**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**___________**





**FORM
      10-K**


**ANNUAL
      REPORT**


**PURSUANT
      TO SECTIONS 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





(Mark
      one)


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




For
      the
      fiscal year ended September 30, 2006





£
            TRANSITION
                REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
                OF
                1934




For
      the
      Transition period from ________ to ____________





Commission
      File Number: 0-24217





**YP
      CORP****.**


(Exact
      Name of Registrant as Specified in Its Charter)





**Nevada**
            
            **85-0206668**(State
                or Other Jurisdiction of Incorporation or Organization)
            
            (IRS
                Employer Identification No.)





**4840
                East Jasmine Street, Suite 105,**
              **Mesa,
                Arizona**
            
            **85205**(Address
                of principal executive offices)
            
            (Zip
                Code)





Registrant’s
      telephone number, including area code: (480) 654-9646





Securities
      registered under Section 12(b) of the Exchange Act: None





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





Common
      Stock, $.001 Par Value


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes £ No T





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes £ No T





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes T No £













Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K £





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


Large
      accelerated filer £ Accelerated
      filer £ Non-accelerated
      filer T





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





The
      aggregate market value of the common stock held by non-affiliates computed
      based
      on the closing price of such stock on March 31, 2006 was approximately
      $29,007,749





The
      number of shares outstanding of the registrant’s classes of common stock, as of
      December 15, 2006, was 50,020,094 shares.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Proxy Statement for the Registrant’s 2007 Annual Meeting of Shareholders
      are incorporated by reference in Part III of this Form 10-K.










**YP
      CORP.**





**FORM
      10-K**


**For
      the year ended September 30, 2006**





**TABLE
      OF CONTENTS**





**Page**Part
                IItem
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            21Item
                2.
            Properties
            21Item
                3.
            Legal
                Proceedings
            22Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            22Part
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            23Item
                6.
            Selected
                Financial Data
            24Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            25Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            37Item
                8.
            Financial
                Statements and Supplementary
                Data
            38Report
                of Registered Public Accounting
                Firm
            39Consolidated
                Financial Statements:Consolidated
                Balance Sheet at September 30, 2006 and
                2005
            40Consolidated
                Statements of Operations for the Years Ended
                September 30, 2006, 2005, and 2004
            41Consolidated
                Statements of Cash Flows for the Years Ended
                September 30, 2006, 2005, and 2004
            42Consolidated
                Statements of Stockholder’s Equity for the Years
                Ended September 30, 2006, 2005, and 2004
            43Notes
                to Consolidated Financial
                Statements
            44Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            63Item
                9A.
            Controls
                and Procedures
            63Item
                9B.
            Other
                Information
            63Part
                IIIItem
                10.
            Directors
                and Executive Officers of the
                Registrant
            63Item
                11.
            Executive
                Compensation
            64Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            64Item
                13.
            Certain
                Relationships and Related
                Transactions
            64Item
                14.
            Principal
                Accounting Fees and Services
            64Part
                IVItem
                15.
            Exhibits
                and Financial Statement
                Schedules
            64Signatures
            
            67




i
 *Table
            of Contents*





**PART
      I**





**Forward-Looking
      Statements**





Part
      I of
      this Annual Report on Form 10-K, includes statements that constitute
“forward-looking statements.” These forward-looking statements are often
      characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
      statements contained in Part I of this Annual Report include, but are not
      limited to our company’s (i) belief that local exchange carrier, or LEC billing,
      will continue to be a significant billing channel in the future; (ii) with
      the
      discontinuance of activation checks, the expectation of increasing our future
      telemarketing efforts to generate new business; (iii) expectation of increasing
      revenues through the national accounts programs, fulfillment contracts, web
      hosting and other arrangements; (iv) expectation that its technologies will
      increase recurrent use of its system by users of its directory services; (v)
      belief in the growth of Internet usage and the Internet Yellow Page market
      as
      set forth in recent press releases by The Kelsey Group; (vi) belief that
      existing cash on hand will be sufficient to meet our needs for the next twelve
      months; and (vii) belief that existing facilities are adequate for its current
      and anticipated future needs and that its facilities and their contents are
      adequately covered by insurance.





Forward-looking
      statements involve risks, uncertainties and other factors, which may cause
      our
      actual results, performance or achievements to be materially different from
      those expressed or implied by such forward-looking statements. Factors and
      risks
      that could affect our results and achievements and cause them to materially
      differ from those contained in the forward-looking statements include those
      identified in *Item
      1A. Risk Factors* ,
      as well
      as other factors that we are currently unable to identify or quantify, but
      may
      exist in the future.





In
      addition, the foregoing factors may affect generally our business, results
      of
      operations and financial position. Forward-looking statements speak only as
      of
      the date the statement was made. We do not undertake and specifically decline
      any obligation to update any forward-looking statements.





**ITEM
      1. Business**





**Our
      Company**





YP
      Corp.,
      a Nevada corporation (the “Company,” “we,” “us,” or “our”) is a national
      Internet Yellow Pages publisher, headquartered in Mesa, Arizona. Through our
      wholly-owned subsidiary, Telco Billing, Inc., or Telco, located in Las Vegas,
      Nevada, we publish our Yellow Pages online at or through the following URL’s:
      www.Yellow-Page.Net, www.YP.Net and www.YP.Com. Any information contained on
      the
      foregoing websites or any other websites referenced in this Annual Report are
      not a part of this Annual Report.





**Summary
      Business Description**





We
      use a
      business model similar to print Yellow Pages publishers. We publish basic
      directory listings on the Internet free of charge. Our basic listings contain
      the business name, address and telephone number for almost 17 million U.S.
      businesses. We strive to maintain a listing for almost every business in America
      in this format.





We
      generate revenues from advertisers that desire increased exposure for their
      businesses. As described below, advertisers pay us monthly fees in the same
      manner that advertisers pay additional fees to traditional print Yellow Pages
      providers for enhanced advertisement font, location or display. The users of
      our
      website are prospective customers for our advertisers, as well as the other
      businesses for which we publish basic listings. We also have arrangements with
      third parties to distribute our advertisers’ information to other search
      engines, thereby enhancing our advertisers’ presence on the Internet.





*Products.* Our
      primary product is our Internet Advertising PackageTM, or IAP. Under this
      package, the advertiser pays for additional exposure by purchasing a
      Mini-WebPageTM. In order to provide search traffic to our advertiser’s
      Mini-WebPage, we elevate the advertiser to a preferred listing status, at no
      additional charge. We provide our IAP advertisers with enhanced presentation
      and
      additional unique products, such as larger font, bolded business name, map
      directions, ease of communication between our advertisers and users of our
      website, a link to the advertiser’s webpage, as well as other
      benefits.





1
 *Table
            of Contents*





We
      also
      offer our customers other products and services to enhance their use of the
      Internet, including a simple, effective, website development tool and a
      cost-effective Internet dial-up package. These products are described in greater
      detail below under *Products
      and Services* .





In
      fiscal
      2006, we began providing fulfillment services for certain third parties. Under
      the terms of these agreements, we provide hosting and administrative services
      under a revenue sharing agreement with the related third party.





*Marketing* .
      Unlike
      most print Yellow Pages companies that sell advertising space by visiting or
      calling potential advertisers in their area, we solicit advertisers for our
      IAP
      product by direct mail and telemarketing.





Our
      direct mail marketing program historically has included a promotional incentive,
      generally in the form of a $3.25 activation check that a solicited business
      simply deposits to activate the service and become an IAP advertiser on a
      month-by-month basis. In response to a number of inquiries from state regulatory
      agencies, we voluntarily entered into an agreement to cease the use of these
      activation checks.





In
      fiscal
      2006, we began acquiring new customers via telemarketing campaigns, for whom
      our
      monthly billing rates are higher than for those acquired through other means.
      With the discontinuance of activation checks, we expect to increase our future
      telemarketing efforts to generate new business. Additionally, we are testing
      other marketing channels, developing new product offerings and exploring other
      strategic partnerships to generate future revenues.





*Billing* .
      Similar
      to the local Regional Bell Operating Companies, we are approved to bill our
      products and services directly on some of our advertisers’ local telephone bill
      through their local exchange carrier, or LEC, commonly referred to as their
      local telephone company. We believe that this is an efficient and cost-effective
      billing method as compared to direct billing methods. However, during the fourth
      quarter of fiscal 2004, several of these LECs changed their internal policies
      regarding the use of activation checks as the letter of authorization that
      allows us to bill our products and services directly on our advertisers’ local
      telephone bill. We therefore began to convert many of our advertisers to billing
      via recurring direct bank account withdrawal options through an Automated
      Clearing House, or ACH billing, which is an efficient and cost-effective billing
      alternative to LEC billing. This transition to ACH billing continued through
      fiscal 2005. In fiscal 2006, we began acquiring new customers via telemarketing
      campaigns, which are allowed to be billed via LECs. These telemarketing
      campaigns have revitalized certain LEC billing channels. See *Item
      7: Management’s Discussion and Analysis of Financial Condition and Operating
      Results - Executive Overview* for a
      more detailed description of these changes and the impact they have had on
      our
      business and operations.





*Benefits
      to Advertisers* .
      RH
      Donnelley indicated in its 2004 report that the Internet is the future of the
      Yellow Pages. For advertisers, we believe that online Yellow Pages provide
      significant competitive advantages over existing print directories. For example,
      the ability of online advertisers to access and modify their displays and
      advertisements often results in more current information. Additionally, online
      advertisers can more readily advertise temporary or targeted specials or
      discounts. We provide added value to advertisers that have purchased our IAP
      through promotion and branding of our website to bring customers to our
      advertisers. We believe that the large number of IAPs, which include the
      Mini-WebPages, provide users of our website with more information about our
      advertisers and that this feature is more readily available on our website
      than
      that of our competitors. We believe that we provide users of our website with
      the information they are looking for, more quickly and more efficiently. We
      believe our call center provides the highest level of customer service and
      therefore provides IAP advertisers with the necessary resources to fully utilize
      the benefits of the IAP. We also believe the attraction of these users will,
      over the long-term, result in more sales for our IAP advertisers.





