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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-QSB (Mark One) x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 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
(State or other jurisdiction of
Incorporation or organization)
    
    75-2838415
(I.R.S. Employer
Identification No.)14911 Quorum Drive, Suite 140, Dallas, Texas
(Address of principal executive offices)
    
    75254
(Zip Code)Issuers telephone number, including area code:
    
    (972) 361-1980
 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 At October 31, 2004, the registrant had outstanding 6,814,382 shares of par
value $.01 common stock. Transitional Small Business Disclosure Format (check one): Yes  o  No  x -1-




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TABLE OF CONTENTS  PART IFINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS.CONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 3. CONTROLS AND PROCEDURESPART II-OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. CHANGES IN SECURITIESITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.ITEM 5. OTHER INFORMATIONITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.SIGNATURESCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906    Table of Contents  WQN, INC. 
 PART IFINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. WQN, INC. 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,2004
    
    2003(unaudited)Current assets:Cash and cash equivalents
    
    $
    14,347,262
    
    
    $
    17,931,820Accounts receivable, net
    
    
    504,047
    
    
    
    553,251Current portion of notes receivable and accrued interest
    
    
    2,427,796
    
    
    
    Prepaid expenses and other current assets
    
    
    675,268
    
    
    
    557,577Total current assets
    
    
    17,954,373
    
    
    
    19,042,648Property and equipment, net
    
    
    564,232
    
    
    
    1,039,783Note receivable
    
    
    291,667
    
    
    
    Other assets, net
    
    
    1,033,541
    
    
    
    101,192Total assets
    
    $
    19,843,813
    
    
    $
    20,183,623Current liabilities:Accounts payable
    
    $
    1,391,420
    
    
    $
    1,108,152Accrued expenses
    
    
    811,715
    
    
    
    471,746Deferred revenue
    
    
    385,934
    
    
    
    254,121Total current liabilities
    
    
    2,589,069
    
    
    
    1,834,019Promissory note
    
    
    300,000
    
    
    
    300,000Commitments and contingenciesStockholders equity:Preferred stock, par value $0.01 per share;
Authorized shares10,000,000; none issued and
outstanding at September 30, 2004 and December 31, 2003
    
    
    
    
    
    
    Common stock, par value $0.01 per share;
Authorized shares50,000,000; issued
outstanding shares 6,814,382 at September 30, 2004
and 6,386,199 at December 31, 2003
    
    
    68,144
    
    
    
    63,862Additional capital
    
    
    43,068,264
    
    
    
    41,994,594Accumulated deficit
    
    
    (26,181,664
    )
    
    
    (24,008,852
    )Total stockholders equity
    
    
    16,954,744
    
    
    
    18,049,604Total liabilities and stockholders equity
    
    $
    19,843,813
    
    
    $
    20,183,623
 The accompanying notes are an integral part of these condensed consolidated
financial statements. -2-




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WQN, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Retail telephony revenue
    
    $
    2,254,098
    
    
    $
    2,326,676
    
    
    $
    6,982,011
    
    
    $
    7,029,318Wholesale telephony and other revenue
    
    
    1,346,122
    
    
    
    90,966
    
    
    
    1,417,927
    
    
    
    170,112Total revenue
    
    
    3,600,220
    
    
    
    2,417,642
    
    
    
    8,399,938
    
    
    
    7,199,430Cost of revenue
    
    
    3,133,505
    
    
    
    1,769,254
    
    
    
    6,926,839
    
    
    
    5,384,433Gross profit
    
    
    466,715
    
    
    
    648,388
    
    
    
    1,473,099
    
    
    
    1,814,997Operating expenses:Selling, general and administrative
    
    
    814,071
    
    
    
    1,094,421
    
    
    
    2,582,246
    
    
    
    3,564,015Merger expenses
    
    
    82,089
    
    
    
    
    
    
    
    1,290,173
    
    
    
    Depreciation and amortization
    
    
    212,134
    
    
    
    191,081
    
    
    
    575,024
    
    
    
    689,633Total operating expenses
    
    
    1,108,294
    
    
    
    1,285,502
    
    
    
    4,447,443
    
    
    
    4,253,648Operating loss
    
    
    (641,579
    )
    
    
    (637,114
    )
    
    
    (2,974,344
    )
    
    
    (2,438,651
    )Interest income, net
    
    
    87,684
    
    
    
    45,854
    
    
    
    202,590
    
    
    
    159,635Loss from continuing operations
    
    
    (553,895
    )
    
    
    (591,260
    )
    
    
    (2,771,754
    )
    
    
    (2,279,016
    )Net gain (loss) from discontinued operations
    
    
    755,542
    
    
    
    (150,829
    )
    
    
    598,942
    
    
    
    (372,850
    )Net income (loss)
    
    $
    201,649
    
    
    $
    (742,089
    )
    
    $
    (2,172,812
    )
    
    $
    (2,651,866
    )Net income (loss) per share  basic and diluted:Continuing operations
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.43
    )
    
    $
    (0.36
    )Discontinued operations
    
    
    0.11
    
    
    
    (0.03
    )
    
    
    0.10
    
    
    
    (0.06
    )Net income (loss) per share
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.33
    )
    
    $
    (0.42
    )Weighted average common shares outstanding -
basic and diluted
    
    
    6,733,799
    
    
    
    6,386,199
    
    
    
    6,583,255
    
    
    
    6,386,199
 The accompanying notes are an integral part of these condensed
consolidated financial statements. -3-




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WQN, INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (UNAUDITED)
 Common
    
    Stock
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Deficit
    
    TotalBalance at December 31, 2003
    
    
    6,386,199
    
    
    $
    63,862
    
    
    $
    41,994,594
    
    
    $
    (24,008,852
    )
    
