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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission file number 0-27751
 WQN, INC.
  Delaware
    
    75-2838415(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)
 14911 Quorum Drive, Suite 140, Dallas, Texas
    
    75254(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number, including area code:
    
    (972) 361-1980
  YES þ NO o
   o þ
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WQN, INC.
 PART IFINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS.
 WQN, INC.
CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2005
    
    2004(unaudited)Current assets:Cash and cash equivalents
    
    $
    9,050,469
    
    
    $
    9,942,280Investment in partnership
    
    
    2,546,878
    
    
    
    2,944,243Accounts receivable, net
    
    
    685,035
    
    
    
    874,219Current portion of notes receivable and accrued interest
    
    
    357,358
    
    
    
    2,408,679Prepaid expenses and other current assets
    
    
    1,038,293
    
    
    
    806,068Total current assets
    
    
    13,678,033
    
    
    
    16,975,489Property and equipment, net
    
    
    695,257
    
    
    
    597,522Note receivable
    
    
    29,167
    
    
    
    204,167Other assets, net
    
    
    764,912
    
    
    
    972,794Investment in Seaview Capital
    
    
    1,000,000
    
    
    
    Total assets
    
    $
    16,167,369
    
    
    $
    18,749,972Current liabilities:Accounts payable
    
    $
    1,524,053
    
    
    $
    1,481,188Accrued expenses
    
    
    254,207
    
    
    
    457,459Deferred revenue
    
    
    411,167
    
    
    
    444,988Promissory note
    
    
    300,000
    
    
    
    300,000Total current liabilities
    
    
    2,489,427
    
    
    
    2,683,635Commitments and contingenciesStockholders equity:Preferred stock, par value $0.01 per share;
Authorized shares10,000,000; none issued and
outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share;
Authorized shares50,000,000; issued and
outstanding shares 6,878,062 at June 30, 2005
and 6,830,062 at December 31, 2004
    
    
    68,781
    
    
    
    68,301Additional capital
    
    
    43,202,359
    
    
    
    43,180,859Accumulated deficit
    
    
    (29,593,198
    )
    
    
    (27,182,823
    )Total stockholders equity
    
    
    13,677,942
    
    
    
    16,066,337Total liabilities and stockholders equity
    
    $
    16,167,369
    
    
    $
    18,749,972Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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WQN, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Retail telephony revenue
    
    $
    2,813,594
    
    
    $
    2,731,078
    
    
    $
    5,342,012
    
    
    $
    4,727,913Wholesale telephony and other revenue
    
    
    5,162,035
    
    
    
    55,494
    
    
    
    10,241,355
    
    
    
    71,805Total revenue
    
    
    7,975,629
    
    
    
    2,786,572
    
    
    
    15,583,367
    
    
    
    4,799,718Cost of revenue
    
    
    7,605,626
    
    
    
    2,251,031
    
    
    
    14,931,037
    
    
    
    3,793,334Gross profit
    
    
    370,003
    
    
    
    535,541
    
    
    
    652,330
    
    
    
    1,006,384Operating expenses:Selling, general and administrative
    
    
    1,371,592
    
    
    
    666,072
    
    
    
    2,430,052
    
    
    
    1,768,175Merger expenses
    
    
    
    
    
    
    40,844
    
    
    
    
    
    
    
    1,208,084Depreciation and amortization
    
    
    171,896
    
    
    
    195,497
    
    
    
    339,837
    
    
    
    362,890Total operating expenses
    
    
    1,543,488
    
    
    
    902,413
    
    
    
    2,769,889
    
    
    
    3,339,149Operating loss
    
    
    (1,173,485
    )
    
    
    (366,872
    )
    
    
    (2,117,559
    )
    
    
    (2,332,765
    )Interest income, net
    
    
    40,466
    
    
    
    73,097
    
    
    
    104,549
    
    
    
    114,906Loss from partnership investment
    
    
    (28,107
    )
    
    
    
    
    
    
    (397,365
    )
    
    
    Loss from continuing operations
    
    
    (1,161,126
    )
    
    
    (293,775
    )
    
    
    (2,410,375
    )
    
    
    (2,217,859
    )Loss from discontinued operations
    
    
    
    
    
    
    (69,036
    )
    
    
    
    
    
    
    (156,600
    )Net income loss
    
    $
    (1,161,126
    )
    
    $
    (362,811
    )
    
    $
    (2,410,375
    )
    
    $
    (2,374,459
    )Net loss per share  basic and diluted:Continuing operations
    
    $
    (0.17
    )
    
    $
    (0.04
    )
    
    $
    (0.35
    )
    
    $
    (0.34
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net loss per share
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    (0.35
    )
    
    $
    (0.36
    )Weighted average common shares
outstanding  basic and diluted
    
    
    6,878,062
    
    
    
    6,596,880
    
    
    
    6,869,841
    
    
    
    6,507,156
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WQN, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
 Common
    
    Stock
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Deficit
    
    TotalBalance at December 31, 2004
    
    
    6,830,062
    
    
    $
    68,301
    
    
    $
    43,180,859
    
    
    $
    (27,182,823
    )
    
    $
    16,066,337Exercise of employee stock
options
    
    
    48,000
    
    
    
    480
    
    
    
    21,500
    
    
    
    
    
    
    
    21,980Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,410,375
    )
    