2
 *Table
            of Contents*





Moreover,
      we provide additional value through our relationships. We provide the majority
      of our IAP advertisers additional exposure by circulating their listings to
      other search engines.   The circulated listing competes for appearance
      in search results across the Internet through a paid advertising agreement
      with
      Interchange Corp, who in turn circulates listings to destinations such as epilot.com and
      local.com. Interchange has agreements with approximately 300 search
      partners with over 3 billion searches per month to display
      advertising.  We also have an agreement with Yahoo! Search Services to
      improve our IAP advertisers’ appearance in search results at several
      high-profile sites including www.msn.com, www.altavista.com, www.cnn.com
      and www.infospace.com.  In addition to our paid advertising programs,
      our preferred listings are syndicated to community
      portals at www.mycity.com.   MyCity.com has a national network of
      online city guides, focused on delivering local search results.





*Benefits
      to Users of our Website* .
      We are
      a national online Yellow Pages. Users of our website can access information
      nationally rather than relying exclusively on local listings such as those
      provided in print Yellow Pages directories. In addition, our product offerings
      allow users to find and take advantage of our advertisers’ current special
      offerings and discounts. Users can access such information easily through their
      desktop or laptop computers, cellular telephones or hand-held devices, such
      as
      personal digital assistants. We believe our offering of a national online Yellow
      Pages service meets the growing demand for immediate access and the increasing
      need and trend of Internet users who are more frequently traveling to areas
      outside the areas serviced by their local print directories. We also believe
      that our website meets or exceeds the local Yellow Page search capabilities
      of
      our major competitors.





*Directory
      Service and Search Engine* .
      We
      believe that our products offer many competitive advantages over standard search
      engines. Our directory service and search engine format allows a user of our
      website to search by location using either a business name or business category.
      Unlike popular commercial search engines, our search engine does not search
      the
      Internet to provide results. Instead, it searches our defined database,
      resulting in a more focused, refined and, typically, quicker and more accurate
      search.





**Products
      and Services**





For
      those
      advertisers that want additional exposure for their businesses or desire to
      take
      full advantage of connectivity to the World Wide Web, we offer several products
      and services for a fee.





*Internet
      Advertising Package.* Our
      primary product is our Internet Advertising Package, or IAP. Under this package,
      the advertiser pays for additional exposure by purchasing a Mini-WebPage. This
      Mini-WebPage contains, among other useful information, a 40-word description
      of
      the business, hours of operation, and detailed contact information. The
      advertiser can easily access and modify its Mini-WebPage. This product is easily
      searched by users of our website on their personal computers, as well as
      cellular telephones and other hand-held devices. In order to provide search
      traffic to an advertiser’s Mini-WebPage, we elevate the advertiser to a
      preferred listing status at no additional charge. As such, the preferred
      advertiser enjoys the benefit of having its advertisement displayed in a primary
      position before all of the basic listings in that particular category when
      users
      of our website perform searches on our website. We also provide our IAP
      advertisers with enhanced presentation and additional unique products,
      including:




·
            Larger
                font.


·
            Bolded
                business name.


·
            A
                “tagline” whereby the advertiser can differentiate itself from its
                competitors.


·
            An
                audio advertisement.


·
            Map
                directions.


·
            A
                Click2CallTM feature, whereby a user of our website can place a telephone
                call to one of our advertising customers by clicking the icon that
                is
                displayed on the Mini-WebPage. This initiates a telephone call by
                the
                advertiser to the user, in a conference call type format. Once both
                are
                connected, it functions as a regular telephone call. Because we cover
                all
                charges for this telephone call, it is free of charge to both the
                user and
                the IAP advertiser. We have an agreement with WebDialogs, Inc. to
                provide
                this service.


·
            A
                link to the advertiser’s own webpage and email
                address.


·
            Additional
                distribution network for preferred listings. This feature gives additional
                exposure to our IAP advertisers by placing their preferred listing
                on
                several online directory systems. There currently is no charge to
                the IAP
                advertiser for these additional channels of
                distribution.





Our
      IAP
      advertisers generally pay between $27.50 and $39.95 per month. Our IAP and
      the
      Internet Dial-Up Package described below account for over 99% of our net
      revenues.





3
 *Table
            of Contents*





*Internet
      Dial-Up PackageTM* .
      We also
      offer all of our IAP advertisers a cost-effective and efficient Internet dial-up
      package to take advantage of the benefits offered by on-line access. This allows
      our advertisers that do not have Internet access to take full advantage of
      the
      IAP and QuickSite packages that we offer. In most instances, we offer this
      service bundled with our IAP service for between $29.95 and $39.95 per month.
      In
      some regions, we only offer the bundled product and not an IAP standalone
      product.





*Online
      QuickSite PackageTM.* For
      those IAP advertisers that do not have their own website and that desire to
      provide more information than is offered through the IAP Mini-WebPage, we will
      design and create an eight page, template-driven website for the advertiser.
      This is known as a QuickSiteTM. Once set up, the advertiser can access its new
      QuickSite online and make modifications at its discretion. This essentially
      serves the same function as display advertisements in print Yellow Pages books,
      except that it can be changed more often to meet the advertiser’s needs. Users
      of our website can access these QuickSites on the World Wide Web or from the
      advertiser’s preferred listing or Mini-WebPage. Currently, this product accounts
      for less than 1% of our net revenues.





*Fulfillment
      Services.* Beginning
      in fiscal 2006, we began entering into contracts with several third parties
      whereby we provide hosting, customer service and certain administrative
      functions under a revenue sharing agreement. We believe these agreements allow
      us to increase operational efficiencies and expand our customer base.





**Billing**





Our
      billing process allows us to deliver high levels of service to our customers
      through convenient and timely billing and payment options. We currently bill
      our
      advertisers through (i) their LEC, (ii) ACH billing, (iii) their credit card
      or
      (iv) direct bill invoices.





Until
      the
      end of fiscal 2004, we historically billed the majority of our advertisers
      via
      their LEC. However, during the fourth quarter of fiscal 2004, several of the
      LECs changed their internal policies regarding the use of activation checks
      as
      the letter of authorization that would allow us to bill our products and
      services directly on our advertisers’ local telephone bill. In fiscal 2006, we
      began acquiring new customers via telemarketing campaigns, which are allowed
      to
      be billed via LECs. These telemarketing campaigns, together with our fulfillment
      contracts, have revitalized certain LEC billing channels. **** See *Item
      7: Management’s Discussion and Analysis of Financial Condition and Operating
      Results - Executive Overview* for a
      detailed description of these changes and the effects they have had and will
      continue to have on our financial condition and results of
      operations.





During
      fiscal 2004, we began converting many of our advertisers to ACH billing, which
      is an efficient and cost-effective billing method and has a faster collection
      time than LEC billing. However, it was time-consuming and labor-intensive to
      convert customers from one billing channel to another and resulted in missed
      billings and customer cancellations. While ACH billing is a cost-effective
      billing method, many of our customers prefer LEC billing. Therefore, many of
      our
      existing marketing programs, including our telemarketing campaign, offer LEC
      billing as a payment option. We expect that LEC billing will continue to be
      a
      significant billing channel in the future.





In
      cases
      where other billing methods, including LEC billing, ACH billing and recurring
      credit card charges, are unavailable or instances where the customer requests
      that we bill them directly, we utilize direct bill invoices. Direct billing
      has
      a higher percentage of uncollectible accounts than other billing methods and,
      therefore, is our least attractive billing option.





*Billing
      Service Agreements* .
      In
      order to bill our advertisers through their LECs, we are required to use one
      or
      more billing service aggregators. These aggregators have been approved by
      various LECs to provide billing, collection, and related services through the
      LECs. Under these agreements, our service aggregators bill and collect our
      charges to our advertisers through LEC billing and remit to us the proceeds,
      net
      of fees, bad debt expense, customer returns, and unbillable accounts, typically
      within 90 days of submission.





4
 *Table
            of Contents*





We
      also
      use billing service providers to process our ACH billings. These service
      providers process direct bank withdrawals through an Automated Clearing House
      and remit the proceeds, net of fees and refunds to advertisers that cancel
      their
      service, typically within 15 days of settlement.





Under
      our
      contractual agreements with our LEC billing service aggregators and our ACH
      service providers, these third-parties are entitled to withhold certain amounts
      from our net proceeds to serve as a security deposit or “holdbacks” or
“reserves.” In the case of LEC billing aggregators, such amounts are generally
      remitted to us over a 12-18 month period, depending on the terms of the
      respective agreements. ACH processors maintain a rolling reserve based on
      average monthly volume.





During
      2005, in an effort to reduce our concentration of credit risk with any single
      third-party, we engaged the services of additional service providers. We
      currently utilize three LEC billing aggregators and two ACH service providers.
      This reduced our concentration of gross accounts receivable with any single
      vendor from approximately 65% at the end of fiscal 2005 to approximately 31%
      at
      the end of fiscal 2006.





**Pricing**





We
      generally price our IAP product between $27.50 and $39.95 per month, which
      includes all of the service benefits previously described. We believe that
      these
      prices are comparable to the prices of our competitors and we believe that
      our
      site provides superior value to our advertisers when considering the many
      benefits that they receive, including the Click2Call feature, the Mini-WebPage,
      mapping directions, links to the advertiser websites, and the speed and ease
      of
      use of our website.





Our
      pricing advantage is significant when compared with printed Yellow Pages. For
      a
      Yellow Pages listing with comparable information content, an advertiser would
      typically pay over $200 per month. This listing in the printed Yellow Pages
      would include a business description of comparable size to our IAP offering
      but
      would lack our Click2Call feature, mapping directions, and link to the
      advertiser’s website. Our online Yellow Pages provide significant flexibility in
      terms of changing content and adding special informational items at any time
      throughout the year. Advertisers in printed Yellow Pages are limited by the
      publishers’ infrequent re-publication schedule if they desire to change their
      advertisement.





**Marketing**





Unlike
      most print Yellow Pages companies that sell advertising space by visiting or
      calling potential advertisers in their area, we solicit advertisers for our
      IAP
      product by direct mail and telemarketing.





*Direct
      Mail Solicitation* .
      Our
      direct mail marketing solicitation is made up of several pages that describe
      in
      detail our products, services, pricing, sign-up instructions, and billing
      alternatives. Until recently, we included in this solicitation a promotional
      sign-up incentive, generally in the form of a $3.25 activation check made
      payable to the name of the solicited business.