    $
    18,049,604Exercise of employee stock
options
    
    
    428,183
    
    
    
    4,282
    
    
    
    1,073,670
    
    
    
    
    
    
    
    1,077,952Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,172,812
    )
    
    
    (2,172,812
    )Balance at September 30, 2004
    
    
    6,814,382
    
    
    $
    68,144
    
    
    $
    43,068,264
    
    
    $
    (26,181,664
    )
    
    $
    16,954,744
 The accompanying notes are an integral part of these condensed consolidated
financial statements. -4-




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WQN, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Nine months ended September 30,2004
    
    2003Operating ActivitiesNet loss from continuing operations
    
    $
    (2,771,754
    )
    
    $
    (2,279,016
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss from discontinued operations
    
    
    (178,172
    )
    
    
    (372,850
    )Depreciation and amortization
    
    
    682,321
    
    
    
    798,840Loss on disposition of property and equipment and asset write-downs
    
    
    76,522
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (28,592
    )
    
    
    (307,086
    )Accounts payable and accrued expenses
    
    
    98,237
    
    
    
    373,819Deferred revenue
    
    
    131,813
    
    
    
    25,333Other assets
    
    
    (637,926
    )
    
    
    (105,602
    )Net cash used in operating activities
    
    
    (2,627,551
    )
    
    
    (1,866,562
    )Investing ActivitiesAdditions to property and equipment
    
    
    (245,160
    )
    
    
    (246,825
    )Proceeds from the sale of subsidiary
    
    
    851,868
    
    
    
    Note from the sale of subsidiary
    
    
    (700,000
    )
    
    
    Payments received on note from the sale of subsidiary
    
    
    58,333
    
    
    
    Loan to Ntera Holdings, Inc.
    
    
    (2,000,000
    )
    
    
    Net cash used in investing activities
    
    
    (2,034,959
    )
    
    
    (246,825
    )Financing ActivitiesProceeds from exercise of stock options
    
    
    1,077,952
    
    
    
    Decrease in cash and cash equivalents
    
    
    (3,584,558
    )
    
    
    (2,113,387
    )Cash and cash equivalents at beginning of period
    
    
    17,931,820
    
    
    
    20,721,207Cash and cash equivalents at end of period
    
    $
    14,347,262
    
    
    $
    18,607,820Supplemental Disclosure of Cash Flow InformationInterest paid
    
    $
    500
    
    
    $
    913Non-cash increase in ValuCom assets and accrued liabilities
    
    $
    525,000
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated
financial statements. -5-




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WQN, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of
WQN, Inc. (formerly WorldQuest Networks, Inc.) and subsidiaries (collectively,
the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for annual financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The results
for the interim periods presented are not necessarily indicative of the results
that may be expected for any future period. The balance sheet at December 31,
2003 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements in this Form 10-QSB should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form
10-KSB for the year ended December 31, 2003. 2. Discontinued Operations In July 2004, the Company sold all of the outstanding capital stock of its
wholly-owned subsidiary buyindiaonline.com, Inc. (Cash2India) to a private
company for approximately $1,552,000. The Cash2India business comprised the
Companys previously reported financial services segment and is accounted for
as a discontinued operation in the accompanying condensed consolidated
financial statements. Under the terms of the transaction, the Company received
$852,000 in cash, a promissory note for $700,000, and a warrant to purchase
common stock in the acquiring company. The cash payment included consideration
for $352,000 in working capital associated with Cash2India at the time of the
sale. The promissory note bears interest at 5% per annum, is secured by the
capital stock of Cash2India, and is to be repaid in twenty-four consecutive
monthly payments of $29,167 plus accrued interest. The balance of the
promissory note and accrued interest was $641,667 as of September 30, 2004.
As a result of the transaction the Company recorded gain on the disposition of
Cash2India of approximately $777,000 in the third quarter of 2004. The net
gain/(loss) from discontinued operations is comprised as follows: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    40,294
    
    
    $
    134,316
    
    
    $
    340,027
    
    
    $
    410,923Cost of revenue
    
    
    (15,898
    )
    
    
    (48,444
    )
    
    
    (134,969
    )
    
    
    (136,129
    )Gross profit
    
    
    24,396
    
    
    
    85,872
    
    
    
    205,058
    
    
    
    274,794Operating expenses
    
    
    (45,968
    )
    
    
    (236,701
    )
    
    
    (383,230
    )
    
    
    (647,644
    )Net loss
    
    
    (21,572
    )
    
    
    (150,829
    )
    
    
    (178,172
    )
    
    
    (372,850
    )Gain on disposal
    
    
    777,114
    
    
    
    
    
    
    
    777,114
    
    
    
    Net gain/(loss) on discontinued operations
    
    $
    755,542
    
    
    $
    (150,829
    )
    
    $
    598,942
    
    
    $
    (372,850
    )
 The components of net assets of discontinued operations are as follows: September 30,
    
    December 31,2004
    
    2003Cash and cash equivalents
    
    $
    
    
    
    $
    514,635Accounts receivable
    
    
    
    
    
    
    409,717Prepaid expenses and other current assets
    
    
    
    
    
    
    71,988Property and equipment, net
    
    
    
    
    
    
    236,308Accounts payable and accrued expenses
    
    
    
    
    
    
    (210,658
    )Net assets of discontinued operations
    
    $
    
    
    
