of Total Assets (as defined below), payable on May 15, August
      15,
      November 15 and March 31, based on our financial statements at the end of the
      fiscal quarter immediately preceding the payment date (the “Base Management
      Fee”); and (ii) an incentive fee equal to 20% of the excess, if any, of our Net
      Investment Income (as defined below) for each of our fiscal quarters that
      exceeds the Priority Return (as defined below), payable on May 15, August 15,
      November 15 and March 31, based on our financial statements determined in
      accordance with generally accepted accounting principles, consistently applied,
      at the end of the fiscal quarter immediately preceding the payment date (the
      “Incentive Fee”); and (iii) an incentive fee (“Capital Gains Fee”) equal to 20%
      of our net Realized Capital Gains (Realized Capital Gains (as defined below)
      less Realized Capital Losses (as defined below)) on a cumulative basis for
      each
      of our fiscal years following October 11, 2005, minus any Unrealized Capital
      Depreciation (as defined below) at the end of such fiscal year and minus the
      aggregate amount of all Capital Gains Fees paid to WQNI Management in our prior
      fiscal years, payable on April 15 of each year based on our audited financial
      statements for our prior fiscal year; provided, however, that no Capital Gains
      Fees shall be paid to  WQNI
      Management with respect to our investment in Seaview.




39


As
      used
      herein, the following terms have the following meanings: (i) “Total Assets”
means the amount of our gross assets as set forth on our applicable financial
      statements at the end of the fiscal quarter immediately preceding the payment
      date, as determined in accordance with generally accepted accounting principles,
      consistently applied; provided, however, that in computing Total Assets the
      gross book value with respect to our investment in Seaview shall be excluded
      from the calculation of Total Assets; (ii) “Net Investment Income” shall mean
      our interest income, dividend income, and any other income (including any other
      fees such as commitment, origination, syndication, structuring, diligence,
      managerial assistance, monitoring, and consulting fees or other fees that we
      receive from portfolio companies or investments) which are collected during
      the
      fiscal quarter of our company; minus our operating expenses for the fiscal
      quarter (including the Base Management Fee and any interest expense, but
      excluding the Incentive Fee and the Capital Gains Fee); provided, however,
      that
      any Net Investment Income with respect to the our investment in Seaview shall
      be
      excluded from the calculation of Net Investment Income. Net Investment Income
      does not include Realized Capital Gains, Realized Capital Losses or Unrealized
      Capital Depreciation; (iii) “Priority Return” means a rate equal to 1.5% (6%
      annualized) of the our Total Assets; (iv) “Realized Capital Gains” on each of
      our investments will be calculated as the excess of the net amount realized
      from
      the sale or other disposition of such investment over the original cost of
      the
      investment (less any Unrealized Capital Depreciation with respect to such
      investment which was deducted with respect to the payment of any Capital Gains
      Fees in any prior fiscal year); (v) “Realized Capital Losses” on each of our
      investments will be calculated as the amount by which the net amount realized
      from the sale or other disposition of such investment is less than the original
      cost of such investment; and (vi) “Unrealized Capital Depreciation” on each of
      our investments will be calculated as the amount by which the original cost
      of
      such investment exceeds the fair value of such investment as of the end of
      a
      fiscal year of the Company.




The
      management agreement has a ten year term and is scheduled to expire on October
      11, 2015. We may not terminate the management agreement earlier except upon
      the
      occurrence of any of the following events: (i) our total assets (as defined
      in
      the management agreement) for two consecutive fiscal quarters are not at least
      equal to 60% of our total assets on October 11, 2005; (ii) E. Denton Jones,
      B.
      Michael Adler, David S. Montoya or Scott W. Hartman withdraw as members of
      the
      management company, other than as a result of death or disability; or (iii)
      either Mr. Hartman or Mr. Montoya voluntarily terminates their employment with
      us.




Upon
      the
      occurrence of any such triggering event, we may terminate the management
      agreement upon written notice to WQNI Management within 30 days following the
      occurrence of such event.




In
      addition, either we or WQNI Management may terminate the management agreement
      upon written notice to the breaching party following the occurrence of a
      material breach of the management agreement by the other party if either:
      (i) the material breach relates to the failure to pay amounts due under the
      management agreement and such breach continues unremedied for 10 days after
      notice; or (ii) the other party materially breaches the terms of the management
      agreement and such breach continues unremedied for 30 days after
      notice.




40




**ITEM
      13. EXHIBITS**





The
      following documents are filed as part of this Annual Report on Form
      10-KSB:





1.
            Financial
                Statements: The financial statements filed as part of this report
                are
                listed in the “Index to Financial Statements” on Page F-1 hereof.





2.
            Exhibits
                required to be filed by Item 601 of Regulation
                S-B:








**Exhibit**
              **Number**
            
            **Description
                of Exhibits**3.1
            
            Certificate
                of Incorporation of WorldQuest, filed as Exhibit 3.1 to WorldQuests’ Form
                SB-2 Registration Statement, File No. 333-82721 (the “Prior Registration
                Statement”), and incorporated herein by reference.3.2
            
            Bylaws
                of WorldQuest, filed as Exhibit 3.2 to the Prior Registration Statement,
                and incorporated herein by this reference.10.1
            
            Subscription
                Agreement of SeaView Mezzanine Fund L.P., filed as Exhibit 10.1 to
                WQN’s
                Current Report on Form 8-K dated July 1, 200510.2
            
            SeaView
                Mezzanine Fund L.P. Agreement of Limited Partnership, dated as of
                December
                8, 2004 (exhibits omitted), filed as Exhibit 10.2 to WQN’s Current Report
                on Form 8-K dated July 1, 2005. Portions of this agreement have been
                omitted and separately filed with the Securities and Exchange Commission
                with a request for confidential treatment.10.3
            
            Asset
                Purchase Agreement by and among WQN, Inc., VoIP, Inc., and VoIP
                Acquisition Company, Inc., dated as of August 3, 2005 (Exhibits
                Omitted), filed as Exhibit 10.1 to WQN’s Current Report on Form 8-K dated
                August 9, 2005.10.4
            
            $1,000,000
                Promissory Note executed by VoIP, Inc. in favor of WQN, Inc., dated
                as of
                August 3, 2005, filed as Exhibit 10.2 to WQN’s Current Report on Form
                8-K dated August 9, 2005.10.5
            
            Common
                Stock Purchase Warrant to acquire 625,000 of common stock of VoIP,
                Inc.,
                executed by VoIP, Inc., filed as Exhibit 10.3 to WQN’s Current Report on
                Form 8-K dated August 9, 2005.10.6
            
            Security
                Agreement between VoIP, Inc. and WQN, Inc. dated as of August 3,
                2005, filed as Exhibit 10.4 to WQN’s Current Report on Form 8-K dated
                August 9, 2005.10.7
            
            Employment
                Agreement dated as of August 25, 2005 by and between WQN, Inc. and
                Scott
                W. Hartman, filed as Exhibit 10.1 to WQN’s Current Report on Form 8-K/A
                dated August 26, 2005.10.8
            
            Employment
                Agreement dated as of August 25, 2005 by and between WQN, Inc. and
                David
                S. Montoya, filed as Exhibit 10.2 to WQN’s Current Report on Form 8-K/A
                dated August 26, 2005.10.9
            
            Management
                Agreement dated August 25, 2005 by and between WQNI Management Group
                LLC
                (f/k/a WQNI Capital Advisors, LLC) and WQN, Inc., filed as Exhibit
                10.3 to
                WQN’s Current Report on Form 8-K/A dated August 26,
                2005.10.10
            
            Park
                Ave. Assoc. LLC Securities Purchase Agreement dated as of October
                31,
                2005, filed as Exhibit 10.1 to WQN’s Current Report on Form 8-K dated
                November 4, 2005.10.11
            
            Operating
                Agreement of Park Ave. Assoc. LLC dated as of October 31, 2005, filed
                as
                Exhibit 10.2 to WQN’s Current Report on Form 8-K dated November 4,
                2005.10.12
            
            Operating
                Agreement of Park Ave. Assoc. Management LLC dated as of October
                31, 2005,
                filed as Exhibit 10.3 to WQN’s Current Report on Form 8-K dated November
                4, 2005.10.13
            
            Management
                Agreement dated October 31, 2005 by and between Park Ave. Assoc.
                Management LLC and Park Ave. Assoc. LLC, filed as Exhibit 10.4 to
                WQN’s
                Current Report on Form 8-K dated November 4, 2005.*23.1
            
            Consent
                of Grant Thornton LLP.*31.1
            
            Certification
                of the Company’s Chief Executive Officer, pursuant to Rule 13a-14(a) and
                15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002.*31.2
            
            Certification
                of the Company’s Chief Financial Officer, pursuant to Rule 13a-14(a) and
                15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002.*32.1
            
            Certification
                of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.*32.2
            
            Certification
                of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
                1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.