We
      have
      received numerous inquiries from the attorney general offices of several states
      investigating our promotional activities, specifically, the use of our check
      mailer for customer activation. In December 2006, we voluntarily entered into
      a
      settlement with thirty-four states’ attorneys general to address their inquiries
      and bring finality to the process. Under this settlement, we have voluntarily
      agreed to the following:





·
            We
                will pay a settlement fee of $2,000,000 to the state consortium,
                which
                they may distribute among
                themselves;


·
            We
                will discontinue the use of activation checks as a promotional
                incentive;


·
            We
                will suspend billing of any active customer that was acquired in
                connection with the use of an activation check until a letter is
                mailed
                notifying the customer of their legal rights to cancel the service
                and
                providing them a 60-day opportunity to receive a refund equivalent
                to the
                customer’s last two payments; and


·
            We
                will not employ any collection efforts with respect to past-due accounts
                of customers that were secured through the use of an activation check,
                nor
                will we represent our ability to do
                so.





5
 *Table
            of Contents*





This
      settlement limits our exposure to significant legal fees and costs that may
      have
      been otherwise incurred had we decided to dispute these inquiries. Further,
      we
      had been transitioning a significant amount of our marketing efforts away from
      the use of activation checks toward the use of telemarketing and other marketing
      channels during 2005 and 2006. This settlement accelerates this transition
      away
      from the use of activation checks and focuses our marketing efforts toward
      improving the effectiveness and efficiency of our telemarketing campaigns and
      other marketing efforts.





*Telemarketing.* During
      the fourth quarter of fiscal 2005, we began testing our telemarketing sales
      campaign. In fiscal 2006, this campaign went into full production and we
      utilized multiple third parties to make outbound calls to potential customers
      using a marketing list that we provide. We pay these third parties a combination
      of hourly rates and commissions.





When
      soliciting a new customer, we offer a variety of payment options, including
      LEC
      billing, ACH billing, and credit card prepayments.




*Marketing
      List Generation* .
      To
      generate the leads for our telemarketing efforts and to continually update
      our
      billing records, we purchase business directory information from some of the
      largest information providers in the North American market: Qsent, InfoUSA,
      and
      Amacai. We refer to each information provider’s list of business listings as a
      data set. Each data set consists of 10-19 million records with each record
      composed of several attributes, such as company name, address, employment range,
      telephone number, United States Standard Industrial Classification, or SIC
      code,
      and Standard Yellow Pages Heading, or SYPH code. While SYPH codes are
      proprietary to many vendors, we believe our fluency in multiple industrial
      classifications and the additional cost and effort of acquiring data from
      several sources gives us a competitive edge over companies that purchase data
      from only a single provider of information or a provider that does not verify
      the accuracy of the information for each business listing.





We
      continue to evaluate the accuracy of data provided to us by our information
      providers and continuously expand our list of information providers as necessary
      in order to generate an accurate database of potential customers. We believe
      the
      quality of a lead from each information provider’s data set cannot be evaluated
      by business count alone. We consider other factors including overall quality,
      duplicates, out of business records, and records without telephone numbers.
      Each
      information provider verifies the information for each business listing
      differently. For example, some will attempt to verify information for each
      business by telephone while others will attempt to verify by using a United
      States Postal Service Certified Address Standardization process for converting
      addresses to a standard zipcode-4 format required to qualify for lower bulk
      mailing rates.





*Other
      Marketing Efforts.* We
      utilize our expertise and experience as an Internet Yellow Page company to
      identify other marketing opportunities. Through our referral networks, we have
      generated revenue from national accounts programs (whereby revenues are
      generated on a “per click” basis), fulfillment contracts, web hosting and other
      arrangements. We also have entered into various marketing arrangements with
      other businesses whereby we pay commissions based on sales leads and revenue
      generated from these businesses. To date, such commissions have not been
      material. We evaluate such business opportunities on a case-by-case basis and
      expect to expand future revenues from such marketing efforts.


During
      fiscal 2006, we suspended the majority of our branding activities. Whereas
      in
      the past we have tried to drive traffic to our site, YP.com, changes in the
      competitive landscape have made it difficult to compete with local search
      engines that are significantly larger than us. We now focus on driving high
      quality traffic to our IAP advertisers through our agreements with local search
      engines and affiliates. For example, through our agreements with Yahoo! Search
      Services and Interchange, a searcher can find our advertisers in the results
      of
      their search at destinations other than YP.com. We believe that this
      distribution strategy provides greater value to our IAP advertisers than merely
      branding the YP.com site as a search destination.





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In
      July
      2003, we entered into a licensing agreement with a vendor to license the use
      of
      the URL www.yp.com in
      exchange for cash and restricted shares of our common stock. Under the terms
      of
      this agreement, the licensor had the option of transferring the rights to the
      URL and the restricted shares to us in exchange for $300,000. In July 2006,
      the
      licensor exercised this option, and transferred ownership of the URL and the
      restricted shares to us. As this option was deemed to be a purchase commitment,
      no liability was reflected in our financial statements prior to the exercise
      of
      the option. We capitalized the URL at its net acquisition price, computed as
      the
      $300,000 cash payment less the fair market value of the shares acquired
      (determined based on the stock price on the date of reacquisition) and we are
      amortizing this asset on a straight-line basis over its estimated useful life.





**Technology
      and Infrastructure**





We
      have
      developed technologies to support the timely delivery of information requested
      by a user of our online Yellow Pages system. A staff of senior engineers
      experienced in large-scale system design and computer operation develops and
      maintains the technology. We believe we are particularly adept at large-scale
      database management, design, data modeling, operations and content management.





To
      focus
      on a quality and timely product, we have divided our technology staff and
      technology base into a business operations unit and an advanced technologies
      group dedicated to our directory services product. Our business operations
      support a sophisticated call center, automated billing of our customers,
      customer relationship management, and automated mailing campaign. Our advanced
      technologies group supports all programming and other systems enhancements
      to
      the YP website and internal systems. These operations are described in the
      following paragraphs.





*YP.Com.* The
      front
      end of our directory services and the showcase of our technology and marketing
      capabilities is our website, YP.Com. The YP.Com website currently is in its
      sixth generation of development. We develop ongoing enhancements to our website
      on a recurring schedule to meet the increased demand for our services and
      products. Our YP.com website provides several key and easy to use features,
      including timely information, simple search, search tips, reverse telephone
      number lookup, mapping, and residential and business directory listings.





*Database
      Management Systems.* At
      the
      core of our infrastructure are several high-performance and proprietary database
      systems containing several terabytes of data representing billions of records
      with hundreds of attributes each, such as business name, telephone number,
      address, number of employees, and our unique-to-the-industry 40-word description
      of the business. We maintain the data for internal operations on
      high-performance servers and with large-scale storage systems at our Mesa,
      Arizona facility, which is co-located with our call center operation and
      technology teams. To meet the demand for our products and services and to
      provide the highest level of reliability, we employ technologies and techniques
      providing data redundancy and clustering. Clustering is the use of several
      computers deployed in a manner that provides redundancy and additional computer
      processing power.





*High-Performance
      Database and Search Engine.* We
      believe we provide one of the most complete and high-performing directory
      services in the market today. Our proprietary database enables us to collect
      and
      merge data from multiple sources to provide extensive and accurate content
      for
      our users. With our xDirectoryTM and DirectXMLTM technologies, we provide
      spellchecking, synonym matching, automated content delivery, and multiple source
      data merging in a simple to use paradigm. We believe these technologies simplify
      the search process and provide the most relevant content to suit our customers’
and users’ needs. Ultimately, we expect these technologies to increase recurrent
      use of our system by users of our directory services.





*xDirectory.* xDirectory
      is the platform for our high-performance database and search engine. xDirectory
      is a proprietary content management system and repository for extensible data
      merged from multiple sources of North American listing data. xDirectory also
      serves as a platform for several proprietary features, including real-time
      search feedback on accuracy, search time, spellchecking, synonym matching,
      geographical positioning, automated content syndication, and the proprietary
      algorithms to perform listing data match-up and merging into a uniquely accurate
      record.





*DirectXML.* DirectXML
      is the technology that supports our content syndication program and distribution
      network. DirectXML integrates our proprietary content management system with
      our
      distribution network to deliver up-to-date syndicated content. DirectXML
      leverages the XML standard for the definition, interoperability, transmission,
      validation, and interpretation of data between systems and
      organizations.





7
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*Extensible
      Record* .
      We
      purchase data from some of the largest information providers in North America
      and merge that data with our extensive in-house customer data set to form what
      we believe is the largest and most comprehensive content in the market. This
      effort provides users of our directory services the greatest number of results
      per search. Our xDirectory platform has the unique ability to weigh the accuracy
      of a wide variety of attributes from the source record for inclusion into the
      merged record. xDirectory’s proprietary algorithm for identifying accurate
      information and removing inaccuracies during the merge process is complemented
      by our customer verification process that confirms the attributes of a given
      customer record.





*Content
      Syndication, Distribution, and Private Label Networks.* We
      add
      value by increasing our IAP advertisers’ visibility by providing automated
      conduits and content delivery to numerous search engines besides our own. We
      can
      deliver content both on the Internet and on mobile devices such as cell phones
      and personal digital assistants. Our market position and volume allows us to
      provide content to any of our strategic alliances, as discussed elsewhere in
      this Annual Report, at a cost below what would be accomplished if one were
      to
      attempt to duplicate our content and distribution network. We have further
      enhanced the capabilities of this global distribution network with our DirectXML
      technology, which provides high-volume automated record updates daily to our
      distribution partners and private-label customers.





*Billing
      Operation.* Our
      billing process is executed using a two-tier architecture that consists of
      foundation and business platforms. Our foundation platform is anchored with
      Microsoft® as the primary partner leveraging their SQL Server product line. This
      alliance aligns us technically with a stable industry standard with proven
      scaling ability to meet our growth needs. System stability is enabled through
      built-in design features including high availability, simplified database
      administration and security features. Our business applications tier rests
      on a
      program suite that consists of partner-provided utilities and our own utilities
      developed specifically to our billing process. By having development abilities
      in-house, we have control over our application, which allows us greater
      flexibility, greater security and reduced dependency on an external entity.
      These programs also reduce LEC submittal fees by cleaning our customer billing
      submittals prior to formal submission. They also optimize which provider best
      suits our needs in order to maximize profit potential.