    $
    1,021,990
 -6-




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WQN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(UNAUDITED) 3. Earnings (Loss) Per Share Stock options and warrants convertible into 1,712,856 and 1,775,947 shares
of the Companys common stock at September 30, 2004 and 2003, respectively, are
excluded from the calculation of diluted earning per share because the Company
reported losses from continuing operations in those periods and their effect
would be antidilutive. 4. Related Party Transactions The Companys founder, Chief Executive Officer and President 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 September
30, 2004. A consulting company managed by one of the Companys directors holds
warrants outstanding to acquire 100,000 shares of the Companys common stock.
The warrants have an exercise price of $6.00 per share and expire in 2005. In
November 2004, the Company invested $3 million in a partnership managed by an
affiliate of a director of the Company (see Note 11). 5. Merger Agreement with Ntera Holdings On March 16, 2004, the Company entered into an Agreement and Plan of
Merger (the Agreement) with Ntera Holdings, Inc., a Delaware corporation
(Ntera), providing for a transaction that would have resulted in a change of
control of WQN. On September 2, 2004 the Company terminated the Agreement with
Ntera. In connection with the Agreement, WQN extended to Ntera a bridge loan in
the principal amount of $2 million bearing interest of 7% per annum. Ntera
granted WQN a security interest in its assets to secure repayment of the loan.
Under the terms of the loan agreement, the full amount of the loan and accrued
interest are due and payable within six months of the termination of the
Agreement. Ntera is currently in default of its repayment obligations under the
terms of the loan agreement; however, the Company is in discussions with Ntera
to modify the repayment terms. The Company believes the loan and accrued
interest of $78,000 at September 30, 2004 will be repaid in full during the
first quarter of 2005. If we are unable to reach agreement on the repayment
terms with Ntera, we may be forced to pursue the remedies available to us under
the loan agreement and the security agreement. 6. Promissory Note The Company has borrowed $300,000 from a financial institution under a
term promissory note agreement (the Note). The Note bears interest at the
financial institutions prime rate as adjusted from time to time (4.75% at
September 30, 2004) less 2.25% per annum. The Note is due in October 2005 and
is collateralized by a $300,000 certificate of deposit bearing interest of
1.48% per annum. 7. Value Communications Transaction In April 2004, the Company purchased from Value Communications Corporation
(ValuCom), a wholly owned subsidiary of Rediff.com India Limited, certain
assets consisting primarily of ValuComs customer list, brand, trademarks, web
sites, internally built software, and certain hardware for $500,000. The
Company paid $200,000 of the total consideration at closing with the remaining
$300,000 to be paid in twelve monthly installments of $25,000 commencing May
2004. In addition, the Company entered into an advertising agreement with
Rediff.com, Inc. (Rediff) entitling WorldQuest to marketing services
including exclusive rights to prominent online advertising space on the
Rediff.com U.S. website, the premier online destination for Indians in North
America. Under the terms of the advertising agreement, the Company will pay
Rediff $50,000 for twelve consecutive months commencing in May 2004 for the
advertising services. The Company provided both ValuCom and Rediff irrevocable
letters of credit for the Companys remaining obligation under the agreements.
The letters of credit are secured by deposits in money market funds and the
amount of the letters of credit and the security deposits are reduced as the
monthly installments are paid. At September 30, 2004, the Companys obligation
under both the agreements totaled $525,000. Substantially all of the ValuCom
purchase consideration was allocated to customer lists, which is included in
other long-term assets and is being amortized over four years. -7-




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WQN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) (UNAUDITED)
 8. Distribution and Marketing Agreement In September 2004, we entered into a distribution and marketing agreement
with a privately held company. As a result of the agreement, the Companys
products will be sold in more than 4,000 retail outlets in the Southern
California market. We sell telephony and other products to a network of
distributors who then re-sell the product to the retail outlets. The revenues
generated through this agreement are included in wholesale telephony revenues.
In connection with the agreement, we paid the private company $50,000 and
issued a warrant to purchase 40,000 shares of our common stock for a total
consideration of approximately $126,000 which is included as other long-term
assets and is being amortized over the three year term of the agreement. 9. 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 following table illustrates the effect on
net loss and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS 123. Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Net gain (loss) as reported
    
    $
    201,647
    
    
    $
    (742,089
    )
    
    $
    (2,172,812
    )
    
    $
    (2,651,868
    )Less stock-based employee
compensation expense
    
    
    (21,298
    )
    
    
    (27,291
    )
    
    
    (152,158
    )
    
    
    (124,606
    )Pro forma net gain (loss)
    
    $
    180,349
    
    
    $
    (769,380
    )
    
    $
    (2,324,970
    )
    
    $
    (2,776,474
    )Earnings per share:As reported  basic and diluted
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.33
    )
    
    $
    (0.42
    )Pro forma  basic and diluted
    
    $
    0.03
    
    
    $
    (0.12
    )
    
    $
    (0.35
    )
    
    $
    (0.43
    )
 10. Legal Matters 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. In September 2004, the Company settled a dispute with a vendor from which
it had purchased telecommunication services. Under the terms of the settlement,
the Company agreed to purchase from the vendor a total of $960,000 in
telecommunication services at rates less than the Company is paying for similar
services over a fourteen month period. The Company must purchase a minimum of
$80,000 per month in services beginning in the month that is four months after
the settlement date. The Company is a defendant from time to time in lawsuits and disputes
arising in the ordinary course of business. The Company believes that
resolution of all known contingencies is uncertain, and there can be no
assurance that future costs related to such litigation would not be material to
the Companys financial position or results of operations. -8-