_______________________


*
      Filed
      herewith.


41




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




**Audit
      Fees**


The
        aggregate fees billed for each of the fiscal years 2005 and 2004 for
        professional services rendered by Grant Thornton LLP, the Company’s principal
        accountant for the Company’s annual financial statements and review of financial
        statements included in the Company’s Form 10-QSB for the fiscal years then
        ended, including fees for services that are normally provided by Grant Thornton
        in connection with statutory and regulatory filings or engagements for each
        such
        fiscal year, were approximately $230,000 and $97,000,
        respectively.




**Audit-Related
      Fees**




Grant
      Thornton LLP billed the Company any fees for assurance and related services,
      which are reasonably related to the performance of the audit or review of the
      Company’s financial statements and are not reported in under the caption “Audit
      Fees” above, in fiscal year 2005 of $0 and in fiscal year 2004 of
      $11,000.




**Tax
      Fees**




The
      aggregate fees billed for each of the fiscal years 2005 and 2004 for
      professional services rendered by Grant Thornton LLP for tax compliance, tax
      advice and tax planning were $15,000 and $11,000, respectively. These fees
      consisted of tax compliance services and tax advice provided to the Company
      in
      connection with the preparation of its tax returns.




**All
      Other Fees**




The
      aggregate fees billed for each of the fiscal years 2005 and 2004 for products
      and services provided by Grant Thornton LLP, other than fees reported under
      the
      categories above, were $0 in both years.




Prior
      to
      engagement, the Audit Committee pre-approves these services by category of
      service. The fees are budgeted and the Audit Committee requires the independent
      auditor and management to report actual fees versus the budget periodically
      throughout the year by category of service. During the year, circumstances
      may
      arise when it may become necessary to engage the independent auditor for
      additional services not contemplated in the original pre-approval. In those
      instances, the Audit Committee requires specific pre-approval before engaging
      the independent auditor.




The
      Audit
      Committee may delegate pre-approval authority to one or more of its members.
      The
      member to whom such authority is delegated must report, for informational
      purposes only, any pre-approval decisions to the Audit Committee at its next
      scheduled meeting.




42




**SIGNATURES**





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




**WQN,
                INC.**May
                30, 2006
            /s/
                Scott W. Hartman**Scott
                W. Hartman**President
                and Chief Executive Officer(Principal
                Executive Officer)




May
                30, 2006
            /s/
                David S. Montoya**David
                S. Montoya**Chief
                Financial Officer(Principal
                Financial and Accounting Officer)




In
      accordance with the Securities Exchange Act of 1934, this report has been signed
      below by the following persons on behalf of the Company and in the capacities
      and on the dates indicated.




May
                30, 2006
            /s/
                B. Michael Adler**B.
                Michael Adler**Director




May
                30, 2006
            /s/
                E. Denton Jones**E.
                Denton Jones**Director




May
                30, 2006
            /s/
                Elizabeth H. Buchler**Elizabeth
                H. Buchler**Director




May
                30, 2006
            /s/
                Hal H. Bibee**Hal
                H. Bibee**Director




May
                30, 2006
            /s/
                Robert A. Farmer**Robert
                A. Farmer**Director
                (Chairman of the Board)




43




May
                30, 2006
            /s/
                Charles P. Miller**Charles
                P. Miller**Director




May
                30, 2006
            /s/
                Scott W. Hartman**Scott
                W. Hartman**Director




May
                30, 2006
            /s/
                David S. Montoya**David
                S. Montoya**Director




44




**WQN,
        Inc. and Subsidiaries**
  **Index
        to Consolidated Financial Statements**
  **Contents**
 
 Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets as of December 31, 2005 and 2004
              F-3Consolidated
                  Statements of Operations for the years ended December 31, 2005 and
                  2004
              F-4Consolidated
                  Statements of Changes in Stockholders’ Equity for the years ended
                  December 31, 2005 and 2004
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2005 and
                  2004
              F-6Notes
                  to Consolidated Financial Statements
              F-7
   F-1
   **Report
        of Independent Registered Public Accounting Firm**
   Board
        of
        Directors
 WQN,
        Inc.
        and Subsidiaries
 
 We
        have
        audited the accompanying consolidated balance sheets of WQN ,
        Inc. (a
        Delaware corporation, formerly known as WorldQuest Networks, Inc.) and
        subsidiaries as of December
        31, 2005 and 200 4,
        and
        the related consolidated statements of operations, changes in stockholders’
equity, and cash flows for the years 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 audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit
        also 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 audits provide
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of WQN ,
        Inc.
        and subsidiaries as of December 31, 2005 and 2004, and the consolidated results
        of their operations and their consolidated cash flows for the years then
        ended
        in conformity with accounting principles generally accepted in the United
        States
        of America.
  /s/
        Grant
        Thornton LLP
  Dallas,
        Texas
 May
        30,
        2006
   F-2
  **WQN,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        BALANCE SHEETS**
  **December
                  31,****2005**
              
              **2004****ASSETS**Current
                  assets:Cash
                  and cash equivalents, including restricted cash of $3,580,000 in
                  2005
              
              $
              3,847,732
              
              $
              9,942,280Notes
                  receivable
              
              
              204,167
              
              
              2,408,679Receivables
                  from settlements
              
              
              2,145,914
              
              
              —Other
                  receivable
              
              
              81,603
              
              
              —Total
                  current assets
              
              
              6,279,416
              
              
              12,350,959Property
                  and equipment, net
              
              
              9,708
              
              
              12,941Investments:Investment
                  in Cross Country Capital, LP
              
              
              1,854,086
              
              
              2,944,243Investment
                  in SeaView Capital, LP
              
              
              1,592,635
              
              
              —Investment
                  in VoIP Inc. - common stock
              
              
              8,842,500
              
              
              —Convertible
                  Note Receivable - VoIP Inc.
              
              
              3,700,000
              
              
              —Note
                  Receivable - Other
              
              
              —
              
              
              204,167Assets
                  of discontinued operations
              
              
              —
              
              
              3,237,662Total
                  assets
              
              $
              22,278,345
              
              $
              18,749,972**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              70,121
              
              $
              —Accrued
                  expenses
              
              
              410,857
              
              
              71,797Short
                  term debt
              
              
              3,580,000
              
              
              —Liabilities
                  of Discontinued Operations
              
              
              —
              
              
              2,611,838Total
                  current liabilities
              
              
              4,060,978
              
              
              2,683,635Stockholders’
                  equity:Preferred
                  stock, par value $0.01 per share:Authorized
                  shares—10,000,000; none issued and outstanding
              
              
              —
              
              
              —Common
                  stock, par value $.01 per share:Authorized
                  shares—50,000,000; issued and outstanding shares — 6,878,062 at
                  December 31, 2005 and — 6,830,062 at December 31,
                  2004
              
              
              68,781
              
              
              68,301Additional
                  capital
              
              
              43,201,959
              
              
              43,180,859Accumulated
                  other comprehensive income
              
              
              1,849,500
              
              
              —Accumulated
                  deficit
              
              
              (26,902,873
              )
              
              (27,182,823
              )Total
                  stockholders’ equity
              
              
              18,217,367
              
              
              16,066,337Total
                  liabilities and stockholders’ equity
              
              $
              22,278,345
              
              $
              18,749,972
 
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.  F-3
 **WQN,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  **Year
                  ended December 31,****2005**
              
              **2004**Operating
                  expenses:Selling,
                  general and administrative
              
              
              810,992
              
              
              1,209,286Depreciation
                  and amortization
              
              
              3,233Total
                  operating expenses
              
              
              814,225
              
              
              1,209,286Operating
                  loss
              
              
              (814,225
              )
              
              (1,209,286
              )Interest
                  income
              
              
              236,010
              
              
              292,709Interest
                  expense
              
              
              (30,381
              )
              
              (5,000
              )Equity
                  in loss from SeaView Capital, LP. investment
              
              
              (707,365
              )
              
              —Equity
                  in loss from Park Ave. Assoc. LP. investment
              
              
              (2,577,001
              )
              
              —Equity
                  in (loss)/gain from Cross Country Capital, LP. investment
              
              
              55,757
              
              
              (55,757
              )Loss
                  from continuing operations before tax benefit
              
              
              (3,837,205
              )
              
              (977,334
              )Income
                  tax benefit
              
              
              1,534,882
              
              
              —Loss
                  from continuing operations
              
              
              (2,302,323
              )
              
              (977,334
              )Income/(loss) from
                  discontinued operations (2005: net of tax $1,534,882)
              
              
              2,582,273
              
              
              (2,196,637
              )Net
                  income/(loss)
              
              $
              279,950
              
              $
              (3,173,971
              )Loss per
                  share - basic and diluted:Continuing
                  operations
              