*Call
      Center Operation.* We
      use
      sophisticated call center technologies to support teams dedicated to servicing
      customer needs, managing the provisioning of new customers and selling
      additional services to existing customers. The call center operation is built
      around a high-volume telephone switch and sophisticated applications that
      manage, distribute, and analyze workload across and between call center
      representatives. Since our call center is staffed five days a week, an automated
      call attendant is employed only after hours, on weekends or during holidays.





*Site
      Design and Facilities.* We
      implement our website on a set of large-scale, high-performance Unix servers
      with accompanying large-scale storage subsystems that are organized into layers
      and groups. Each layer and group provides different functionality across the
      site. We organize the site to allow the integration of new information and
      functionality without any interruption of service. To ensure our site remains
      continuously available to our users, we house the site at environmentally
      controlled co-location facilities geographically distributed and repeated
      between three locations in Arizona and Nevada. XO Communications, a leader
      and
      national provider of telecommunications services and facilities, provides the
      co-location services. The co-location facilities are interconnected by a
      high-performance, scalable and highly-reliable state-of-the-art fiber data
      network.





*Mailing
      List Generation* .
      The
      technology for generating a mailing list is comprised of a proprietary
      application and three primary databases for generating a mailing list of leads.
      On a monthly basis our information providers send us leads in an electronic
      format for integration into a database. After data has been refreshed in each
      provider database, our proprietary application performs a comparison-and-merge
      process between data sets. The proprietary algorithm within our application
      improves the quality of the record by verifying the accuracy of the information
      for every business listing sent to us. We compare information from each
      information provider to determine matching records, unique records, and the
      method employed to verify the information for each business listed in order
      to
      gauge the accuracy for each respective information provider. A unique record
      is
      one that exists only in a single provider’s data set. The number of unique
      records varies from month to month and is one of the reasons we purchase from
      multiple sources. Following the merge process, our proprietary mailing
      application employs a sophisticated filtering process to determine address
      accuracy and facilitate the delivery of the solicitation mailer. Ultimately,
      the
      application generates an electronic file containing a list of leads with the
      name, address of the lead and type of business of each lead. We then send the
      list to our service provider for printing and mass mailing.





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**The
      Internet Yellow Pages Market**





According
      to The Kelsey Group and the Yellow Pages Integrated Media Association, or YPIMA,
      while there are approximately 200 major U.S. Yellow Pages print publishers,
      an
      increasingly mobile and computer-sophisticated population is accessing the
      Yellow Pages by way of the Internet at a sharply increasing rate.





According
      to a July 2005 press release from The Kelsey Group, 8% of advertisers indicated
      that they were likely to spend more money on Internet Yellow Pages this year,
      up
      from 2% one year ago. Among the media tracked by this study—print and Internet
      Yellow Pages, newspapers, direct mail, magazines, radio, outdoor, coupons,
      local
      TV, Web site, search engine key word optimization, e-mail, online city guides,
      pay-per-click—only Internet Yellow Pages showed a statistically significant
      jump. Internet Yellow Pages advertising is expected to grow to an estimated
      $1.3
      billion by 2009, an estimated annual growth rate of 19% from 2003.





Internet
      Yellow Pages provide the following advantages over print Yellow
      Pages:





·
            More
                current and extensive listing
                information.


·
            Immediate
                access to business listings across the nation from any
                location.


·
            Broad
                accessibility via computers and hand-held devices, such as mobile
                phones
                and personal digital assistants.


·
            Features
                such as mapping, direct calling to the advertiser, and e-mail at
                the click
                of a button also may be available.





Internet
      Yellow Pages also offer lower costs for a given level of content and the ability
      to easily access and modify displays and advertisements, which allows for
      opportunistic or targeted specials or discounts.





Internet
      usage, in general, has increased dramatically in recent years. According to
      Internet World Stats, 69.3% of the United States population uses the Internet,
      a
      growth of 117.3% from 2000 to 2006. Search engines are a common method by which
      these users navigate the Internet. Our expanding distribution network seeks
      to
      allow our advertisers to benefit from this growth by receiving prominent
      placement in search engine results.





**Strategic
      Alliances**





In
      order
      to service users of our website more effectively and to extend our brand to
      other Internet sources, we have entered into strategic relationships with
      business partners that offer content, technology, and distribution capabilities.
      The following are descriptions of our most significant strategic
      relationships:





·
            We
                have cross-marketing arrangements with reciprocal linking of websites
                without any compensation to either party. These arrangements increase
                the
                page views for our advertisers’ listings by being listed on the linked
                websites. During 2006, the number of websites providing such links
                to
                YP.com fluctuated between 300 and 400 websites. These co-promotional
                arrangements typically are terminable on a monthly
                basis.





·
            We
                have a distribution agreement with Interchange to increase the page
                views
                for our advertisers’ listings by displaying our advertisers’ information
                in the search results of their affiliate sites.





·
            We
                have a license agreement with Palm, Inc. whereby we pay a fee to
                be a
                provider of Yellow Pages content on hand-held devices using the Palm
                operating system. We provide this content to Palm through a hypertext
                link
                from the Palm operating system to our website.





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·
            We
                have an agreement with Yahoo! Search Services to provide visibility
                to our
                website so that we can provide traffic to our advertisers. In exchange
                for
                monthly fees, Yahoo! Search Services tries to ensure that our website
                will
                be one of the highest placed sites when Yellow Pages searches are
                done on
                major search engines, such as MSN® and
                Yahoo®.





·
            We
                utilize WebDialogs in a co-promotional effort to provide automatic
                dialing
                services to our website users. These services allow these users to
                place a
                call to one of our IAP advertisers by simply clicking a button. This
                function powers our Click2Call
                feature.





We
      are
      members of the Yellow Pages Association (fka Yellow Pages Integrated Media
      Association) and the Association of Directory Publishers and have been since
      1998. These organizations are trade associations for Yellow Pages publishers
      or
      others that promote the quality of published content and advertising methods.





**Customer
      Service**





We
      believe that superior customer service is an important factor in differentiating
      ourselves from our competitors. To meet this objective, our customer service
      department is comprised of four main departments - inbound, outbound, quality
      assurance and administration.





*Inbound
      Call Center* .
      Our
      call center supports incoming calls from our advertisers for all of our
      products. The inbound customer service representatives, or CSRs, are responsible
      for taking calls regarding billing, technical service and general questions.
      The
      CSRs are empowered to activate new accounts, adjust accounts with credits,
      accept payments, change the billing method, and cancel accounts. Our proprietary
      CSR software is tiered in order to limit the actions taken with an advertiser’s
      account, depending on the CSR’s position. If a CSR is unable to accommodate the
      advertiser’s request, the CSR transfers the call to a supervisor to ensure the
      customer is satisfied. Requests beyond those a supervisor can handle are given
      to a department manager or our quality assurance personnel. The CSRs have the
      ability to update advertiser’s accounts by adding or changing a Mini-WebPage,
      changing hours of operation, changing the business category, and adding the
      link
      to the advertiser’s website and email. After the CSR makes the requested
      changes, the new information will appear on our website within two business
      days, enabling the advertiser to make timely changes to their listing. The
      inbound customer call center is generally staffed five days a week.





*Outbound
      Calling* .
      We
      established the outbound call center to help our IAP advertisers receive the
      full benefit for the advertising they purchased. The outbound CSRs primarily
      call new advertisers. They confirm the sale and, in the case of a new
      advertiser, they obtain the information to build the advertiser’s Mini-Webpage. After
      the
      outbound CSR speaks with the advertiser and obtains all the information for
      the
      advertiser’s listing, that listing is then sent to our proofreaders. Every
      listing that is updated is proofread prior to being placed on our site. This
      additional step ensures that our advertisers are represented professionally
      and
      accurately to their customers. Since our outbound CSRs only call existing or
      new
      advertisers, we are not affected by the “National Do Not Call”
list.





*Quality
      Assurance* . The
      goal
      of our quality assurance personnel is to monitor inbound and outbound calls,
      take calls transferred from CSRs, perform customer satisfaction surveys, and
      make test calls into our customer care line on a random basis.





In
      addition to the quality assurance representatives, we have a training supervisor
      whose responsibility is to produce and distribute training material to the
      entire call center to ensure consistent information is provided to all
      departments.





*Administration* .
      The
      purpose of our administration department is to provide our customers with timely
      feedback when requested through the mail, e-mail or by facsimile. In addition
      to
      the CSRs answering incoming calls, we have individuals trained to assist
      customers via email. Our website and our incoming greeting on the telephone
      give
      our customers and our website users our email address. We review these emails
      daily and generally reply within two business days. We have found that many
      advertisers prefer to email us with their changes and are very satisfied with
      our response time and ability to respond to their request. The administration
      department receives, sorts, and distributes all incoming and outgoing mail.
      They
      also are responsible for filing the hard copies of the cashed incentive checks.
      All information that is sent to our advertisers or potential customers by the
      call center is routed through the administration department in order to ensure
      that accurate and consistent information is sent.





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**Competition**





We
      operate in the highly competitive and rapidly expanding and evolving
      business-to-business Internet services market. Our largest competitors are
      LECs,
      which are generally known as local telephone companies, and national search
      engines such as Yahoo! and Google that have recently expanded their presence
      in
      the local search market. We compete with other online Yellow Pages services,
      website operators, advertising networks, and traditional offline media, such
      as
      traditional Yellow Pages directory publishers, television, radio, and print
      share advertising. Our services also compete with many directory website
      production businesses and Internet information service providers.





The
      principal competitive factors of the markets in which we compete include
      personalization of service, ease of use of directories, quality and
      responsiveness of search results, availability of quality content, value-added
      products and services, and access to end-users. We compete for advertising
      listings with the suppliers of Internet navigational and informational services,
      high-traffic websites, Internet access providers, and other media. This
      competition could result in significantly lower prices for advertising and
      reductions in advertising revenues. Increased competition could have a material
      adverse effect on our business.





Many
      of
      our competitors have greater capital resources than we have. These capital
      resources could allow our competitors to engage in advertising and other
      promotional activities that will enhance their brand name recognition at levels
      we cannot match. The LECs and national search engines have advantages in terms
      of brand name recognition.





We
      believe that we are in a position to successfully compete in these markets
      due
      to the speed of our local search engine, the comprehensiveness of our database,
      the effectiveness of marketing programs and the effectiveness of our
      distribution network. We further believe that we can compete effectively by
      continuing to provide quality services at competitive prices and by actively
      developing new products and services for customers.