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11. Subsequent Event In November 2004, the Company invested $3 million in a partnership managed
by an affiliate of 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.
The Company will account for its partnership interest under the equity method
of accounting. -9-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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, 2003. 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
WorldQuests control. These forward-looking statements include statements of
managements plans and objectives for WorldQuest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, our dependence on network infrastructure,
capacity, telecommunications carriers and other suppliers, industry pricing and
technology trends, evolving industry standards, domestic and international
regulatory matters, 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. Overview We are an international Internet telephony company. Our customers utilize
our networks of Internet gateways and other traditional networks to place
long-distance calls online at discounted rates. We also sell virtual calling
cards processed through other companies platforms including prepaid wireless
and prepaid Internet and from time to time we sell our excess capacity to other
long distance carriers. In September 2004, we began selling virtual calling
cards processed through our platform to other companies who then re-sell our
product to the end consumer under their private brand. Also, in September
2004, we entered into a distribution and marketing agreement giving us
distribution of prepaid calling cards and other telephony products to more than
4,000 retail outlets in Southern California. As of September 30, 2004, 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 and
Chief Executive Officer. Our primary source of revenue is the fees that we receive from our
telephony customers for completing calls over our network and from the sale of
telephony products to our network of distributors in the Southern California
market. Our Internet telephony revenue is dependent on the volume of voice
traffic carried over the network, which is measured in terms of minutes of
voice traffic and the fees per minute of traffic we charge our customers. We
recognize this revenue in the period in which the call is completed. We bill
our retail customers on a prepaid basis through credit cards. Our revenue from
the sale of telephony products to our distributors is included as wholesale
telephony revenue. We provide some of our credit worthy wholesale customers
with terms that generally allow them to pay for our products within two weeks.
All other wholesale customers pay for our products upfront. Cost of telephony revenue consists primarily of data communication and
telecommunication expenses to terminate long distance traffic over our
networks, which vary proportionately with the volume of traffic carried over
our network. These costs include Internet related expenses to send voice
traffic over the Internet, fees we pay to terminate calls, fees we pay to
utilize the traditional telephone network to terminate our calls, expenses
incurred to connect our customers to our network, and fees we pay to other
service providers for the purchase of telecom and other products which we
distribute. Selling, general and administrative expenses consist of advertising and
promotional expenditures, payroll and related expenses for executive and
administrative personnel, facilities expenses, professional services expenses,
travel and other general corporate expenses. -10-




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Discontinued Operations In July 2004, the Company sold all of the outstanding capital stock in its
wholly-owned subsidiary buyindiaonline.com, Inc. (Cash2India) to a private
company for approximately $1,552,000. Under the terms of the transaction, the
Company received $852,000 in cash, a promissory note for $700,000, and a
warrant to purchase common stock in the acquiring company. The cash payment
included consideration for $352,000 in working capital associated with
Cash2India at the time of the sale. The promissory note bears interest at 5%
per annum, is secured by the capital stock of Cash2India, and is to be repaid
in twenty-four consecutive monthly payments of $29,167 plus accrued interest.
The balance of the promissory note and accrued interest was $641,667 as of
September 30, 2004. Cash2India is accounted for as a discontinued operation in
the accompanying consolidated financial statements. Merger Agreement with Ntera Holdings On March 16, 2004, the Company entered into an Agreement and Plan of
Merger (the Agreement) with Ntera Holdings, Inc., a Delaware corporation
(Ntera), providing for a transaction that would have resulted in a change of
control of WQN. On September 2, 2004 the Company terminated the Agreement with
Ntera. In connection with the Agreement, WQN extended to Ntera a bridge loan in
the principal amount of $2 million bearing interest of 7% per annum. Ntera
granted WQN a security interest in its assets to secure repayment of the loan.
Under the terms of the loan agreement, the full amount of the loan and accrued
interest are due and payable within six months of the termination of the
Agreement. Ntera is currently in default of its repayment obligations under the
terms of the loan agreement; however, the Company is in discussions with Ntera
to modify the repayment terms. The Company believes the loan and accrued
interest of $78,000 at September 30, 2004 will be repaid in full during the
first quarter of 2005. If we are unable to reach agreement on the repayment
terms with Ntera, we may be forced to pursue the remedies available to us under
the loan agreement and the security agreement. Value Communications Transaction In April 2004, the Company purchased from Value Communications Corporation
(ValuCom), a wholly owned subsidiary of Rediff.com India Limited, certain
assets consisting primarily of ValuComs customer list, brand, trademarks, web
sites, internally built software, and certain hardware for $500,000. The
Company paid $200,000 of the total consideration at closing with the remaining
$300,000 to be paid in twelve monthly installments of $25,000 commencing May
2004. In addition, the Company entered into an advertising agreement with
Rediff.com, Inc. (Rediff) entitling WorldQuest to marketing services
including exclusive rights to prominent online advertising space on the
Rediff.com U.S website, the premier online destination for Indians in North
America. Under the terms of the advertising agreement, the Company will pay
Rediff $50,000 for twelve consecutive months commencing in May 2004 for the
advertising services. The Company provided both ValuCom and Rediff irrevocable
letters of credit for the Companys remaining obligation under the agreements.
The letters of credit are secured by deposits in money market funds and the
amount of the letters of credit and the security deposits are reduced as the
monthly installments are paid. At September 30, 2004, the Companys obligation
under both the agreements totaled $525,000. Substantially all of the ValuCom
purchase consideration was allocated to customer lists, which is included in
other long-term assets. Critical Accounting Policies 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, 2003. 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: -11-