              $
              (0.34
              )
              $
              (0.15
              )Discontinued
                  operations
              
              
              0.38
              
              
              (0.33
              )Income/(loss) per
                  share
              
              $
              0.04
              
              $
              (0.48
              )Weighted-average
                  common shares outstanding - basic and diluted
              
              
              6,868,462
              
              
              6,642,005
 
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
  **WQN,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 
 **Accumulated****Other****Additional**
              
              **Comprehensive**
              
              **Accumulated**
              
              **Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Income**
              
              **Deficit**
              
              **Equity**Balance
                  at January 1, 2003
              
              
              6,386,199
              
              $
              63,862
              
              $
              41,994,594
              
              $
              —
              
              $
              (24,008,852
              )
              $
              18,049,604Issuance
                  of warrants
              
              
              
              
              
              
              
              
              76,000
              
              
              
              
              
              
              
              
              76,000Exercise
                  of stock options
              
              
              443,863
              
              
              4,439
              
              
              1,110,265
              
              
              
              
              
              
              
              
              1,114,704Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,173,971
              )
              
              (3,173,971
              )Balance
                  at December 31, 2004
              
              
              6,830,062
              
              
              68,301
              
              
              43,180,859
              
              
              —
              
              
              (27,182,823
              )
              
              16,066,337Exercise
                  of stock options
              
              
              48,000
              
              
              480
              
              
              21,100
              
              
              
              
              
              
              
              
              21,580Accumulated
                  other comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              1,849,500
              
              
              
              
              
              1,849,500Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              279,950
              
              
              279,950Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,129,450Balance
                  at December 31, 2005
              
              
              6,878,062
              
              $
              68,781
              
              $
              43,201,959
              
              $
              1,849,500
              
              $
              (26,902,873
              )
              $
              18,217,367
 
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
  **WQN,
        INC. AND SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **Year
                  ended December 31,****2005**
              
              **2004****Operating
                  Activities**Net
                  income/(loss)
              
              $
              279,950
              
              $
              (3,173,971
              )**Adjustments
                  to reconcile net loss to net cash used in operating activities:**(Income)
                  / loss from discontinued operations
              
              
              (2,
                  582,273
              )
              
              2,196,637Non-cash
                  tax benefit
              
              
              (1,534,882
              )
              
              —Depreciation
                  and amortization
              
              
              3,233
              
              
              —Loss
                  in investments in partnerships
              
              
              3,228,608
              
              
              55,757Changes
                  in operating assets and liabilities:Other
                  receivables
              
              
              (81,603
              )
              
              —Accounts
                  payable and accrued expenses
              
              
              409,181
              
              
              —Net
                  cash used in continuing operations
              
              
              (277,784
              )
              
              (921,577
              )Net
                  cash used in discontinued operations
              
              
              (4,561,363
              )
              
              (3,
                  309,992
              )Net
                  cash used in operating activities
              
              
              (4,839,149
              )
              
              (4,231,569
              )**Investing
                  Activities**Purchase
                  of partnership interests
              
              
              (5,877,000
              )
              
              (3,000,000
              )Payments
                  received on note from sale of subsidiary
              
              
              2,408,679
              
              
              145,833Net
                  cash used in continuing operations
              
              
              (3,468,321
              )
              
              (2,854,167
              )Net
                  cash used in discontinued operations
              
              
              (1,388,658
              )
              
              (2,018,508
              )Net
                  cash used in investing activities
              
              
              (4,856,979
              )
              
              (4,872,675
              )**Financing
                  Activities**Proceeds
                  from exercise of stock options
              
              
              21,580
              
              
              1,114,704Borrowings
                  from short term debt
              
              
              3,580,000
              
              
              —Net
                  cash provided by continuing operations
              
              
              3,601,580
              
              
              1,114,704Net
                  cash provided by discontinued operations
              
              
              —
              
              
              —Net
                  cash provided by financing activities
              
              
              3,601,580
              
              
              1,114,704Decrease
                  in cash and cash equivalents
              
              
              (6,094,548
              )
              
              (7,989,540
              )Cash
                  and cash equivalents at beginning of year
              
              
              9,942,280
              
              
              17,
                  931,820Cash
                  and cash equivalents at end of year
              
              $
              3,847,732
              
              $
              9,942,280**Supplemental
                  Disclosures of Cash Flow Information:**Interest
                  paid
              
              
              30,381
              
              
              4,538Income
                  taxes paid
              
              $
              -0-
              
              $
              -0-
 
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-6
  **WQN,
        INC. AND SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Years
        ended December 31, 2005 and 2004**
 
 **1.
        Organization and Description of Business**
 
 WQN
        Inc.
        (“WQN,” “Company” or “Registrant”) is a diversified financial services company
        whose goal is to be the financial partner of choice for small businesses.
        Our
        strategy is to provide capital and offer an array of financial services/products
        to businesses in the small business sector. Our primary lines of business
        are
        asset management and finance. We anticipate expanding our lines of business
        to
        include service offerings, such as consulting and insurance, to small
        businesses. WQN’s corporate headquarters moved after the VoIP Inc. sale
        transaction and we are now located in New York, NY. WQN’s operating businesses
        in which it invests are managed on both a centralized and decentralized basis.
        WQN’s corporate headquarters is involved in overseeing general and
        administrative activities, capital allocation and strategic direction, with
        some
        lesser involvement in the day-to-day business activities of the operating
        businesses.
 
 We
        need
        to raise additional funds if, for example, we pursue business acquisitions
        or
        experience operating losses that exceed our current expectations. If we raise
        additional funds through the issuance of equity, equity-related securities
        or
        debt securities, such securities may have rights, preferences or privileges
        senior to those of the rights of our common stock and our stockholders may
        experience additional dilution. We cannot be certain that additional financing
        will be available to us on favorable terms or at all. We believe our available
        investments will provide sufficient liquidity in the event we do not raise
        funds
        during 2006 to fulfill our current obligations. Our remaining obligations
        for
        2006 would require approximately $2,000,000 to fund and we will meet these
        obligations through the following:
 
 ·
            On
                May 23 2006 we received a $1,000,000 payment following the release
                of the
                Eastern District Funds (see Item 3- “Legal Proceedings”). We have cash of
                approximately $500,000 as of May 30, 2006. Additionally we received
                $1,000,000 in notes receivable in the settlement which are payable
                to us
                over an 18 month period, which for accounting purposes at December
                31,
                2005 we have provided a valuation
                allowance. ·
            We
                have 1,750,000 shares of VoIP at May 30, 2006 and will receive additional
                VoIP shares valued at $2.65 million from the settlement with CCCP
                in July
                2006. Although these shares are not registered as of May 30, 2006
                we can
                sell those shares to other investors in a private transaction to
                generate
                cash if necessary. WQN has received an offer to purchase its VoIP
                shares
                in a private transaction for an amount that should provide sufficient
                liquidity to pay its obligations in 2006. 
 WQN’s
        largest obligation is its commitment to fund an additional $7,700,000 in
        SeaView
        Mezzanine Fund L.P. (“SeaView”), a private equity limited partnership that is
        operated by the principal officers of WQN. WQN and SeaView have executed
        a
        standstill agreement whereby SeaView has agreed to not call any of the Company’s
        capital commitment unless WQN has the ability to pay all of its other
        obligations.
 
 Following
        the sale of its Voice-Over-Internet Protocol business in October of 2005,
        WQN
        has been repositioning its operations to focus on asset management and finance.
        We anticipate expanding our lines of business to include service offerings,
        such
        as consulting and insurance, to small businesses.
  **2.
        Significant Accounting Policies**
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles in the United States of America requires management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosure of contingent liabilities at the date of the
        financial statements and the reported amounts of revenues and expenses during
        the reporting period. Management believes the estimates used in preparing
        the
        financial statements are reasonable; however, actual results could differ
        from
        these estimates.
 
 **Principles
        of Consolidation**
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries and joint ventures in which the Company owns a controlling
        interest. Limited partner interests in partnerships and their affiliates
        and
        investments in 20 -50% owned companies are accounted for on the equity method.
        All intercompany balances and transactions have been eliminated in
        consolidation.
 
 **Reclassifications**
 
 Due
        to
        the discontinuation of the former operations of WQN, the results of operations
        for 2005 and 2004 relating to the former operations have been presented as
        discontinued operations.
  F-7
  **Cash
        Equivalents**
 
 Cash
        equivalents include money market mutual funds and other highly liquid
        investments purchased with maturities of three months or less.
 
 **Income
        Taxes**
 
 Income
        taxes are determined using the liability method, which gives consideration
        to
        the future tax consequences associated with differences between the financial
        accounting and tax basis of assets and liabilities. This method also gives
        immediate effect to changes in income tax laws. Deferred tax assets are
        recognized when it is more likely than not that the assets will be realized.
        Because of the Company’s uncertainty regarding future profitability, a valuation
        allowance is provided for any deferred tax asset.
 