We
      believe our listings and our Mini-WebPages provide users of our website with
      readily available information that is easy to understand and from which they
      can
      make their buying decisions. We believe that our calling center is a competitive
      advantage. Through our calling centers, we continually receive and process
      requests to update customer information on our website and, accordingly, we
      believe our site contains more useful and timely information than that of our
      competitors. We further believe that this, in turn, will translate into more
      page views and advertisers.





**Employees**





As
      of
      September 30, 2006, we engaged 76 full-time and 3 part-time employees. Such
      employees are not covered by any collective bargaining agreements.





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**ITEM
      1A. Risk Factors**





An
      investment in our common stock involves a substantial degree of risk. Before
      making an investment decision, you should give careful consideration to the
      following risk factors in addition to the other information contained in this
      report. The following risk factors, however, may not reflect all of the risks
      associated with our business or an investment in our common stock. Accordingly,
      you should only consider investing in our common stock if you can afford to
      lose
      your entire investment.





**Risks
      Related to Our Business**








**We
      face intense competition, including from companies with greater resources,
      which
      could adversely affect our growth and could lead to decreased revenues.**





Several
      companies, including Google, Microsoft, Verizon, and Yahoo, currently market
      Internet Yellow Pages or local search services that directly compete with our
      services and products. We may not compete effectively with existing and
      potential competitors for several reasons, including the following:





·
            some
                competitors have longer operating histories and greater financial
                and
                other resources than we have and are in better financial condition
                than we
                are;




·
            some
                competitors have better name recognition, as well as larger, more
                established, and more extensive marketing, customer service, and
                customer
                support capabilities than we have;




·
            some
                competitors may supply a broader range of services, enabling them
                to serve
                more or all of their customers’ needs. This could limit our sales and
                strengthen our competitors’ existing relationships with their customers,
                including our current and potential IAP
                advertisers;




·
            some
                competitors may be able to better adapt to changing market conditions
                and
                customer demand; and




·
            barriers
                to entry are not significant. As a result, other companies that are
                not
                currently involved in the Internet-based Yellow Pages advertising
                business
                may enter the market or develop technology that reduces the need
                for our
                services.





Increased
      competitive pressure could lead to reduced market share, as well as lower prices
      and reduced margins for our services. If we experience reductions in our revenue
      for any reason, our margins may continue to decline, which would adversely
      affect our results of operations. We cannot assure you that we will be able
      to
      compete successfully in the future.





**Our
      success depends upon our ability to establish and maintain relationships with
      our advertisers.**





Our
      ability to generate revenue depends upon our ability to maintain relationships
      with our existing advertisers, to attract new advertisers to sign up for
      revenue-generating services, and to generate traffic to our advertisers’
websites. We primarily use direct marketing efforts to attract new advertisers.
      These direct marketing efforts may not produce satisfactory results in the
      future. We attempt to maintain relationships with our advertisers through
      customer service and delivery of traffic to their businesses. An inability
      to
      either attract additional advertisers to use our service or to maintain
      relationships with our advertisers could have a material adverse effect on
      our
      business, prospects, financial condition, and results of
      operations.





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**If
      we do not introduce new or enhanced offerings to our advertisers and users,
      we
      may be unable to attract and retain those advertisers and users, which would
      significantly impede our ability to generate revenue.**





We
      will
      need to introduce new or enhanced products and services in order to attract
      and
      retain advertisers and users and to remain competitive. Our industry has been
      characterized by rapid technological change, changes in advertiser and user
      requirements and preferences, and frequent new product and service introductions
      embodying new technologies. These changes could render our technology, systems,
      and website obsolete. We may experience difficulties that could delay or prevent
      us from introducing new products and services. If we do not periodically enhance
      our existing products and services, develop new technologies that address our
      advertisers’ and users’ needs and preferences, or respond to emerging
      technological advances and industry standards and practices on a timely and
      cost-effective basis, our products and services may not be attractive to
      advertisers and users, which would significantly impede our revenue growth.
      In
      addition, our reputation and our brand could be damaged if any new product
      or
      service introduction is not favorably received.





**Our
      quarterly results of operations could fluctuate due to factors outside of our
      control.**





Our
      operating results have historically fluctuated significantly and we have
      experienced recent declines in net revenues and operating profits. We could
      continue to experience fluctuations or continued declining operating results
      due
      to factors that may or may not be within our control. Such factors include
      the
      following:




·
            fluctuating
                demand for our services, which may depend on a number of factors
                including




o
            changes
                in economic conditions and our IAP advertisers’
                profitability,




o
            varying
                IAP advertiser response rates to our direct marketing
                efforts,




o
            our
                ability to complete direct mailing solicitations on a timely basis
                each
                month,




o
            changes
                in our direct marketing efforts,




o
            IAP
                advertiser refunds or cancellations,
                and




o
            our
                ability to continue to bill through LEC billing, ACH billing or credit
                card channels rather than through direct
                invoicing;




·
            market
                acceptance of new or enhanced versions of our services or products;




·
            price
                competition or pricing changes by us or our
                competitors;




·
            new
                product offerings or other actions by our
                competitors;




·
            the
                ability of our check processing service providers to continue to
                process
                and provide billing information regarding our solicitation
                checks;




·
            the
                amount and timing of expenditures for expansion of our operations,
                including the hiring of new employees, capital expenditures, and
                related
                costs;




·
            technical
                difficulties or failures affecting our systems or the Internet in
                general;




·
            a
                decline in Internet traffic at our
                website;




·
            the
                cost of acquiring, and the availability of, information for our database
                of potential advertisers; and




·
            the
                fixed nature of a significant amount of our operating
                expenses.





**The
      loss of our ability to bill IAP advertisers through our Local Exchange Carriers
      on the IAP advertisers’ telephone bills would adversely impact our results of
      operations.**





We
      rely
      heavily on our ability to bill advertisers on their telephone bills through
      their respective Local Exchange Carriers, or “LECs.” LEC billing has steadily
      increased in recent quarters and accounted for 64% of net billings in the fourth
      quarter of 2006.





The
      existence of the LECs is the result of Federal legislation. In the same manner,
      Congress could pass future legislation that obviates the existence of or the
      need for the LECs. Additionally, regulatory agencies could limit or prevent
      our
      ability to use the LECs to bill our advertisers. The introduction of and
      advancement of new technologies, such as WiFi technology or other
      wireless-related technologies, could render unnecessary the existence of fixed
      telecommunication lines, which also could obviate the need for and access to
      the
      LECs. Finally, we have historically been affected by the LECs’ internal
      policies. With respect to certain LECs, such policies are becoming more
      stringent. Our inability to use the LECs to bill our advertisers through their
      monthly telephone bills would result in increased dilution and decreased
      revenues and would have a material adverse impact on our financial condition
      and
      results of operations.





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            of Contents*





**Our
      revenue may decline over time due to the involvement of the CLECs in the local
      telephone markets.**  ****





Due
      to
      competition in the telephony industry, many business customers are finding
      alternative telephony suppliers, such as Competitive Local Exchange Carriers,
      or
      CLECs, that offer less expensive alternatives to the LECs. When the LECs
      effectuate a price increase, many business customers look for an alternative
      telephone company, which may be a CLEC. When our advertising customers switch
      service providers from the LECs to a CLEC, we are precluded from billing these
      customers on their monthly telephone bill and must instead convert them to
      alternative billing methods such as ACH billing or direct invoicing. This
      conversion process can be disruptive to our operations and result in lost
      revenue. We cannot provide any assurances that our efforts will be successful.
      We may experience future increases in dilution of our customer base that we
      are
      able to bill on their monthly telephone bills, which, in turn, may result in
      decreases in our revenue.





**The
      loss of our ability to bill IAP advertisers through our ACH billing channel
      would adversely impact our results of operations.**





We
      bill a
      significant number of our IAP advertisers through our ACH billing channel.
      ACH
      transactions are closely regulated by NACHA - The Electronic Payments
      Association, which develops operating rules and business practices for the
      Automated Clearing House (ACH) Network and for electronic payments in the areas
      of Internet commerce and other electronic payment means. Changes in these rules
      and business practices could compromise our ability to bill a significant number
      of our advertisers through ACH billing, and we would have to transition these
      advertisers to other billing channels. Such changes would be disruptive and
      result in lost revenue.





**We
      depend upon our executive officers and key personnel** .





Our
      performance depends substantially on the performance of our executive officers
      and other key personnel. The success of our business in the future will depend
      on our ability to attract, train, retain, and motivate high quality personnel,
      especially highly qualified technical and managerial personnel. The loss of
      services of any executive officers or key personnel could have a material
      adverse effect on our business, results of operations or financial condition.
      We
      do not maintain key person life insurance on the lives of any of our executive
      officers or key personnel.





Competition
      for talented personnel is intense, and there is no assurance that we will be
      able to continue to attract, train, retain or motivate other highly qualified
      technical and managerial personnel in the future. In addition, market conditions
      may require us to pay higher compensation to qualified management and technical
      personnel than we currently anticipate. Any inability to attract and retain
      qualified management and technical personnel in the future could have a material
      adverse effect on our business, prospects, financial condition, and results
      of
      operations.





**Our
      ability to efficiently process new advertiser sign-ups and to bill our
      advertisers monthly depends upon our third party service providers and billing
      aggregators and processors, respectively.**





We
      currently use third party service providers to provide us with advertiser
      information at the point of sign-up for our Internet Advertising Package. Our
      ability to gather information to bill our advertisers at the point of sign-up
      could be adversely affected if one or more of these providers experiences a
      disruption in its operations or ceases to do business with us.





We
      also
      depend upon our billing aggregators and service providers to efficiently bill
      and collect monies through our LEC billing and ACH billing channels. We
      currently have agreements with three billing aggregators and two ACH service
      providers. Any disruption in these third parties’ ability to perform these
      functions could adversely affect our financial condition and results of
      operations.





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**We
      depend upon third parties to provide certain services and software, and our
      business may suffer if the relationships upon which we depend fail to produce
      the expected benefits or are terminated.**





We
      depend
      upon third-party software to operate certain of our services. The failure of
      this software to perform as expected would have a material adverse effect on
      our
      business. Additionally, although we believe that several alternative sources
      for
      this software are available, any failure to obtain and maintain the rights
      to
      use such software would have a material adverse effect on our business,
      prospects, financial condition, and results of operations. We also depend upon
      third parties to provide services that allow us to connect to the Internet
      with
      sufficient capacity and bandwidth so that our business can function properly
      and
      our websites can handle current and anticipated traffic. Any restrictions or
      interruption in our connection to the Internet would have a material adverse
      effect on our business, prospects, financial condition, and results of
      operations.