    
    (2,410,375
    )Balance at June 30, 2005
    
    
    6,878,062
    
    
    $
    68,781
    
    
    $
    43,202,359
    
    
    $
    (29,593,198
    )
    
    $
    13,677,942
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WQN, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six months ended June 30,2005
    
    2004Operating ActivitiesNet loss from continuing operations
    
    $
    (2,410,375
    )
    
    $
    (2,217,859
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss from discontinued operations
    
    
    
    
    
    
    (156,600
    )Depreciation and amortization
    
    
    339,837
    
    
    
    454,801Loss on disposition of property and equipment and asset write-downs
    
    
    
    
    
    
    76,522Loss from investment in partnership
    
    
    397,365
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    171,883
    
    
    
    (98,679
    )Accounts payable and accrued expenses
    
    
    (160,387
    )
    
    
    (334,516
    )Deferred revenue
    
    
    (33,821
    )
    
    
    142,331Other assets
    
    
    (178,857
    )
    
    
    (167,998
    )Net cash used in operating activities
    
    
    (1,874,355
    )
    
    
    (2,301,998
    )Investing ActivitiesAdditions to property and equipment
    
    
    (283,058
    )
    
    
    (166,668
    )Payments received on note from the sale of subsidiary
    
    
    175,000
    
    
    
    Payments from (loan to) Ntera Holdings, Inc.
    
    
    2,068,622
    
    
    
    (2,000,000
    )Purchase of partnership interest
    
    
    (1,000,000
    )
    
    
    Net proceeds from (cash used in) investing activities
    
    
    960,564
    
    
    
    (2,166,668
    )Financing ActivitiesProceeds from exercise of stock options
    
    
    21,980
    
    
    
    631,016Increase (decrease) in cash and cash equivalents
    
    
    (891,811
    )
    
    
    (3,837,650
    )Cash and cash equivalents at beginning of period
    
    
    9,942,280
    
    
    
    17,931,820Cash and cash equivalents at end of period
    
    $
    9,050,469
    
    
    $
    14,094,170Supplemental Disclosure of Cash Flow Information
Interest paid
    
    $
    4,287
    
    
    $
    2,625
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WQN, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. Basis of Presentation
  2. Discontinued Operations
  Three months ended


    Six months endedJune 30, 2004
    
    June 30, 2004Revenue
    
    $
    144,791
    
    
    $
    299,733Cost of revenue
    
    
    (59,770
    )
    
    
    (119,071
    )Gross profit
    
    
    85,021
    
    
    
    180,662Operating expenses
    
    
    (154,057
    )
    
    
    (337,262
    )Net loss
    
    
    (69,036
    )
    
    
    (156,600
    )Gain on disposal
    
    
    
    
    
    
    Net loss on discontinued operations
    
    $
    (69,036
    )
    
    $
    (156,000
    )
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WQN, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(UNAUDITED)
 3. Earnings (Loss) Per Share
  4. Related Party Transactions
  5. Merger Agreement with Ntera Holdings
  6. Promissory Note
  7. Value Communications Transaction
  -7-




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WQN, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (UNAUDITED)
 8. Distribution and Marketing Agreement
  9. Investment in Partnership
  10. Investment in Seaview Capital
  11. Subsequent Event
   -8-




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WQN, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 (UNAUDITED)
 12. Stock-Based Compensation
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net loss as reported
    
    $
    (1,161,126
    )
    
    $
    (362,811
    )
    
    $
    (2,410,375
    )
    
    $
    (2,374,459
    )Less stock-based employee
compensation expense
    
    
    (39,123
    )
    
    
    (23,060
    )
    
    
    (87,183
    )
    
    
    (130,860
    )Pro forma net loss
    
    $
    (1,200,249
    )
    
    $
    (385,871
    )
    
    $
    (2,497,558
    )
    
    $
    (2,505,319
    )Loss per share:As reported  basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.05
    )
    
    $
    (0.35
    )
    
    $
    (0.36
    )Pro forma  basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.06
    )
    
    $
    (0.36
    )
    
    $
    (0.39
    )
 13. Legal Matters
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Forward-Looking Statements
  Overview
      -10-




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Discontinued Operations
  Merger Agreement with Ntera Holdings
  Distribution and Marketing Agreement
  Sale of Operating Assets
   -11-




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Critical Accounting Policies
  Revenue Recognition
  Web Site Development Costs
  Investment in Partnership
  Investment in Seaview Capital
  Income Taxes
  -12-




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Results of Operations
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
 Revenue
   Cost of Revenue
  Selling, General and Administrative
  Merger Expenses
  Depreciation and Amortization
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Interest Income, Net
  Loss From Investment In Partnership
  Loss From Continuing Operations
  Loss From Discontinued Operations
  Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
 Revenue
   Cost of Revenue
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Selling, General and Administrative
  Merger Expenses
  Depreciation and Amortization
  Interest Income, Net
  Loss From Continuing Operations
  Loss From Discontinued Operations
  -15-




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Liquidity and Capital Resources
        Income Taxes
  -16-




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-17-




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PART II-OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  -18-




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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
 (a)
    
    The following exhibits are filed with this Report:
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ExhibitNumber
    
    Description of Exhibits10.7
    
    2002 Stock Option Plan.*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. SIGNATURES
  WQN, INC.August 15, 2005
    
    By:
    
    /s/ B. Michael AdlerB. Michael AdlerPrincipal Financial and Accounting Officer
 -20-