 **Investments
        in Partnerships**
 
 The
        Company’s investment in Cross Country Capital Partners LP and its investment in
        SeaView Mezzanine Fund, LP are accounted for using the equity method of
        accounting. The Company’s share of income and losses are included in income
        (loss) from the partnership investment. The Company can redeem its
        investment in Cross Country Capital Partners LP partner capital account by
        giving the partnership 60 days written notice.  The Company can
        receive a distribution on its SeaView Mezzanine Fund, LP partnership capital
        account only at the sole discretion of the general partner of SeaView and
        is
        obligated to fulfill a commitment to fund an additional $7.7 million to SeaView
        when that is called by the general partner of SeaView. WQN and SeaView have
        executed a standstill agreement whereby SeaView has agreed to not call any
        of
        the Company’s capital commitment unless WQN has the ability to pay all of its
        other obligations. The underlying partnerships account for their investments
        at
        fair value. Securities owned by the partnerships that are traded on national
        securities exchanges are valued at the average closing price on the valuation
        date. For investments that are not traded, management of the partnerships
        determine fair value by taking into account such factors as the investees
        current and projected financial condition, operating results, subsequent
        capital
        funding and various valuation methods. Impairments are recognized when the
        carrying value of the investments exceed the fair value of the underlying
        investments in each partnership.
 
 **Investments
        in Common Stock**
 
 The
        Company accounts for its investments in common stock as available for sale
        securities  when
        its
        investment is not sufficient to give it significant influence over the
        operations of the investee. Under this method the assets are adjusted to
        their
        fair value on the balance sheet at each reporting period and the corresponding
        change is recorded as a component of other comprehensive income. The Company’s
        investments at December 31, 2005 included restricted common stock of VoIP,
        Inc.
 
 **Notes
        Receivable**
  Notes
        receivable represent balances due from third parties related to the sale
        of
        WQN’s former wholly-owned subsidiary, buyindiaonline.com, Inc., a bridge loan
        in
        connection with a terminated merger with Ntera Holding Inc., and a convertible
        note receivable from VoIP, Inc. Interest earned on notes receivable is
        recognized over the term of the note and is included in interest
        income.
 
 **Advertising
        Costs**
 
 The
        Company expenses advertising costs as incurred. Advertising expense for
        discontinued operations for the years ended December 31, 2005 and 2004 was
        approximately $193,000 and $467,000, respectively.
 
 **Stock-Based
        Compensation**
 
 The
        Company has elected to follow Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” in the primary financial statements
        and has provided supplemental disclosures required by Statement of Financial
        Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and
        by Statement of Financial Accounting Standards No. 148, “Accounting for
        Stock-Based Compensation - Transition and Disclosure an amendment of FASB
        Statement No. 123.”
 
 Statement
        of Financial Accounting Standards No. 123, “Accounting for Stock Based
        Compensation,” (“SFAS 123”) requires the disclosure of pro forma net loss and
        loss per share computed as if the Company had accounted for its employee
        stock
        options under the fair value method set forth in SFAS 123. The Company’s
        reported and pro forma net loss for the years ending December 31, 2005 and
        2004
        are as follows:
  F-8
   **Year
                  ended December 31,****2005**
              
              **2004**Net
                  income/(loss) as reported
              
              $
              279,950
              
              $
              (3,173,971
              )Pro
                  forma stock-based employee compensation
              
              
              (462,898
              )
              
              (202,499
              )Pro
                  forma net loss
              
              $
              (182,948
              )
              $
              (3,376,470
              )Net
                  loss per share:As
                  reported - basic and diluted
              
              $
              0.04
              
              $
              (0.48
              )Pro
                  forma - basic and diluted
              
              $
              (0.03
              )
              $
              (0.51
              )
 
 
 The
        fair
        value of options granted was estimated at the date of grant using the
        Black-Scholes option pricing model. The weighted average assumptions used
        in the
        December 31, 2005 calculation were as follows: risk free interest rate of
        4.0%, dividend yield of zero, volatility factor of 1.1 and average expected
        life
        of 4 years. The weighted average assumptions used in the December 31, 2004
        calculation were as follows: risk free interest rate of 3.5%, dividend yield
        of
        zero, volatility factor of 1.1, and average expected life of 4 years. The
        options granted during 2005 and 2004 had a weighted average fair value of
        $1.43
        and $1.50 per share, respectively.
 
 In
        December 2004, FASB issued Statement of Financial Accounting Standards
        No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be
        effective in our first quarter of fiscal 2006. This standard sets forth the
        revised rules for the accounting treatment of employee stock options and
        other
        share-based payments. SFAS 123(R) requires the adoption of a fair value-based
        method for measuring the compensation expense related to employee stock awards;
        this will lead to additional compensation expense. The Company will use the
        modified prospective method for adoption of SFAS 123R and expects unvested
        options outstanding at December 31, 2005 to result in compensation expense
        of
        $462,898 for each of the years ended 2006 and 2007.
 
 **Net
        Income / Loss per Share**
 
 Basic
        and
        diluted net income/loss per share is computed using the Company’s net
        income/loss for each period presented divided by the average common shares
        outstanding during the period. Stock options and warrants convertible into
        970,000 and 1,267,759 shares of the Company’s common stock for the years ended
        December 31, 2005 and 2004, respectively, are excluded from the calculation
        of diluted earnings per share because the Company reported losses from
        continuing operations in those periods and their effect would be anti-dilutive.
 
 **Fair
        Value of Financial Instruments**
 
 The
        Company’s financial instruments consist primarily of cash equivalents, common
        stock, notes receivable, accounts payable and short term debt. At
        December 31, 2005 and 2004, the carrying amount of the Company’s financial
        instruments approximates their fair values. Management believes the Company’s
        debt approximates fair value due to its short maturity and its variable interest
        rate and the Company’s notes receivable approximate fair value because of their
        short maturities. The fair value of the note receivable from VoIP, Inc. is
        $4,570,721, based on the value of the VoIP shares into which the note is
        convertible.
 
 **3.
        Discontinued Operations**
 
 On
        October 5, 2005, WQN completed the sale of its Voice-Over-Internet Protocol
        business (the “Sale”) to VoIP Acquisition Company, a Delaware corporation (the
“Purchaser”), pursuant to the Asset Purchase Agreement, dated as of August 3,
        2005, by and among the Company, VoIP, Inc., a Texas corporation (“VOIP”) and the
        Purchaser (such Asset Purchase Agreement, the “APA”). Pursuant to the APA, the
        Company received, in connection with the Sale, total consideration of (i)
        a $3.7
        million secured convertible promissory note issued by VoIP, convertible into
        3,489,100 shares of common stock of VoIP, Inc. that bears interest at 6%
        and all
        interest and principal is due, if the note is not converted, in 2007, (ii)
        1,750,000 shares of VoIP’s restricted common stock and (iii) a warrant to
        purchase 5,000,000 shares of VoIP’s common stock at an exercise price of $0.001
        per share, plus the assumption of certain liabilities by VoIP. The Company
        determined the value of the common stock and warrants received by using the
        average of the closing price for VoIP, Inc. for the five business days prior
        to
        August 3, 2005. The Company would own approximately 14.6% of the existing
        common
        stock of VoIP, Inc. if it converted all these securities to common stock
        and the
        Company has no rights to appoint members of management but has the right
        to
        nominate one person to the board of directors. The Voice-Over-Internet Protocol
        business comprised all of the Company’s previously recorded revenues and cost of
        goods sold and consisted of:
  F-9
  **Year
                  ended December 31,****2005**
              
              **2004**Revenue
              
              $
              24,533,741
              
              $
              15,263,806Cost
                  of revenue
              
              
              (23,385,167
              )
              
              (13,387,986
              )Gross
                  profit
              
              
              1,148,574
              
              
              1,875,820Operating
                  expenses
              
              
              (4,316,782
              )
              
              (4,072,457
              )Gain
                  on sale of assets
              
              
              7,285,363
              
              
              —Tax
                  Expense
              
              
              (1,534,882
              )
              
              —Income
                  (loss) from discontinued operations
              
              $
              2,582,273
              
              
              (2,196,637
              )
 
 The
        components of assets and liabilities of discontinued operations are as
        follows:
  **Year
                  ended December 31,****2005**
              
              **2004**Accounts
                  receivable
              
              $
              —
              
              $
              874,219Prepaid
                  expenses and other current assets
              
              
              —
              
              
              806,068Property
                  and equipment, net
              
              
              —
              
              
              584,581Other
                  assets, net
              
              
              —
              
              
              972,794Assets
              
              $
              —
              
              $
              3,237,662Accounts
                  payable and accrued expenses
              
              $
              —
              
              $
              1,866,850Deferred
                  revenue
              
              
              —
              
              
              444,988Promissory
                  note
              
              
              —
              
              
              300,000Liabilities
              
              $
              —
              
              $
              2,611,838
 
 At
        December 31, 2005 the Company holds the following securities of VoIP,
        Inc.:
  Cost
                10/05/2005
              