**The
      market for our services is uncertain.**





The
      demand and market acceptance for our services may be subject to a high level
      of
      uncertainty. Advertisers and users may not adopt or continue to use
      Internet-base Yellow Pages services and other online services that we may offer
      in the future. Advertisers may find Internet Yellow Pages advertising to be
      less
      effective for meeting their business needs than traditional methods of Yellow
      Pages or other advertising and marketing. Our business, prospects, financial
      condition or results of operations will be materially and adversely affected
      if
      potential advertisers do not adopt Internet Yellow Pages as an important
      component of their advertising expenditures.





**We
      may not be able to secure additional capital to expand our operations.**





Although
      we currently have no material long-term needs for capital expenditures, we
      will
      likely be required to make increased capital expenditures to fund our
      anticipated growth of operations, infrastructure, and personnel. We currently
      anticipate that our cash on hand as of September 30, 2006, together with cash
      flows from operations, will be sufficient to meet our anticipated liquidity
      needs for working capital and capital expenditures over the next 12 months.
      In
      the future, however, we may seek additional capital through the issuance of
      debt
      or equity depending upon our results of operations, market conditions or
      unforeseen needs or opportunities. Our future liquidity and capital requirements
      will depend on numerous factors, including the following:





·
            the
                pace of expansion of our
                operations;




·
            our
                need to respond to competitive pressures;
                and




·
            future
                acquisitions of complementary products, technologies or
                businesses.





Our
      forecast of the period of time through which our financial resources will be
      adequate to support our operations is a forward-looking statement that involves
      risks and uncertainties and actual results could vary materially as a result
      of
      the factors described above. As we require additional capital resources, we
      may
      seek to sell additional equity or debt securities or draw on our existing bank
      line of credit. Debt financing must be repaid at maturity, regardless of whether
      or not we have sufficient cash resources available at that time to repay the
      debt. The sale of additional equity or convertible debt securities could result
      in additional dilution to existing stockholders. We cannot provide assurance
      that any financing arrangements will be available in amounts or on terms
      acceptable to us, if at all.





**Our
      business is subject to a strict regulatory environment** .





Existing
      laws and regulations and any future regulation may have a material adverse
      effect on our business. For example, we believe that our direct marketing
      programs meet existing requirements of the United States Federal Trade
      Commission. Any changes to FTC requirements or changes in our direct or other
      marketing practices, however, could result in our marketing practices failing
      to
      comply with FTC regulations.





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We
      have
      received numerous inquiries from the attorney general offices of several states
      investigating our promotional activities, specifically, the use of our check
      mailer for customer activation. In December 2006, we voluntarily entered into
      a
      settlement with thirty-four states’ attorneys general to address their inquiries
      and bring finality to the process. We have voluntarily agreed to the
      following:





·
            We
                will pay a settlement fee of $2,000,000 to the state consortium,
                which
                they may distribute among
                themselves;


·
            We
                will discontinue the use of activation checks as a promotional
                incentive;


·
            We
                will suspend billing of any active customer that was acquired in
                connection with the use of an activation check until a letter is
                mailed
                notifying the customer of their legal rights to cancel the service
                and
                providing them a 60-day opportunity to receive a refund equivalent
                to the
                customer’s last two payments; and


·
            We
                will not employ any collection efforts with respect to past-due accounts
                of customers that were secured through the use of an activation check,
                nor
                will we represent our ability to do
                so.




This
      settlement could have an adverse affect on future revenues. Furthermore, there
      can be no absolute assurance that the other states, which were not part of
      the
      above-mentioned state consortium, would not attempt to file similar claims
      against us in the future. However, we believe this risk is somewhat mitigated
      by
      the fact that those states did not join the states in filing complaints against
      us and the fact that we are discontinuing the use of our check activators.
      Finally, our utilization of ACH billing has exposed us to greater scrutiny
      by
      the National Automated Clearing House Association, or NACHA. Future actions
      from
      these and other regulatory agencies could expose us to substantial liability
      in
      the future, including fines and criminal penalties, preclusion from offering
      certain products or services, and the prevention or limitation of certain
      marketing practices.





**We
      may be unable to promote and maintain our brands.**





We
      believe that establishing and maintaining the brand identities of our Internet
      Yellow Pages services is a critical aspect of attracting and expanding a base
      of
      advertisers and users. Promotion and enhancement of our brands will depend
      largely on our success in continuing to provide high quality service. If
      advertisers and users do not perceive our existing services to be of high
      quality, or if we introduce new services or enter into new business ventures
      that are not favorably received by advertisers and users, we will risk diluting
      our brand identities and decreasing their attractiveness to existing and
      potential IAP advertisers.





**We
      may not be able to adequately protect our intellectual property
      rights.**





Our
      success depends both on our internally developed technology and our third party
      technology. We rely on a variety of trademarks, service marks, and designs
      to
      promote our brand names and identity. We also rely on a combination of
      contractual provisions, confidentiality procedures, and trademark, copyright,
      trade secrecy, unfair competition, and other intellectual property laws to
      protect the proprietary aspects of our products and services. Legal standards
      relating to the validity, enforceability, and scope of the protection of certain
      intellectual property rights in Internet-related industries are uncertain and
      still evolving. The steps we take to protect our intellectual property rights
      may not be adequate to protect our intellectual property and may not prevent
      our
      competitors from gaining access to our intellectual property and proprietary
      information. In addition, we cannot provide assurance that courts will always
      uphold our intellectual property rights or enforce the contractual arrangements
      that we have entered into to protect our proprietary technology.





Third
      parties may infringe or misappropriate our copyrights, trademarks, service
      marks, trade dress, and other proprietary rights. Any such infringement or
      misappropriation could have a material adverse effect on our business,
      prospects, financial condition, and results of operations. In addition, the
      relationship between regulations governing domain names and laws protecting
      trademarks and similar proprietary rights is unclear. We may be unable to
      prevent third parties from acquiring domain names that are similar to, infringe
      upon or otherwise decrease the value of our trademarks and other proprietary
      rights, which may result in the dilution of the brand identity of our services.





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We
      may
      decide to initiate litigation in order to enforce our intellectual property
      rights, to protect our trade secrets, or to determine the validity and scope
      of
      our proprietary rights. Any such litigation could result in substantial expense,
      may reduce our profits, and may not adequately protect our intellectual property
      rights. In addition, we may be exposed to future litigation by third parties
      based on claims that our products or services infringe their intellectual
      property rights. Any such claim or litigation against us, whether or not
      successful, could result in substantial costs and harm our reputation. In
      addition, such claims or litigation could force us to do one or more of the
      following:





·
            cease
                selling or using any of our products that incorporate the challenged
                intellectual property, which would adversely affect our
                revenue;




·
            obtain
                a license from the holder of the intellectual property right alleged
                to
                have been infringed, which license may not be available on reasonable
                terms, if at all; and




·
            redesign
                or, in the case of trademark claims, rename our products or services
                to
                avoid infringing the intellectual property rights of third parties,
                which
                may not be possible and in any event could be costly and
                time-consuming.




Even
      if
      we were to prevail, such claims or litigation could be time-consuming and
      expensive to prosecute or defend, and could result in the diversion of our
      management’s time and attention. These expenses and diversion of managerial
      resources could have a material adverse effect on our business, prospects,
      financial condition, and results of operations.





**Capacity
      constraints may require us to expand our infrastructure and IAP advertiser
      support capabilities.**





Our
      ability to provide high-quality Internet Yellow Pages services largely depends
      upon the efficient and uninterrupted operation of our computer and
      communications systems. We may be required to expand our technology,
      infrastructure, and IAP advertiser support capabilities in order to accommodate
      any significant increases in the numbers of advertisers and users of our
      websites. We may not be able to project accurately the rate or timing of
      increases, if any, in the use of our services or expand and upgrade our systems
      and infrastructure to accommodate these increases in a timely manner. If we
      do
      not expand and upgrade our infrastructure in a timely manner, we could
      experience temporary capacity constraints that may cause unanticipated system
      disruptions, slower response times, and lower levels of IAP advertiser service.
      Our inability to upgrade and expand our infrastructure and IAP advertiser
      support capabilities as required could impair the reputation of our brand and
      our services, reduce the volume of users able to access our website, and
      diminish the attractiveness of our service offerings to our advertisers.





Any
      expansion of our infrastructure may require us to make significant upfront
      expenditures for servers, routers, computer equipment, and additional Internet
      and intranet equipment, as well as to increase bandwidth for Internet
      connectivity. Any such expansion or enhancement will need to be completed and
      integrated without system disruptions. An inability to expand our infrastructure
      or IAP advertiser service capabilities either internally or through third
      parties, if and when necessary, would materially and adversely affect our
      business, prospects, financial condition, and results of
      operations.




**Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the Sarbanes-Oxley Act could have a material adverse effect on our
      business and stock price.**




Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
      Report on Form 10-K for the fiscal year ending September 30, 2008, we will
      be
      required to furnish a report by our management on our internal control over
      financial reporting. The internal control report must contain (i) a statement
      of
      management's responsibility for establishing and maintaining adequate internal
      control over financial reporting, (ii) a statement identifying the framework
      used by management to conduct the required evaluation of the effectiveness
      of
      our internal control over financial reporting, (iii) management's assessment
      of
      the effectiveness of our internal control over financial reporting as of the
      end
      of our most recent fiscal year, including a statement as to whether or not
      internal control over financial reporting is effective, and (iv) a statement
      that the Company's independent auditors have issued an attestation report on
      management's assessment of internal control over financial reporting.





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In
      order
      to achieve compliance with Section 404 of the Act within the prescribed period,
      we will need to engage in a process to document and evaluate our internal
      control over financial reporting, which will be both costly and challenging.
      In
      this regard, management will need to dedicate internal resources, engage outside
      consultants and adopt a detailed work plan to (i) assess and document the
      adequacy of internal control over financial reporting, (ii) take steps to
      improve control processes where appropriate, (iii) validate through testing
      that
      controls are functioning as documented, and (iv) implement a continuous
      reporting and improvement process for internal control over financial reporting.
      We can provide no assurance as to our, or our independent auditors’, conclusions
      at September 30, 2008 with respect to the effectiveness of our internal control
      over financial reporting under Section 404 of the Act. There is a risk that
      neither we nor our independent auditors will be able to conclude at September
      30, 2008 that our internal controls over financial reporting are effective
      as
      required by Section 404 of the Act.