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Revenue Recognition The Company recognizes revenues in accordance with generally accepted
accounting principles as outlined in SAB No. 101 which requires that four basic
criteria be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists, (2) product delivery, including customer acceptance, has
occurred or services have been rendered, (3) the price is fixed or determinable
and (4) collectibility is reasonably assured. We bill our telephony calling
card customers on a prepaid basis through credit cards and recognize the
revenue in the period in which the call is completed. A substantial portion of
the Companys revenues is derived from the sale of prepaid phone cards that
terminate in India. We recognize sales of termination services we provide to
other long distance carriers in the period in which the service is provided
which is when the call is completed. We recognize the sale of telephony
products that we re-sell from other providers upon delivery of the product to
the wholesale customer. Property and Equipment Property and equipment are depreciated over their useful lives. Useful
lives are based on managements estimates of the period that the assets will
generate revenue. Any change in conditions that would cause management to
change its estimate as to the useful lives of a group or class of assets may
significantly impact the Companys depreciation expense on a prospective basis. Web Site Development Costs Our products and services are sold predominantly through our web sites. We
incur costs to maintain and add new functionality to our existing web sites and
to develop new web sites. Costs related to the planning and post
implementation phases of our web site development efforts are expensed. Direct
costs incurred in the development phase are capitalized and amortized over the
products estimated useful life of one to three years, which is included in
depreciation expense. Costs associated with minor enhancements and maintenance
for web sites are expensed. Income Taxes As of September 30, 2004, we had approximately $25,134,000 of net
operating loss carry forwards for federal income tax purposes, which expire
beginning in 2011. We have not recognized an income tax benefit for our losses
because of uncertainty regarding future realizability and we have provided a
full valuation allowance on our deferred tax assets. Results of Operations Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 Revenue Revenue increased approximately 49% to $3,600,000 for the three months
ended September 30, 2004 from $2,417,000 for the three months ended September
30, 2003. The $1,183,000 increase in revenue is attributable to a $1,255,000
increase in wholesale telephony revenue partially offset by a $72,000 decrease
in retail telephony revenue. The increase in wholesale telephony revenue is
primarily attributable to a distribution and marketing agreement we entered
into in September 2004 giving the Company distribution to more than 4,000
retail locations in Southern California. During the third quarter of 2004, the
majority of the wholesale telephony revenue was from the sale of telephony
product we purchased from other providers. In the next few months we expect to
purchase less products from these providers as we begin selling our proprietary
calling cards and VoIP and WiFi products through this distribution channel. We
expect wholesale telephony revenue will continue to increase during the fourth
quarter of 2004. The decrease in retail telephony is primarily attributable to
a decrease in the average price per minute we charged our customers reflecting
an overall market decrease in prices charged for calls to international
destinations. Overall, our minutes of use have increased to 13.4 million
minutes for the three months ended September 30, 2004, up from 13.3 million
minutes for the three months ended September 30, 2003. A substantial portion of our retail telephony customers are calling from
the United States to India. The Indian international telephony market
continues to experience downward pricing pressures and it is unlikely that this
trend will reverse in the near future. -12-




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Cost of Revenue Cost of revenue increased approximately 77% to $3,134,000 for the three
months ended September 30, 2004 from $1,769,000 for the three months ended
September 30, 2003. This $1,365,000 increase is primarily attributable to an
increase in wholesale telephony revenue. Our gross profit percentage was
approximately 13% during the third quarter of this year, a decrease from
approximately 27% in the year ago quarter. The decrease in gross profit
percentage during the quarter was primarily due to the addition of lower margin
wholesale telephony revenue. During the third quarter of 2004, wholesale
revenue consisted primarily of reselling other carriers products. During the
coming months, we expect the wholesale gross-profit margin will improve as we
migrate the business over our VoIP network. Excluding the wholesale
operations, our gross profit margin for the third quarter of 2004 was
approximately 19%. The decrease in our retail gross profit margin was
primarily attributable to a decrease in the average selling price per minute
without a corresponding decrease in the average termination price per minute. Selling, General and Administrative Selling, general and administrative expenses decreased approximately 26%
to $814,000 for the three months ended September 30, 2004 from $1,094,000 for
the three months ended September 30, 2003. This $280,000 decrease is due
primarily to lower personnel costs associated with the reduction in staffing
levels from 33 full-time employees as of September 30, 2003 to 23 full-time
employees at September 30, 2004, and the Companys efforts to concentrate on
its core Internet telephony business. Merger Expenses During the third quarter of 2004 we incurred merger related expenses of
approximately $82,000 primarily for legal fees associated with the previously
announced Ntera Holdings, Inc. merger agreement (see Part I, Item 2  Merger
Agreement with Ntera Holdings). Depreciation and Amortization Depreciation and amortization increased approximately 11% to $212,000 for
the three months ended September 30, 2004 from $191,000 for the three months
ended September 30, 2003. The increase in depreciation and amortization is
primarily attributable to the increase in depreciable assets in the second
quarter of 2004 in connection with the acquisition of assets (primarily
customer databases) from ValuCom (see Item 2  Management Discussion and
Analysis or Plan of Operation  Value Communications Transaction). Interest Income, Net Interest income, net consists of interest earned on cash and cash
equivalents less interest expense on borrowings. Interest earned on cash and
cash equivalents increased to $89,000 for the three months ended September 30,
2004 from $47,000 for the three months ended September 30, 2003. The increase
is due primarily to interest income earned on the bridge loan made to Ntera
Holdings, Inc. in March 2004 and interest income earned on the Companys note
receivable from the sale of Cash2India, the financial services subsidiary.
Interest expense for the 2004 third quarter totaled approximately $1,000
compared to $1,000 in the comparable 2003 quarter. Loss From Continuing Operations We incurred a loss from continuing operations of $553,000 for the three
months ended September 30, 2004 compared to a loss of $591,000 for the three
months ended September 30, 2003. The decrease in loss from continuing
operations for the 2004 second quarter is primarily attributable to a $280,000
decrease in selling, general and administrative expenses and to a $42,000
increase in interest income partially offset by a $181,000 reduction in the
Companys gross profit, the addition $82,000 of Ntera merger expenses and a
$21,000 increase in depreciation and amortization. -13-