              Carrying
                  Value
                12/31/2005
              
              Unrealized
                Gain1,750,000
                  restricted stock
              
              $
              1,813,000
              
              $
              2,292,500
              
              $
              479,5005,000,000
                  warrants
              
              
              5,180,000
              
              
              6,550,000
              
              
              1,370,000$
              6,993,000
              
              $
              8,842,500
              
              $
              1,849,500
 
 
 F-10
  **4.
        Investments in partnerships**
  Investments
        in partnerships consisted of the following at December 31:
  Carrying
                  AmountProfits
                  Interest
              
              2005
              
              2004SeaView
                  Mezzanine Fund, LP
              
              
              28%
              
              $
              1,592,635
              
              $
              —Cross
                  Country Capital Partners, LP
              
              
              66%
              
              
              1,854,086
              
              
              2,898,156$
              3,446,721
              
              $
              2,898,156
  
 We
        hold
        interests of at least 20% but do not exercise significant control in either
        of
        the above partnerships, as defined in the Financial Accounting Standard Board’s
        Emerging Issues Task Force 96-16 and 04-5 Consensus. Therefore, we account
        for
        our investments in these partnerships using the equity method.
 
 *SeaView
        Mezzanine Fund, LP.* On June
        27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
        in
        SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
        has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
        the terms of the limited partnership agreement, WQN is treated as if it were
        a
        limited partner as of December 8, 2004. WQN has an approximate 28% limited
        partnership interest in SeaView at December 31, 2005. Such partnership ownership
        varies based on when other partners invest in the partnership. SeaView invests
        in mezzanine securities in a diversified portfolio of small to mid-size
        companies. Scott Hartman, our Chief Executive Officer and a director, David
        S.
        Montoya, our Chief Financial Officer and a director, Robert Farmer, a director,
        and an affiliate of E. Denton Jones, a director, each hold a financial interest
        in the general partner of SeaView. The Company accounts for its limited
        partnership interest in SeaView Mezzanine Fund LP under the equity method
        of
        accounting and for the year ended December 31, 2005 recorded a loss from
        its
        investment of $707,365. If the Company does not have adequate funds to meet
        its
        remaining commitment to SeaView when called, the Company may be subject to
        financial penalties, including the loss of its investment in SeaView. WQN
        and
        SeaView have executed a standstill agreement whereby SeaView has agreed to
        not
        call any of the Company’s capital commitment unless WQN has the ability to pay
        all of its other obligations.
  *Cross
        Country Capital Partners, LP* .
        In
        November 2004, WQN invested $3 million in Cross Country Capital Partners,
        L.P.
        (“Cross Country”), a partnership managed by an affiliate of E. Denton Jones, a
        director of WQN. WQN has an approximate 66% limited partnership interest
        in
        Cross Country  at
        December 31, 2005. Such partnership ownership varies based on when other
        partners invest or remove their capital from the partnership. The majority
        of
        the partnership assets are to be invested in private investments in public
        entities. The partnership investments will take the form of common equity,
        preferred equity, convertible debt and/or equity or debt securities. Among
        other
        investments, Cross Country has substantial investments in VoIP, SeaView and
        PAA (defined below). The Company accounts for its limited partnership interest
        in Cross Country under the equity method of accounting and for the year ended
        December 31, 2005 recorded a loss from its investment of $1,090,157 to account
        for the losses due to investments. Included within the 2005 loss relating
        to the
        investment in Cross Country is $46,087 relating to 2004 and $645,000 relating
        to
        2005 arising from financial improprieties involving investments of Cross
        Country
        in 2004 and 2005.  These were discovered in 2006 by the current management
        of WQN. The 2004 results have not been restated due to the immateriality
        of the
        amount involved related to 2004. The 2005 loss of $645,000 was recorded in
        its
        entirety in the fourth quarter of 2005. However
        in May 2006 Cross Country agreed to return to WQN its initial $3,000,000
        capital
        contribution which allowed the Company to recognize a recovery of all previous
        losses on its investment in Cross Country as of December 31,
        2005.
 
 *Park
        Ave. Assoc. LLC.* Effective
        October 31, 2005, WQN entered into a Securities Purchase Agreement with Park
        Ave. Assoc. LLC, a Delaware limited liability company (“PAA”) pursuant to which
        the registrant subscribed for a 50.9% membership interest in PAA in exchange
        for
        the contribution of a capital commitment to PAA of $5.6 million in cash to
        be
        funded over time. PAA was established as a real estate development company
        specializing in the acquisition and development of properties for small business
        use and for communities designed for the active adult lifestyle. An additional
        $5.4 million was to be invested over time by the other members of PAA for
        a
        total capitalization of $11 million. Although WQN became entitled to elect
        3 of
        the 5 members of PAA’s Board of Managers, control over PAA’s day-to-day
        activities was exercised by PAA’s chief executive officer.
  F-11
 
 Pursuant
        to the Securities Purchase Agreement, WQN made capital contributions to PAA
        aggregating approximately $3.6 million during 2005. In the course of its
        review
        of various documents relating to certain real estate investments purportedly
        entered into by the former chief executive officer of PAA, WQN discovered
        certain irregularities. On February 2, 2006, WQN caused the Board of Managers
        of
        PAA to remove said chief executive officer and appoint Scott W. Hartman as
        the
        interim chief executive officer of PAA and David S. Montoya as the interim
        chief
        financial officer of PAA. The new management of PAA has met with various
        persons
        with whom the former chief executive officer of PAA had business dealings
        and
        discovered that a number of the transactions in which PAA was purportedly
        involved were in fact not conducted. As a result of these discoveries, WQN
        has
        taken a write-down for 2005 in the amount of $2,577,001. In addition, since
        Cross Country was also an investor in PAA, a portion of the activity that
        WQN
        recorded on its investment in Cross Country in 2005 was attributable to
        PAA.
 
 On
        February 9, 2006, WQN commenced litigation against Mark C. Hotton, the former
        chief executive officer of PAA, and certain other persons and entities, seeking
        the return of the monies involved in the transactions that the Company alleges
        were not conducted at PAA. On February 14, 2006, the Supreme Court of the
        State
        of New York issued an Order to Show Cause with Temporary Restraining Order
        against Mr. Hotton and certain others.
 
 On
        May
        17, 2006, WQN, Inc., a Delaware corporation, (“WQN”) and its wholly-owned
        subsidiary Park Ave. Assoc. LLC, a Delaware limited liability company (“Park
        Ave. Delaware’) entered into a Settlement Agreement (the "Settlement
        Agreement"), by and among WQN, Park Ave. Delaware (WQN and Park Ave. Delaware
        are collectively referred to as the “WQN Parties” or the “Company”), Mark C.
        Hotton (“Hotton”), 154 TH Street
        Corp. (“154 TH Street”), Pioneer Ventures LLC (“Pioneer”), The Rising Child Foundation (“Rising
        Child”), Mark C. Hotton Trust (the “Hotton Trust”), Mark C. Hotton Living Trust
        (the “Hotton Living Trust”), Edward Johnson (“Johnson”), Park Ave. Assoc. LLC, a
        New Jersey limited liability company (“Park Ave. New Jersey”) (Hotton,
        154 th Street,
        Pioneer, Rising Child, the Hotton Trust, the Hotton Living Trust, Johnson
        and
        Park Ave. New Jersey are collectively referred to as the “Hotton Parties”) and
        certain other parties.
 The
          Hotton Parties will pay to the Company the agreed upon sum of $2,000,000
          as
          follows: $1,000,000 upon the release of the Eastern District Funds (defined
          below); and $1,000,000 in installments over a period of 18 months as follows:
          (i) $150,000 on or before the 6 month anniversary of the date of the Settlement
          Agreement; (ii) $150,000 dollars on or before the 9 month anniversary of
          the
          date of the Settlement Agreement; (iii) $150,000 on or before the 1 year
          anniversary of the date of the Settlement Agreement; (iv) $275,000 on or
          before
          the 15 month anniversary of the date of the Settlement Agreement; and (v)
          $275,000 on or before the 18 month anniversary of the date of the Settlement
          Agreement. “Eastern District Funds” means certain monies deposited into an
          interest bearing account with the United States District Court, Eastern
          District
          of New York, with respect to a lawsuit pending in such court by and among
          Spina,
          Hotton, WQN and certain other parties. Contemporaneous with the entry into
          the
          Settlement Agreement, certain lawsuits involving various parties to the
          Settlement Agreement were dismissed with prejudice and the parties entered
          into
          general releases with each other. The Eastern District Funds were released
          to
          WQN on May 19, 2006. Settlement amounts are recorded as receivables from
          settlements as of December 31, 2005 for $2,145,914 and WQN’s capital
          balance in Cross Country of $1,854,086 at December 31, 2005. The Company
          holds
          investments and receivables totaling $4,000,000 at December 31, 2005 related
          to
          the Settlement Agreement and the Cross Country Agreement. The $1,000,000
          installment receivable is fully reserved because collectability is
          uncertain.
  On
        May
        17, 2006, WQN and PAA (PAA collectively with WQN, the “WQN Parties”) entered
        into an agreement (the “Cross Country Agreement”), with E. Denton Jones
        (“Jones”) and Cross Country (Jones and Cross Country are collectively referred
        to as the “Jones Parties”). Pursuant to the Cross Country Agreement, WQN
        completely withdrew its investment in Cross Country Capital Partners, LP.
        Cross
        Country will transfer to WQN as the return of its capital (“Return of Capital”),
        the sum of two million eight hundred fifty thousand dollars ($2,850,000).
        The
        Return of Capital shall be made to WQN in the following manner: (i) by the
        payment on the earlier of the closing of the Enabling Mortgages (as defined
        in
        the Cross Country Agreement) and August 16, 2006, of the sum of $200,000
        in
        cash; and (ii) by the transfer within ten (10) business days of date of the
        Cross Country Agreement, of restricted shares of VOIP, Inc. common stock
        (the
“Stock”); the number of shares of the Stock shall be equal to the quotient
        whereby (i) the numerator is $2,650,000 and (ii) the denominator is the volume
        weighted average price of the Stock for the five (5) trading days preceding
        the
        date of the Cross Country Agreement. The terms of the Cross Country Agreement
        also provide that the parties enter into general releases with each other.
        E.
        Denton Jones is a director of WQN. Prior to May 17, 2006 Cross Country had
        returned $150,000 in cash to WQN.
  F-12
 Below
        are
        summarized financial data for SeaView and Cross Country individually and
        combined.
  *December 31,
        2005*
 SeaView
              