During
      the course of our testing we may identify deficiencies that we may not be able
      to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act
      for
      compliance with the requirements of Section 404. In addition, if we fail to
      achieve and maintain the adequacy of our internal controls, as such standards
      are modified, supplemented or amended from time to time, we may not be able
      to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404 of the
      Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those
      related to revenue recognition, are necessary for us to produce reliable
      financial reports and are important to helping prevent financial fraud. If
      we
      cannot provide reliable financial reports or prevent fraud, our business and
      operating results could be harmed, investors could lose confidence in our
      reported financial information, and the trading price of our stock could drop
      significantly.





**Risks
      Related to the Internet**





**We
      may not be able to adapt as the Internet, Internet Yellow Pages services, and
      IAP advertiser demands continue to evolve.**





Our
      failure to respond in a timely manner to changing market conditions or client
      requirements could have a material adverse effect on our business, prospects,
      financial condition, and results of operations. The Internet, e-commerce, and
      the Internet Yellow Pages industry are characterized by:





·
            rapid
                technological change;




·
            changes
                in advertiser and user requirements and
                preferences;




·
            frequent
                new product and service introductions embodying new technologies;
                and




·
            the
                emergence of new industry standards and practices that could render
                our
                existing service offerings, technology, and hardware and software
                infrastructure obsolete.




In
      order
      to compete successfully in the future, we must




·
            enhance
                our existing services and develop new services and technology that
                address
                the increasingly sophisticated and varied needs of our prospective
                or
                current IAP advertisers;




·
            license,
                develop or acquire technologies useful in our business on a timely
                basis;
                and




·
            respond
                to technological advances and emerging industry standards and practices
                on
                a cost-effective and timely basis.




**Our
      future success may depend on continued growth in the use of the
      Internet.**





Because
      Internet Yellow Pages is a relatively new and rapidly evolving industry, the
      ultimate demand and market acceptance for our services will be subject to a
      high
      level of uncertainty. Significant issues concerning the commercial use of the
      Internet and online service technologies, including security, reliability,
      cost,
      ease of use, and quality of service, remain unresolved and may inhibit the
      growth of Internet business solutions that use these technologies. In addition,
      the Internet or other online services could lose their viability due to delays
      in the development or adoption of new standards and protocols required to handle
      increased levels of Internet activity, or due to increased governmental
      regulation. Our business, prospects, financial condition, and results of
      operations would be materially and adversely affected if the use of Internet
      Yellow Pages and other online services does not continue to grow or grows more
      slowly than we expect.





18
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**We
      may be required to keep pace with rapid technological change in the Internet
      industry.**





In
      order
      to remain competitive, we will be required continually to enhance and improve
      the functionality and features of our existing services, which could require
      us
      to invest significant capital. If our competitors introduce new products and
      services embodying new technologies, or if new industry standards and practices
      emerge, our existing services, technologies, and systems may become obsolete.
      We
      may not have the funds or technical know-how to upgrade our services,
      technology, and systems. If we face material delays in introducing new services,
      products, and enhancements, our advertisers and users may forego the use of
      our
      services and select those of our competitors, in which event our business,
      prospects, financial condition, and results of operations could be materially
      and adversely affected.





**Regulation
      of the Internet may adversely affect our business.**





Due
      to
      the increasing popularity and use of the Internet and online services such
      as
      online Yellow Pages, federal, state,  local,
      and foreign governments may adopt laws and regulations, or amend existing laws
      and regulations, with respect to the Internet and other online services. These
      laws and regulations may affect issues such as user privacy, pricing, content,
      taxation, copyrights, distribution, and quality of products and services. The
      laws governing the Internet remain largely unsettled, even in areas where
      legislation has been enacted. It may take years to determine whether and how
      existing laws, such as those governing intellectual property, privacy, libel,
      and taxation, apply to the Internet and Internet advertising and directory
      services. In addition, the growth and development of the market for electronic
      commerce may prompt calls for more stringent consumer protection laws, both
      in
      the United States and abroad, that may impose additional burdens on companies
      conducting business over the Internet. Any new legislation could hinder the
      growth in use of the Internet generally or in our industry and could impose
      additional burdens on companies conducting business online, which could, in
      turn, decrease the demand for our services, increase our cost of doing business,
      or otherwise have a material adverse effect on our business, prospects,
      financial condition, and results of operations.





**We
      may not be able to obtain Internet domain names that we would like to
      have.**





We
      believe that our existing Internet domain names are an extremely important
      part
      of our business. We may desire, or it may be necessary in the future, to use
      these or other domain names in the United States and abroad. Various Internet
      regulatory bodies regulate the acquisition and maintenance of domain names
      in
      the United States and other countries. These regulations are subject to change.
      Governing bodies may establish additional top-level domains, appoint additional
      domain name registrars or modify the requirements for holding domain names.
      As a
      result, we may be unable to acquire or maintain relevant domain names in all
      countries in which we plan to conduct business in the future.





The
      extent to which laws protecting trademarks and similar proprietary rights will
      be extended to protect domain names currently is not clear. We therefore may
      be
      unable to prevent competitors from acquiring domain names that are similar
      to,
      infringe upon or otherwise decrease the value of our domain names, trademarks,
      trade names, and other proprietary rights. We cannot provide assurance that
      potential users and advertisers will not confuse our domain names, trademarks,
      and trade names with other similar names and marks. If that confusion occurs,
      we
      may lose business to a competitor and some advertisers and users may have
      negative experiences with other companies that those advertisers and users
      erroneously associate with us. The inability to acquire and maintain domain
      names that we desire to use in our business, and the use of confusingly similar
      domain names by our competitors, could have a material adverse affect on our
      business, prospects, financial conditions, and results of operations in the
      future.





**Our
      business could be negatively impacted if the security of the Internet becomes
      compromised.**





To
      the
      extent that our activities involve the storage and transmission of proprietary
      information about our advertisers or users, security breaches could damage
      our
      reputation and expose us to a risk of loss or litigation and possible liability.
      We may be required to expend significant capital and other resources to protect
      against security breaches or to minimize problems caused by security breaches.
      Our security measures may not prevent security breaches. Our failure to prevent
      these security breaches or a misappropriation of proprietary information may
      have a material adverse effect on our business, prospects, financial condition,
      and results of operations.





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**Our
      technical systems could be vulnerable to online security risks, service
      interruptions or damage to our systems.**





Our
      systems and operations may be vulnerable to damage or interruption from fire,
      floods, power loss, telecommunications failures, break-ins, sabotage, computer
      viruses, penetration of our network by unauthorized computer users or “hackers,”
natural disaster, and similar events. Preventing, alleviating, or eliminating
      computer viruses and other service-related or security problems may require
      interruptions, delays or cessation of service. We may need to expend significant
      resources protecting against the threat of security breaches or alleviating
      potential or actual service interruptions. The occurrence of such unanticipated
      problems or security breaches could cause material interruptions or delays
      in
      our business, loss of data, or misappropriation of proprietary or IAP
      advertiser-related information or could render us unable to provide services
      to
      our IAP advertisers for an indeterminate length of time. The occurrence of
      any
      or all of these events could materially and adversely affect our business,
      prospects, financial condition, and results of operations.





**If
      we are sued for content distributed through, or linked to by, our website or
      those of our advertisers, we may be required to spend substantial resources
      to
      defend ourselves and could be required to pay monetary damages.**





We
      aggregate and distribute third-party data and other content over the Internet.
      In addition, third-party websites are accessible through our website or those
      of
      our advertisers. As a result, we could be subject to legal claims for
      defamation, negligence, intellectual property infringement, and product or
      service liability. Other claims may be based on errors or false or misleading
      information provided on or through our website or websites of our directory
      licensees. Other claims may be based on links to sexually explicit websites
      and
      sexually explicit advertisements. We may need to expend substantial resources
      to
      investigate and defend these claims, regardless of whether we successfully
      defend against them. While we carry general business insurance, the amount
      of
      coverage we maintain may not be adequate. In addition, implementing measures
      to
      reduce our exposure to this liability may require us to spend substantial
      resources and limit the attractiveness of our content to users.





**Risks
      Related to Our Securities**





**Stock
      prices of technology companies have declined precipitously at times in the
      past
      and the trading price of our common stock is likely to be volatile, which could
      result in substantial losses to investors.**




The
      trading price of our common stock has been volatile over the past few years
      and
      investors could experience losses in response to factors including the
      following, many of which are beyond our control:




·
            decreased
                demand in the Internet services
                sector;




·
            variations
                in our operating results;




·
            announcements
                of technological innovations or new services by us or our
                competitors;




·
            changes
                in expectations of our future financial performance, including financial
                estimates by securities analysts and
                investors;




·
            our
                failure to meet analysts’
expectations;




·
            changes
                in operating and stock price performance of other technology companies
                similar to us;




·
            conditions
                or trends in the technology
                industry;




·
            additions
                or departures of key personnel; and




·
            future
                sales of our common stock.





20
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            of Contents*





Domestic
      and international stock markets often experience significant price and volume
      fluctuations that are unrelated to the operating performance of companies with
      securities trading in those markets. These fluctuations, as well as political
      events, terrorist attacks, threatened or actual war, and general economic
      conditions unrelated to our performance, may adversely affect the price of
      our
      common stock. In the past, securities holders of other companies often have
      initiated securities class action litigation against those companies following
      periods of volatility in the market price of those companies’ securities. If the
      market price of our stock fluctuates and our stockholders initiate this type
      of
      litigation, we could incur substantial costs and experience a diversion of
      our
      management’s attention and resources, regardless of the outcome. This could
      materially and adversely affect our business, prospects, financial condition,
      and results of operations.





**Certain
      provisions of Nevada law and in our charter may prevent or delay a change of
      control of our company** .