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Gain/(Loss) From Discontinued Operations The gain/(loss) from discontinued operations is due to the sale of the
Companys financial services subsidiary, which comprised the financial services
segment (see Note 2, Discontinued Operations in notes to the financial
statements). For the periods presented, the loss from discontinued operations
were attributable to the loss from operations of the entity. As a result of
this transaction, the Company recorded a gain on the disposition of
approximately $777,000 in the third quarter of 2004 and a loss from
discontinued operations of $21,000. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 Revenue Revenue increased approximately 17% to $8,400,000 for the nine months
ended September 30, 2004 from $7,199,000 for the nine months ended September
30, 2003. The $1,201,000 increase is a result of a $1,248,000 increase in
wholesale telephony revenue partially offset by a $47,000 reduction in retail
telephony revenue. The increase in wholesale telephony revenue is primarily
attributable to a distribution and marketing agreement we entered into in
September 2004 giving the Company distribution to more than 4,000 retail
locations in Southern California. During the third quarter of 2004, the
majority of the wholesale telephony revenue was from the sale of telephony
product we purchased from other providers. In the next few months we expect to
purchase less products from these providers as we begin selling our proprietary
calling cards and VoIP and WiFi products through this distribution channel. We
expect wholesale telephony revenue will continue to increase during the fourth
quarter of 2004. The decrease in retail telephony is primarily attributable to
a decrease in the average price per minute we charge our customers reflecting
an overall market decrease in price charged for calls to international
destinations. Overall, our minutes of use have increased to 40.1 million
minutes for the nine months ended September 30, 2004, up from 38.1 million
minutes for the nine months ended September 30, 2004. A substantial portion of our retail customers are calling from the United
States to India. The Indian international telephony market continues to
experience downward pricing pressures and it is unlikely that this trend will
reverse in the near future. Cost of Revenue Cost of revenue increased approximately 29% to $6,927,000 for the nine
months ended September 30, 2004 from $5,384,000 for the nine months ended
September 30, 2003. This $1,543,000 increase is due primarily to an increase in
wholesale telephony revenue. Our gross profit percentage was approximately 18%
during the nine months ended September 30, 2004 of this year, a decrease from
approximately 25% in the year ago period. The decrease in gross profit
percentage during the 2004 period was primarily due to the addition of lower
margin wholesale telpony revenue. During the nine months ended September 30,
2004, wholesale telephony revenue consisted primarily of reselling of other
carriers products. During the coming months we expect the wholesale
gross-profit margin will improve as we migrate the business over our VoIP
network. Excluding the wholesale operations, our gross profit margin for the
nine months ending September 30, 2004 was approximately 21%. The decrease in
our retail gross profit margin was primarily attributable to a decrease in the
average selling price per minute without a corresponding decrease in the
average termination price per minute. Selling, General and Administrative Selling, general and administrative expenses decreased approximately 28%
to $2,582,000 for the nine months ended September 30, 2004 from $3,564,000 for
the nine months ended September 30, 2003. This $982,000 decrease is due
primarily to lower personnel costs associated with the reduction in staffing
levels from 33 full-time employees at September 30, 2003 to 23 full-time
employees at September 30, 2004, and the Companys efforts to concentrate on
its core Internet telephony business. Selling, general and administrative
expenses for the nine months ended September 30, 2004 include a benefit of
$167,000 in connection with the settlement of vendor disputes and an impairment
charge of approximately $60,000 related to certain stored value equipment that
is no longer in use. Selling, general, and administrative expenses for the nine
months ended September 30, 2003 include a benefit of $209,000 in connection
with a legal settlement. Merger Expenses For the nine months ended September 30, 2004 we incurred merger expenses
of approximately $1,290,000 primarily for: legal fees ($497,000), investment
banking fees ($134,000), severance and other personnel cost ($574,000),
accounting fees ($27,000), and other administrative expenses ($58,000)
associated with the previously announced Ntera Holdings, Inc. merger agreement
(see Part I, Item 2  Merger Agreement with Ntera Holdings). -14-




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Depreciation and Amortization Depreciation and amortization decreased approximately 17% to $575,000 for
the nine months ended September 30, 2004 from $690,000 for the nine months
ended September 30, 2003. This $115,000 decrease in depreciation and
amortization is primarily attributable to certain depreciable assets becoming
fully depreciated in 2003 offset by an increase in depreciable assets in the
second quarter of 2004 in connection with the acquisition of the ValuCom
assets. Interest Income, Net Interest income, net consists of interest earned on cash and cash
equivalents less interest expense on borrowings. Interest earned on cash and
cash equivalents was $206,000 for the nine months ended September 30, 2004 and
$164,000 for the nine months ended September 30, 2003. The increase is due
primarily to interest income earned on the bridge loan made to Ntera Holdings,
Inc. in March 2004 and interest income earned on the Companys note receivable
from the sale of the financial services subsidiary. Interest expense for the
2004 period totaled $3,000 compared to $3,000 in the comparable 2003 period. Loss From Continuing Operations We incurred a loss from continuing operations of $2,772,000 for the nine
months ended September 30, 2004 compared to a loss of $2,279,000 for the nine
months ended September 30, 2003. The increase in loss from continuing
operations in the 2004 period is primarily attributable to the expenses
associated with the Ntera Holdings, Inc. merger agreement of approximately
$1,290,000 and a $342,000 decrease in gross profit partially offset by a
$981,000 decrease in selling, general and administrative expenses, a $115,000
decrease in depreciation and amortization, and a $43,000 increase in net
interest income. Gain/(Loss) From Discontinued Operations The gain/(loss) from discontinued operations is due to the sale of the
Companys financial services subsidiary, which comprised the financial services
segment (see Discontinued Operations in Note 2 to the financial statements).
For the periods presented, the loss from discontinued operations were
attributable to the loss from operations of the entity. As a result of this
transaction, the Company will recorded a gain on the disposition of
approximately $777,000 in the third quarter of 2004. Liquidity and Capital Resources As of September 30, 2004, we had approximately $14,347,000 of cash and
cash equivalents and working capital of approximately $15,365,000. We
generated negative cash flow from operating activities of approximately
$2,628,000 during the nine months ended September 30, 2004, compared with
negative cash flow from operating activities of approximately $1,867,000 during
the nine months ended September 30, 2003. Net cash used in operating
activities for the 2004 and 2003 periods primarily resulted from operating
losses as well as changes in working capital. The $761,000 increase in cash
used in operating activities in the 2004 period from the 2003 period is due
primarily to expenses incurred in connection with the Ntera Holdings, Inc.
merger agreement. Cash used in investing activities was $2,035,000 for the nine months ended
September 30, 2004 and $247,000 for the nine months ended September 30, 2003.
Cash used in investing activities for the nine months ended September 30, 2004
includes a $2,000,000 loan made to Ntera Holdings, Inc. in connection with the
merger agreement and $852,000 in proceeds received in connection with the sale
of our financial services subsidiary. The Ntera loan bears interest at 7% per
annum and is secured by the assets of Ntera Holdings, Inc. and certain of its
subsidiaries. On September 2, 2004 the Company terminated the merger with
Ntera. Under the terms of the loan agreement, the full amount of the loan and
accrued interest are due and payable within six months of the termination of
the merger agreement. Ntera is currently in default of its repayment
obligations under the terms of the loan agreement; however, the Company is in
discussions with Ntera to modify the repayment terms, which the Company expects
to provide for the repayment of the loan in full during the first quarter of
2005. If we are unable to reach agreement on the repayment terms with Ntera, we
may be forced to pursue the remedies available to us under the loan agreement
and the security agreement. For the nine months ended September 30, 2004, the Company has generated
cash from financing activities of $1,078,000 related to the exercise of stock
options. The Company has borrowed $300,000 from a financial institution under a
term promissory note agreement (the Note). The Note bears interest at the
financial institutions prime rate as adjusted from time to time (4.75% at
September -15-