              Cross
                  Country
              
              CombinedTotal
                  Assets
              
              $
              5,946,447
              
              $
              5,874,416
              
              $
              11,820,863Total
                  Liabilities
              
              
              217,451
              
              
              3,047,464
              
              
              3,264,915Partners’
                  Capital
              
              
              5,728,996
              
              
              2,826,952
              
              
              8,555,948Investment
                  income / (loss)
              
              $
              157,500
              
              $
              (654,183
              )
              $
              (496,683
              )Expenses
              
              
              (2,502,777
              )
              
              (955,776
              )
              
              (3,458,553
              )Net
                  decrease in partners’ capital resulting from operations
              
              $
              (2,345,277
              )
              $
              (1,609,959
              )
              $
              (3,955,236
              )
 
 *December
        31, 2004*
 SeaView
              
              Cross
                  Country
              
              CombinedTotal
                  Assets
              
              $
              —
              
              $
              4,423,502
              
              $
              4,423,502Total
                  Liabilities
              
              
              —
              
              
              28,381
              
              
              28,381Partners’
                  Capital
              
              
              —
              
              
              4,395,121
              
              
              4,395,121Investment
                  income
              
              $
              —
              
              $
              100,258
              
              $
              100,258Expenses
              
              
              —
              
              
              (228,866
              )
              
              (228,866
              )Net
                  decrease in partners’ capital resulting from operations
              
              $
              —
              
              $
              (128,608
              )
              $
              (128,608
              )
 
  F-13
 
 **5.
        Notes Receivable**
 
 In
        July 2004, the Company sold all of the outstanding capital stock of its
        wholly-owned subsidiary buyindiaonline.com, Inc. and received as a component
        of
        the purchase price a promissory note for $700,000 repayable in twenty-four
        consecutive monthly payments of $29,167 plus interest. During 2005 and 2004,
        the
        Company received principal and interest payments of $369,678 and $159,290,
        respectively and the balance of the promissory note and accrued interest
        was
        $204,167 and $554,167 of which $204,167 and $350,000 was current, as of December
        31, 2005 and 2004 respectively.
 
 In
        connection with an agreement and plan of merger with Ntera Holding Inc. that
        was
        not completed, the Company received a note from Ntera in the principal amount
        of
        $2,000,000 bearing interest of 7% per annum. The balance of the note and
        accrued
        interest at December 31, 2004 was $2,058,679. The full amount of the loan
        and accrued interest was repaid in installments during 2005.
 
 Also,
        during 2005, in connection with the sale of the telephony business and related
        assets to VoIP, Inc, the Company received from VoIP, Inc. a convertible note
        in
        the amount of $3,700,000. During 2005 the Company did not receive any principal
        or interest payments and the balance of the note and accrued interest was
        $3,755,956 at December 31, 2005.
 
 **6.
        Accrued Expenses**
 
 Accrued
        expenses consisting of the following:
  **Year
                  ended December 31,****2005**
              
              **2004**Legal
                  and Professional
              
              $
              155,000
              
              $
              —Management
                  Fees
              
              
              70,208
              
              
              —Other
                  accrued expenses
              
              
              185,649
              
              
              71,797$
              410,857
              
              $
              71,797
 
  **7.
        Short Term Debt**
 
 On
        November 10, 2005, WQN, Inc. secured a revolving credit agreement (“RCA”) from
        North Fork Bank for up to $10,000,000 for purposes of working capital. Loans
        under the RCA have a term of one or two years, at the option of our company,
        from the date of drawdown. WQN, Inc. also holds the option to select an interest
        rate that equals North Fork Bank’s floating prime or 150 basis points over
        30-Day LIBOR. At December 31, 2005, approximately $3.6 million had been drawn
        from this RCA, which amount was collateralized by a pledge of approximately
        $3.8
        million in cash held in a North Fork Bank account. On March 2, 2006, WQN
        repaid
        the outstanding balance on the RCA by utilizing the pledged cash. As a result,
        WQN will not be able to make further drawdowns on the RCA unless it is able
        to
        post additional collateral. The purpose of this line of credit was to establish
        an ongoing relationship with the bank.
  F-14
  **8.
        Related Party Transactions**
 
 On
        June
        27, 2005, WQN committed to invest $10,000,000, effective December 8, 2004,
        in
        SeaView Mezzanine Fund LP (“SeaView”), a private equity limited partnership and
        has invested $2,300,000, as a limited partner, as of December 31, 2005. Under
        the terms of the limited partnership agreement, WQN is treated as if it were
        a
        limited partner as of December 8, 2004. WQN has an approximately 28% limited
        partnership interest in SeaView. SeaView invests in mezzanine securities
        in a
        diversified portfolio of small to mid-size companies. Scott Hartman, our
        Chief
        Executive Officer and a director, David S. Montoya, our Chief Financial Officer
        and a director, Robert Farmer, a director, and an affiliate of E. Denton
        Jones,
        a director, each hold a financial interest in the general partner of
        SeaView.
 
 In
        November 2004, WQN invested $3 million in Cross Country Capital Partners,
        L.P.
        (“Cross Country”), a partnership managed by an affiliate of E. Denton Jones, a
        director of WQN. WQN has an approximately 66% limited partnership interest
        in
        Cross Country. The majority of the partnership assets are to be invested
        in
        private investments in public entities. The partnership investments will
        take
        the form of common equity, preferred equity, convertible debt and/or equity
        or
        debt securities. Among other investments, Cross Country has substantial
        investments in VoIP and PAA.
 
 We
        entered into a management agreement with WQNI Management Group LLC (f/k/a
        WQNI
        Capital Advisors, LLC) (“WQNI Management”) in October 2005. WQNI Management is a
        Delaware limited liability company formed solely for the purpose of providing
        management services to us. Scott W. Hartman, B. Michael Adler, E. Denton
        Jones
        and David S. Montoya, who are four of our directors and certain of our officers,
        comprise all of the managing members of WQNI Management. Each of them, or
        their
        affiliates, own 25% of WQNI Management. The material elements of our management
        agreement are summarized below. The statements that follow are subject to
        and
        qualified in their entirety by reference to all of the provisions of the
        management agreement, a form of which has been incorporated by reference
        as an
        exhibit to this Form 10-KSB.
  The
        management agreement defines our manager’s duties and responsibilities as
        follows: (i) to provide  us
        with
        suitable experienced professionals to enable us to conduct our operations;
        (ii)
        to provide us an office facility within the New York City metropolitan area
        to
        enable us to conduct our business operations, including furnishing such office
        with office equipment (including computers and software) and furniture suitable
        to enable us to conduct our business operations and all janitorial service,
        utility service, local and long distance telephone, high speed internet
        connections and fax service, and other similar services necessary to the
        conduct
        of such operations; and (iii) to seek suitable investment opportunities and
        manage our investment policy; perform our day-to-day investment and business
        operations; provide investment advice; and prepare and disseminate all necessary
        reports and financial statements to our management and board of
        directors.
  Without
        the written approval of our board of directors, WQNI Management shall not
        commit, or enter into any agreement, on our behalf with respect to: (i) the
        incurrence any indebtedness for borrowed money; (ii) any investment by us,
        other
        than the investment of cash in short-term permitted investments in the ordinary
        course of business; or (iii) any other material contract.
  WQNI
        Management is responsible for the payment of: (i) the compensation of all
        employees of WQNI Management; and (ii) the costs of providing services under
        the
        management agreement to us, except for those expenses described below, including
        office expenses, travel, business development, office and equipment rental,
        bookkeeping and the development, underwriting, due diligence, investigation
        and
        monitoring of investments. We pay all of our other expenses directly, including
        our legal fees, audit expenses, directors and officers insurance, other expenses
        related to being a public company and direct transaction expenses.
  In
        consideration for the services provided to us by WQNI Management, we have
        agreed
        to pay to WQNI Management the following consideration: (i) one-half of one
        percent (.5%) of Total Assets (as defined below), payable on May 15, August
        15,
        November 15 and March 31, based on our financial statements at the end of
        the
        fiscal quarter immediately preceding the payment date (the “Base Management
        Fee”); and (ii) an incentive fee equal to 20% of the excess, if any, of our Net
        Investment Income (as defined below) for each of our fiscal quarters that
        exceeds the Priority Return (as defined below), payable on May 15, August
        15,
        November 15 and March 31, based on our financial statements determined in
        accordance with generally accepted accounting principles, consistently applied,
        at the end of the fiscal quarter immediately preceding the payment date (the
        “Incentive Fee”); and (iii) an incentive fee (“Capital Gains Fee”) equal to 20%
        of our net Realized Capital Gains (Realized Capital Gains (as defined below)
        less Realized Capital Losses (as defined below)) on a cumulative basis for
        each
        of our fiscal years following October 11, 2005, minus any Unrealized Capital
        Depreciation (as defined below) at the end of such fiscal year and minus
        the
        aggregate amount of all Capital Gains Fees paid to WQNI Management in our
        prior
        fiscal years, payable on April 15 of each year based on our audited financial
        statements for our prior fiscal year; provided, however, that no Capital
        Gains
        Fees shall be paid to  WQNI
        Management with respect to our investment in SeaView.
  F-15
  As
        used
        herein, the following terms have the following meanings: (i) “Total Assets”
means the amount of our gross assets as set forth on our applicable financial
        statements at the end of the fiscal quarter immediately preceding the payment
        date, as determined in accordance with generally accepted accounting principles,
        consistently applied; provided, however, that in computing Total Assets the
        gross book value with respect to our investment in SeaView shall be excluded
        from the calculation of Total Assets; (ii) “Net Investment Income” shall mean
        our interest income, dividend income, and any other income (including any
        other
        fees such as commitment, origination, syndication, structuring, diligence,
        managerial assistance, monitoring, and consulting fees or other fees that
        we
        receive from portfolio companies or investments) which are collected during
        the
        fiscal quarter of our company; minus our operating expenses for the fiscal
        quarter (including the Base Management Fee and any interest expense, but
        excluding the Incentive Fee and the Capital Gains Fee); provided, however,
        that
        any Net Investment Income with respect to the our investment in SeaView shall
        be
        excluded from the calculation of Net Investment Income. Net Investment Income
        does not include Realized Capital Gains, Realized Capital Losses or Unrealized
        Capital Depreciation; (iii) “Priority Return” means a rate equal to 1.5% (6%
        annualized) of the our Total Assets; (iv) “Realized Capital Gains” on each of
        our investments will be calculated as the excess of the net amount realized
        from
        the sale or other disposition of such investment over the original cost of
        the
        investment (less any Unrealized Capital Depreciation with respect to such
        investment which was deducted with respect to the payment of any Capital
        Gains
        Fees in any prior fiscal year); (v) “Realized Capital Losses” on each of our
        investments will be calculated as the amount by which the net amount realized
        from the sale or other disposition of such investment is less than the original
        cost of such investment; and (vi) “Unrealized Capital Depreciation” on each of
        our investments will be calculated as the amount by which the original cost
        of
        such investment exceeds the fair value of such investment as of the end of
        a
        fiscal year of the Company.
  The
        management agreement has a ten year term and is scheduled to expire on October
        11, 2015. We may not terminate the management agreement earlier except upon
        the
        occurrence of any of the following events: (i) our total assets (as defined
        in
        the management agreement) for two consecutive fiscal quarters are not at
        least
        equal to 60% of our total assets on October 11, 2005 which were approximately
        $15million (ii) E. Denton Jones, B. Michael Adler, David S. Montoya or Scott
        W.
        Hartman withdraw as members of the management company, other than as a result
        of
        death or disability; or (iii) either Mr. Hartman or Mr. Montoya voluntarily
        terminates their employment with us.
  Upon
        the
        occurrence of any such triggering event, we may terminate the management
        agreement upon written notice to WQNI Management within 30 days following
        the
        occurrence of such event.
  In
        addition, either we or WQNI Management may terminate the management agreement
        upon written notice to the breaching party following the occurrence of a
        material breach of the management agreement by the other party if either:
        (i) the material breach relates to the failure to pay amounts due under the
        management agreement and such breach continues unremedied for 10 days after
        notice; or (ii) the other party materially breaches the terms of the management
        agreement and such breach continues unremedied for 30 days after
        notice.
  **9.
        Income Taxes**
 
 Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        the basis used for income tax purposes. Significant components of deferred
        tax
        assets and liabilities are as follows as of December 31:
 
 F-16
 
  **2005**
              
              **2004**Deferred
                  tax assets/(liability):Property
                  and equipment
              
              $
              —
              
              $
              21,265Capital
                  loss carry forward
              
              
              —
              
              
              195,941Unrealized
                  loss on investments
              
              
              2,670,721
              
              
              —Other
              
              
              1,922
              
              
              66,162Net
                  operating loss carry forwards
              
              
              8,141,581
              
              
              9,281,128Total
                  deferred tax assets
              
              
              10,814,224
              
              
              9,564,496Valuation
                  allowance
              
              
              (10,814,224
              )
              
              (9,564,496
              )Net
                  deferred tax assets
              
              $
              —
              
              $
              —
 
 
 The
        Company has U.S. net operating loss carry forwards of approximately $22,022,000
        as of December 31, 2005. The 2005 decrease in net operating loss carry
        forwards resulted from a portion of the loss being consumed by the gain
        recognized by the Company on its sale of its VoIP Assets. The Company has
        not
        recognized a deferred tax asset in the accompanying balance sheets due to
        the
        uncertainty of future realization. No other significant reconciling items
        exist
        between the actual effective tax rate and the expected effective tax rate.
        For
        purposes of computing its deferred tax assets for each of the 2004 and 2005
        tax
        years, the Company has used an assumed combined federal and state tax rate
        of
        36.97%. During 2004 and 2005, the valuation allowance increased by approximately
        $83,000 and $300,000, respectively. If unused, accumulated net operating
        losses
        expire as follows: 2019 - $758,000; 2020 - $4,628,000; 2021 - $8,210,000;
        2022 -
        $3,828,000; 2023 - $4,598,000.
 
 **10.
        Stockholders’ Equity**
 
 **Common
        and Preferred Stock**
 
 The
        Company’s authorized share capital consists of 50,000,000 shares of common stock
        with par value of $0.01 per share, and 10,000,000 shares of preferred stock
        with
        par value of $0.01 per share.
 
 **Warrants**
 
 At
        December 31, 2005 and 2004, the Company had outstanding warrants to
        purchase 10,000 and 414,775 shares of its common stock, respectively. These
        warrants expire in July 2006 and have a weighted average exercise price of
        $13.00 per share. At March 31, 2006, warrants for 10,000 shares remain
        outstanding. At December 31, 2005, all of the warrants were exercisable.
        The warrants outstanding include warrants granted to a consulting company
        managed by one of the Company’s directors to acquire 100,000 shares of common
        stock; warrants granted to representatives of the Company’s underwriters in
        connection with the Company’s initial public offering to acquire 275,000 shares
        of common stock; and warrants granted to various service providers and others
        to
        acquire 39,775 shares of common stock. In 2004, we issued warrants to purchase
        40,000 shares of our common stock to a privately held company in connection
        with
        a distribution and marketing agreement.
 