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30, 2004) less 2.25% per annum. The Note is due in October 2005 and is
collateralized by a $300,000 certificate of deposit bearing interest of 1.48%
per annum. The Company provided ValuCom and Rediff irrevocable letters of credit in
connection with the Companys purchase of certain assets from ValuCom and the
Companys advertising agreement with Rediff. The letters of credit are secured
by deposits in a money market fund and the amount of the letters of credit and
security deposits are reduced as the monthly installments are paid. At
September 30, 2004, the Companys obligation under both agreements was
$525,000. In November 2004, the Company invested $3 million in a partnership managed
by an affiliate of 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.
The Company will account for its partnership interest under the equity method
of accounting. We currently anticipate that our existing cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditure requirements through at least the next 24 months. We may need to
raise additional funds prior to the expiration of such period if, for example,
we pursue business or technology acquisitions or experience operating losses
that exceed our current expectations. If we raise additional funds through the
issuance of equity, equity-related 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
when required, or at all. Income Taxes As of September 30, 2004, we had approximately $25,134,000 of net
operating loss carry forwards for federal income tax purposes, which expire
beginning in 2011. We have not recognized an income tax benefit for our losses
as we have provided a full valuation allowance on our deferred tax assets,
which consists primarily of net operating loss carry forwards, because of
uncertainty regarding future realizability. 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 of our common stock. 
 ITEM 3. CONTROLS AND PROCEDURES In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Report on Form 10-QSB. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of September 30, 2004 to
provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms. There has been no change in our internal controls over financial reporting
that occurred during the three months ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. -16-




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PART II-OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS 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. In September 2004, the Company settled a dispute with a vendor from which
it had purchased telecommunication services. Under the terms of the settlement,
the Company agreed to purchase from the vendor a total of $960,000 in
telecommunication services at rates less than the Company is paying for similar
services over a fourteen month period. The Company must purchase a minimum of
$80,000 per month in services beginning in the month that is four months after
the settlement date. The Company is a defendant from time to time in lawsuits and disputes
arising in the ordinary course of business. The Company believes that
resolution of all known contingencies is uncertain, and there can be no
assurance that future costs related to such litigation would not be material to
the Companys financial position or results of operations. 
 ITEM 2. CHANGES IN SECURITIES The effective date of our first registration statement, filed on Form SB-2
under the Securities Act of 1933 (no. 333-93019) relating to our initial public
offering of our Common Stock, was February 4, 2000. A total of 3,162,500
shares of our Common Stock were sold at a price of $13.00 per share. Net
proceeds to WorldQuest were approximately $36.3 million. From the time of
receipt through September 30, 2004, the net proceeds were applied toward:  -
    
    Repayment of indebtedness, $4,498,000;-
    
    Equipment purchases including additional back-up systems, $4,463,000;-
    
    Merger and acquisition related, $3,210,000;-
    
    Software development, $918,000; and-
    
    General corporate purposes, including operating losses, payment of
outstanding payables, payoffs of capital leases, liability insurance
premiums, development of strategic relationships and research and
development of new products, $8,863,000. The remaining proceeds are being used as working capital or are being held
in high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities. Of the $4,498,000 paid for repayment of indebtedness, $1,440,000 was paid
to Eagle Venture Capital, LLC, which owns approximately 38% of our Common Stock
and is controlled by B. Michael Adler, our Chief Executive Officer and
President. -17-




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 
 ITEM 5. OTHER INFORMATION Not applicable. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    
    The following exhibits are filed as a part of this Report on
Form 10-QSB pursuant to Item 601 of regulation S-B: ExhibitNumber
    
    Description of Exhibits2.1
    
    Agreement and Plan of Merger, dated as of March 16, 2004, among WorldQuest, Ntera Holdings, Inc.
and Engin Yesil, filed as exhibit 2.1 to WorldQuests Current Report on Form 8-K/A dated March 19,
2004, as amended, and incorporated herein by this reference.2.2
    