 **Stock
        Options**
 
 The
        Company has stock option plans (the “Plans”) under which the Company may grant
        Directors and key employees options to purchase up to 2,250,000 shares of
        the
        Company’s common stock at an amount at least equal to the fair value of the
        Company’s common stock on the date of grant. The exercise and vesting period of
        each option is determined by the Company’s Board of Directors, but no option
        shall have a term longer than 10 years. Options granted under the Plans are
        non-qualified stock options. The following table summarizes the employee
        stock
        option transactions for the years ended December 31, 2005 and 2004 under
        the Plans:
  F-17
  
 WeightedAverageNumber
                  of
              
              ExerciseShares
              
              PriceOutstanding
                  at December 31, 2003
              
              
              901,914
              
              $
              3.93Granted
              
              
              265,500
              
              
              2.65Exercised
              
              
              (275,996
              )
              
              2.51Cancelled
              
              
              (38,434
              )
              
              2.10Outstanding
                  at December 31, 2004
              
              
              852,984
              
              $
              4.11Granted
              
              
              970,000
              
              
              1.67Exercised
              
              
              (48,000
              )
              
              0.45Cancelled
              
              
              (172,495
              )
              
              2.76Outstanding
                  at December 31, 2005
              
              
              1,602,489
              
              $
              2.90Options
                  exercisable:December 31,
                  2004
              
              
              662,486
              
              $
              4.57December 31,
                  2005
              
              
              955,823
              
              $
              3.73
 
 
 A
        summary of stock options under the Plans outstanding as of December 31,
        2005 are as follows:
 
 Options
                  Outstanding
              
              Options
                  ExercisableWeighted
              
              
              Weighted
              
              
              
              
              WeightedRange
                  of
              
              
              
              Average
              
              
              Average
              
              
              
              
              AverageExercise
              
              
              
              Remaining
              
              
              Exercise
              
              
              
              
              ExercisePrices
              
              Shares
              
              Life
                  (years)
              
              
              Price
              
              Shares
              
              
              Price$
              0.00
                  -0.99
              
              2,000
              
              0.75
              
              $
              0.01
              
              2,000
              
              $
              0.011.00
                  - 1.99
              
              1,050,000
              
              9.12
              
              
              1.67
              
              403,334
              
              
              1.692.00
                  - 2.99
              
              349,155
              
              0.75
              
              
              2.20
              
              349,155
              
              
              2.203.00
                  - 5.99
              
              100,000
              
              0.96
              
              
              3.75
              
              100,000
              
              
              3.7513.00
                  - 19.99
              
              95,000
              
              0.92
              
              
              16.87
              
              95,000
              
              
              16.8720.00
                  - 24.99
              
              6,334
              
              0.75
              
              
              22.06
              
              6,334
              
              
              22.06
 
 
 **11.
        Contingencies**
 
 In
        December 1996, the Company applied to the United States Patent and Trademark
        Office to register the trademarks: “WorldQuest” and “WorldQuest Networks.” We
        received a registration for the trademark “WorldQuest” from the U.S. Patent and
        Trademark Office on November 23, 1999. In October 1997, the Patent and Trademark
        Office issued a notice of publication regarding our application to register
        “WorldQuest Networks” as a trademark. In response to that notice, Qwest
        Communications filed a notice of opposition in September 1998. Qwest
        Communications instituted a cancellation proceeding in the Patent and Trademark
        Office for the registered trademark “WorldQuest.” In December 2001, a judgment
        was made in the Company’s favor whereby Qwest’s motion to cancel our
“WorldQuest” trademark was dismissed, however, Qwest filed a motion appealing
        the judgment. In December 2002, Qwest filed a separate complaint stating
        that
        the Company’s prepaid cash card product infringes on the Qwest trademark. In
        February 2003, the companies settled all outstanding claims whereby WorldQuest
        received a cash payment and telecommunication services (primarily long distance
        termination) from Qwest and Qwest retained all rights to the trademarks in
        question. Pursuant to the term of a settlement agreement with Qwest
        Communications arising out of a trademark dispute, on November 9, 2004 the
        Company changed its name to WQN, Inc. from WorldQuest Networks,
        Inc.
 
 On
        February 9, 2006, WQN commenced litigation against Mark C. Hotton, the former
        chief executive officer of PAA, and certain other persons and entities, seeking
        the return of the monies involved in the transactions that the Company alleges
        were improperly conducted at PAA. On February 14, 2006, the Supreme Court
        of the
        State of New York issued an Order to Show Cause with Temporary Restraining
        Order
        against Mr. Hotton and certain others.
 
 F-18
 On
        May
        17, 2006, WQN, Inc., a Delaware corporation, (“WQN”) and its wholly-owned
        subsidiary Park Ave. Assoc. LLC, a Delaware limited liability company (“Park
        Ave. Delaware’) entered into a Settlement Agreement (the "Settlement
        Agreement"), by and among WQN, Park Ave. Delaware (WQN and Park Ave. Delaware
        are collectively referred to as the “WQN Parties” or the “Company”), Mark C.
        Hotton (“Hotton”), 154 TH Street
        Corp. (“154 TH Street”), Pioneer Ventures LLC (“Pioneer”), The Rising Child Foundation (“Rising
        Child”), Mark C. Hotton Trust (the “Hotton Trust”), Mark C. Hotton Living Trust
        (the “Hotton Living Trust”), Edward Johnson (“Johnson”), Park Ave. Assoc. LLC, a
        New Jersey limited liability company (“Park Ave. New Jersey”) (Hotton,
        154 th Street,
        Pioneer, Rising Child, the Hotton Trust, the Hotton Living Trust, Johnson
        and
        Park Ave. New Jersey are collectively referred to as the “Hotton Parties”) and
        certain other parties.
  The
        Hotton Parties will pay to the Company the agreed upon sum of $2,000,000
        as
        follows: $1,000,000 upon the release of the Eastern District Funds (defined
        below); and $1,000,000 in installments over a period of 18 months as follows:
        (i) $150,000 on or before the 6 month anniversary of the date of the Settlement
        Agreement; (ii) $150,000 dollars on or before the 9 month anniversary of
        the
        date of the Settlement Agreement; (iii) $150,000 on or before the 1 year
        anniversary of the date of the Settlement Agreement; (iv) $275,000 on or
        before
        the 15 month anniversary of the date of the Settlement Agreement; and (v)
        $275,000 on or before the 18 month anniversary of the date of the Settlement
        Agreement. “Eastern District Funds” means certain monies deposited into an
        interest bearing account with the United States District Court, Eastern District
        of New York, with respect to a lawsuit pending in such court by and among
        Spina,
        Hotton, WQN and certain other parties. Contemporaneous with the entry into
        the
        Settlement Agreement, certain lawsuits involving various parties to the
        Settlement Agreement were dismissed with prejudice and the parties entered
        into
        general releases with each other. The Eastern District Funds were released
        to
        WQN on May 19, 2006.
 
 F-19
 
 WQN
        is
        currently involved as the defendant and counter-claimant in an arbitration
        dispute styled: Dr. Alex Parsinia v. WQN, Inc. (f/k/a World Quest Networks,
        Inc.); Arbitration before the International Institute for Conflict Prevention
        and Resolution. The dispute arises from an Asset Transfer Agreement and Addendum
        thereto that WQN entered into in 2003. The transferor, Dr. Alex Parsinia,
        claims
        that WQN breached the Asset Transfer Agreement. WQN claims that Dr. Parsinia
        breached the agreement, converted WQN’s proprietary information, and committed
        fraud. Pursuant to the Asset Transfer Agreement and Addendum thereto, WQN
        and
        Dr. Parsinia will arbitrate their claims before the International Institute
        for
        Conflict Prevention and Resolution in Dallas, Texas. WQN believes the
        transferor’s claims are without merit. At this point in time the amount of
        damages, if any, is not known and management does not believe it will be
        material.
 
 WQN
        is
        also in the initial stages of responding to a second matter involving Dr.
        Parsinia. This second matter has been asserted by Hossein Haghighi in the
        form
        of a letter demand dated March 8, 2006. Mr. Haghighi claims that WQN is liable
        for damages he sustained as a result of a business transaction with Dr.
        Parsinia. He claims that he purchased calling cards from Dr. Parsinia of
        SuperTel that turned out to be defective and unusable. WQN has requested
        additional information from Mr. Haghighi’s attorney regarding the claim,
        however, no response has been received as of May 30, 2006. It is unclear
        when
        Mr. Haghighi’s claim arose and therefore, WQN’s potential liability for this
        matter is also unclear as facts pertinent to issues of liability and successor
        liability are currently unknown.
 
 **12.
        Commitments**
 
 Our
        executive offices are located in New York, New York, where we are provided
        workspace of approximately 2,500 square feet under a management services
        agreement. The lease for the space expires in November 2010. We also have
        office
        space in Dallas, Texas at a monthly rental of approximately $10,400 which
        we
        partially sublet to VoIP, Inc for $5,000 per month. Such lease expires August
        31, 2006. We believe our space is adequate for our current needs. As we expand,
        we expect that suitable additional space will be available on commercially
        reasonable terms, although no assurance can be made in this regard. We also
        believe our property is adequately covered by insurance.
 
 F-20