    Stock Purchase Agreement dated as of July 26, 2004, by and among Xoom Corporation, Inc., WorldQuest
Networks, Inc., and WQN Mercury Inc., filed as exhibit 2.2 to WorldQuests Quarterly Report as
Form 10-QSB
for the quarter ended June 30, 2004.2.3
    
    Promissory Note dated as of July 26, 2004, by and between Xoom Corporations, Inc. and WorldQuest
Networks,
Inc. filed as exhibit 2.3 to WorldQuests Quarterly Report as Form 10-QSB for the quarter ended
June 30, 2004.2.4
    
    Stock Pledge Agreement dated as of July 26, 2004 by and between Xoom Corporation, Inc. and
WorldQuest Networks, Inc., filed as exhibit 2.5 to WorldQuests Quarterly Report as Form 10-QSB
for the quarter ended June 30, 2004.2.5
    
    Stock Purchase Warrant dated as of July 26, 2004 by and between Xoom Corporation, Inc. and
WorldQuest Networks, Inc., filed as exhibit 2.5 to WorldQuests Quarterly Report as Form 10-QSB
for the quarter ended June 30, 2004.3.1
    
    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.4.1
    
    Specimen common stock certificate, filed as Exhibit 4.1 to the Prior Registration Statement, and
incorporated herein by this reference.4.2.1
    
    Representatives Warrant dated February 4, 2000 granted to John G. Kinnard and Company
Incorporated for 68,750 shares of common stock, filed as Exhibit 4.3.1 to WorldQuests Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by
reference.4.2.2
    
    Representatives Warrant dated February 4, 2000 granted to Kaufman Bros., L.P. for 178,750 shares
of common stock, filed as Exhibit 4.3.2 to WorldQuests Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999, and incorporated herein by reference.4.2.3
    
    Representatives Warrant dated February 4, 2000 granted to WestPark Capital, Inc. for 27,500
shares of common stock, filed as Exhibit 4.3.3 to WorldQuests Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999, and incorporated herein by reference.4.3
    
    Form of Unsecured Subordinated Convertible Promissory Note issued in the private placement closed
in December 1999 (the Private Placement), filed as Exhibit 4.5 to WorldQuests Form SB-2
Registration Statement, file no. 333-93019 (the Second Registration Statement), and incorporated
herein by this reference.4.4
    
    Form of Warrant issued in the Private Placement, filed as Exhibit 4.5 to the Second Registration
Statement, and incorporated herein by this reference.4.5
    
    Warrant to purchase 50,000 shares of common stock granted to Advanced Multimedia Group, Inc. on
March 16, 2000, filed as Exhibit 4.7 to WorldQuests Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000, and incorporated herein by this reference.4.6
    
    Warrant to purchase 50,000 shares of common stock granted to Advanced Multimedia Group, Inc. on
April 26, 2000, filed as Exhibit 4.8 to WorldQuests Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000, and incorporated herein by this reference.
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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.1
    
    Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the Prior Registration Statement, and
incorporated herein by this reference.10.2
    
    Stock Option Agreement dated December 7, 1998 granted to Michael R. Lanham by WorldQuest, filed as
Exhibit 10.3 to the Prior Registration Statement, and incorporated herein by this reference.10.3
    
    Form of Registration Rights Agreement executed in connection with the Private Placement, filed as
Exhibit 10.6 to the Second Registration Statement, and incorporated herein by this reference.10.4
    
    2001 Stock Option Plan, filed as Exhibit 4.8 to WorldQuests Form S-8 Registration Statement, File
No. 333-54498, and incorporated herein by this reference.10.5
    
    Employment agreement by and between WorldQuest Networks, Inc. and B. Michael Adler effective as of
April 14, 2003 filed as exhibit 10.10 to WorldQuests Quarterly Report as Form 10-QSB for the
quarter ended June 30, 2003.10.6
    
    Employment agreement by and between WorldQuest Networks, Inc. and Victor E. Grijalva effective as
of April 14, 2003 filed as exhibit 10.12 to WorldQuests Quarterly Report as Form 10-QSB for the
quarter ended June 30, 2003.*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.  (b)
    
    Reports on Form 8-K The Company filed a Current report on Form 8-K dated August 10, 2004
to furnish in accordance with Securities Exchange Commission Release
No. 33-8126 under item 12, Results of Operations and Financial
Condition, the Companys press release announcing its financial
results for the quarter ended June 30, 2004. The Company filed a
Current report on Form 8-K dated September 3, 2004 to furnish in
accordance with Securities Exchange Commission Release No. 33-8126
under item 1, Termination of a Material Definitive Agreement the
Companys press release announcing the termination of the Agreement
and Plan of Merger, dated as of March 16, 2004, by and among the
Company, Ntera Holdings, Inc. and Engin Yesil, the principal
shareholder of Ntera. The Company filed a Current report on Form 8-K
dated October 13, 2004 to furnish in accordance with Securities
Exchange Commission Release No. 33-8126 under item 7, Regulation FD
Disclosure the Companys press release announcing a distribution
and marketing agreement with Phone House, Inc. The Company filed a
Current report on Form 8-K dated October 25, 2004 to furnish in
accordance with Securities Exchange Commission Release No. 33-8126
under item 7, Regulation FD Disclosure the Companys press release
announcing the appointment of Hal H. Bibee to the Companys Board of
Directors. 
 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
there-unto duly authorized. WORLDQUEST NETWORKS, INC.November 12, 2004
    
    
    
    By:
    
    /s/ Victor E. GrijalvaVictor E. Grijalva
Vice President, Chief Financial Officer,Secretary and Treasurer
(Principal Financial and Accounting Officer)
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