We
      are
      subject to the Nevada anti-takeover laws regulating corporate takeovers. These
      anti-takeover laws prevent Nevada corporations from engaging in a merger,
      consolidation, sales of its stock or assets, and certain other transactions with
      any stockholder, including all affiliates and associates of the stockholder,
      who
      owns 10% or more of the corporation’s outstanding voting stock, for three years
      following the date that the stockholder acquired 10% or more of the
      corporation’s voting stock except in certain situations. In addition, our
      amended and restated articles of incorporation and bylaws include a number
      of
      provisions that may deter or impede hostile takeovers or changes of control
      or
      management. These provisions include the following:





·
            the
                authority of our board to issue up to 5,000,000 shares of serial
                preferred stock and to determine the price, rights, preferences,
                and
                privileges of these shares, without stockholder
                approval;




·
            all
                stockholder actions must be effected at a duly called meeting of
                stockholders and not by written consent unless such action or proposal
                is
                first approved by our board of
                directors;




·
            special
                meetings of the stockholders may be called only by the Chairman of
                the
                Board, the Chief Executive Officer, or the President of our company;
                and




·
            cumulative
                voting is not allowed in the election of our
                directors.




These
      provisions of Nevada law and our articles and bylaws could prohibit or delay
      mergers or other takeover or change of control of our company and may discourage
      attempts by other companies to acquire us, even if such a transaction would
      be
      beneficial to our stockholders.




**Our
      common stock may be subject to the “penny stock” rules as promulgated under the
      Exchange Act.**





In
      the
      event that no exclusion from the definition of “penny stock” under the Exchange
      Act is available, then any broker engaging in a transaction in our common stock
      will be required to provide its customers with a risk disclosure document,
      disclosure of market quotations, if any, disclosure of the compensation of
      the
      broker-dealer and its sales person in the transaction, and monthly account
      statements showing the market values of our securities held in the customer’s
      accounts. The bid and offer quotation and compensation information must be
      provided prior to effecting the transaction and must be contained on the
      customer’s confirmation of sale. Certain brokers are less willing to engage in
      transactions involving “penny stocks” as a result of the additional disclosure
      requirements described above, which may make it more difficult for holders
      of
      our common stock to dispose of their shares.





**ITEM
      1B. Unresolved Staff Comments**





Not
      applicable.





21
 *Table
            of Contents*





**ITEM
      2. Properties**





We
      have a
      long-term operating lease with Arthur Grandlich d/b/a McKellips Corporate Square
      for the 16,772 square foot corporate office that is located in Mesa, Arizona.
      We
      pay rent of approximately $120,000 annually under this lease, which expires
      in
      June 2011. This facility contains our customer service call center and certain
      administrative resources.





We
      lease
      a 3,500 square foot facility in Las Vegas, Nevada that functions as the primary
      operating facility of Telco. In October 2006, we renewed this lease with
      Tomorrow 33 Convention, LP for a one year period with lease payments of $8,000
      per month. We have an option to extend the lease another year.





We
      lease
      office space in Las Vegas, Nevada for our telemarketing activities under a
      month-to-month lease. Payments under this lease vary depending upon the amount
      of space utilized.





We
      believe that these facilities are adequate for our current and anticipated
      future needs and that both of these facilities and their contents are adequately
      covered by insurance.





**ITEM
      3. Legal Proceedings**





Previously,
      we disclosed that we had received numerous inquiries from the Attorney General
      offices of several states investigating our promotional activities,
      specifically, the use of our check mailer for customer activation. On December
      14, 2006, we voluntarily entered into a settlement with thirty-four states’
attorneys general to address their inquiries and bring finality to the process.
      We have voluntarily agreed to the following:





·
            We
                will pay a settlement fee of $2,000,000 to the state consortium,
                which
                they may distribute among
                themselves;


·
            We
                will discontinue the use of activation checks as a promotional
                incentive;


·
            We
                will suspend billing of any active customer that was acquired in
                connection with the use of an activation check until a letter is
                mailed
                notifying the customer of their legal rights to cancel the service
                and
                providing them a 60-day opportunity to receive a refund equivalent
                to the
                customer’s last two payments; and


·
            We
                will not employ any collection efforts with respect to past-due accounts
                of customers that were secured through the use of an activation check,
                nor
                will we represent our ability to do
                so.




We
      are
      party to certain other legal proceedings and other various claims and lawsuits
      in the normal course of our business, which, in the opinion of management,
      are
      not material to our business or financial condition.





**ITEM
      4. Submission of Matters to a Vote of Security
      Holders**





Not
      applicable.





22
 *Table
            of Contents*




**PART
      II**





**ITEM
      5. Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities**





**Our
      Common Stock**





Our
      common stock trades publicly on the OTC Bulletin Board under the symbol “YPNT.”
The OTCBB is a regulated quotation service that displays real-time quotes,
      last-sale prices and volume information in over-the-counter equity securities.
      The OTCBB securities are traded by a community of market makers that enter
      quotes and trade reports. This market is extremely limited and any prices quoted
      are not a reliable indication of the value of our common stock.





The
      following table sets forth the quarterly high and low bid prices per share
      of
      our common stock by the OTCBB during the last two fiscal years. The quotes
      represent inter-dealer quotations, without adjustment for retail mark-up,
      markdown or commission and may not represent actual transactions.




**Fiscal
                    Year**
                
                **Quarter
                    Ended**
                
                **High**
                
                **Low**2005
                
                December
                    31, 2005
                
                $1.70
                
                $0.93March
                    31, 2005
                
                $1.31
                
                $0.78June
                    30, 2005
                
                $1.14
                
                $0.69September
                    30, 2005
                
                $1.12
                
                $0.772006
                
                December
                    31, 2005
                
                $0.94
                
                $0.40March
                    31, 2006
                
                $1.03
                
                $0.51June
                    30, 2006
                
                $1.30
                
                $0.95September
                    30, 2006
                
                $1.08
                
                $0.79




**Holders
      of Record**





On
      December 15, 2006, there were approximately 446 holders of record of our common
      stock according to our transfer agent. The Company has no record of the number
      of shareholders who hold their stock in “street” name with various
      brokers.





**Dividend
      Policy**





We
      have
      one class of outstanding preferred stock (Series E Preferred Stock), of which
      there are currently 127,840 shares issued and outstanding. Each share of Series
      E Preferred Stock is entitled to and receives a dividend of $0.015 per year,
      payable in quarterly installments of $0.00375.





Presently,
      we do not pay dividends on our common stock. The timing and amount of future
      dividend payments by our company, if any, will be determined by our Board of
      Directors based upon our earnings, capital requirements and financial position,
      general economic conditions, alternative uses of capital, and other pertinent
      factors.





23
 *Table
            of Contents*





**Issuer
      Purchases of Equity Securities**





Period
            
            (a)
                Total Number of
              Shares
                (or Units)Purchased
            
            (b)
                Average Price
              Paid
                per
              Share
                (or Unit)
            
            (c)
                Total Number of
              Shares
                (or Units)
              Purchased
                as Part of
              Publicly
                Announced
              Plans
                or Programs2
            
            (d)
                Maximum Number
              (or
                Approximate Dollar
              Value)
                of Shares (or
              Units)
                that May Yet Be
              Purchased
                Under the
              Plans
                or ProgramsJuly
                2006
            
            
            100,0001
            
            $
            1.01
            
            
            -
            
            $
            2,313,207August
                2006
            
            
            -
            
            
            N/A
            
            
            -
            
            $
            2,313,207September
                2006
            
            
            -
            
            
            N/A
            
            
            -
            
            $
            2,313,207Total
            
            
            100,000
            
            $
            1.01
            
            
            -
            
            $
            2,313,207




1  In
      July
      2003, we entered into a licensing agreement with a vendor to license the use
      of
      the URL www.yp.com in
      exchange for cash and restricted shares of the Company’s common stock. Under the
      terms of this agreement, the licensor had the option of transferring the rights
      to the URL and the restricted shares to the Company in exchange for $300,000.
      In
      July 2006, the licensor exercised this option, and transferred ownership of
      the
      URL and the restricted shares to the Company. The portion of the proceeds
      allocated to the shares was based on the fair market value of the stock at
      the
      transaction date.





2 On
      May
      18, 2005, we announced the adoption of a $3,000,000 stock repurchase program.
      To
      date, we have purchased 853,850 shares at an aggregate price of $686,793.





**ITEM
      6. Selected Financial Data**





The
      selected financial data presented below are derived from our historical
      consolidated financial statements for the years indicated, which have been
      audited by Epstein, Weber & Conover, P.L.C., our independent registered
      public accounting firm. The selected financial data should be read in
      conjunction with Management’s Discussion and Analysis of Financial Condition and
      Results of Operations and our consolidated financial statements and the related
      notes thereto included elsewhere in this Annual Report.





24
 *Table
            of Contents*





**Year
                Ended September 30,****2006**
            
            **2005
                (1)**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of Operations Data**Net
                revenues
            
            $
            36,881,164
            
            $
            25,204,858
            
            $
            57,168,105
            
            $
            30,767,444
            
            $
            12,618,126Cost
                of services
            
            
            8,069,239
            
            
            3,980,619
            
            
            24,757,880
            
            
            8,473,746
            
            
            3,497,678Gross
                profit
            
            
            28,811,925
            
            
            21,224,239
            
            
            32,410,225
            
            
            22,293,698
            
            
            9,120,448Operating
                income
            
            
            2,124,450
            
            
            1,313,389
            
            
            11,465,946
            
            
            7,281,886
            
            
            1,595,642Net
                income
            
            
            (1,050,920
            )
            
            725,146
            
            
            8,184,930
            
            
            6,472,705
            
            
            2,073,417Net
                income (loss) per common share:Basic
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17
            
            $
            0.14
            
            $
            0.05Diluted
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17
            
            $
            0.14
            
            $
            0.05Weighted
                average common shares outstanding:Basic
            
            
            44,958,683
            
            
            46,390,356
            
            
            47,375,927
            
            
            45,326,721
            
            
            44,024,329Diluted
            
            
            44,958,683
            
            
            46,659,918
            
            
            48,075,699
            
            
            45,591,590
            
            
            44,024,329Cash
                dividends declared per common share
            
            $
            -
            
            $
            1,444,763
            
            $
            1,427,640
            
            $
            -
            
            $
            -**Statement
                of Cash Flows Data**Net
                cash provided by (used in) operating activities
            
            $
            2,420,083
            
            $
            6,990,161
            
            $
            4,818,203
            
            $
            4,762,238
            
            $
            1,158,015Net
                cash provided by (used in) investing activities
            
            
            (1,088,416
            )
            
            (2,440,092
            )
            
            (2,192,500
            )
            
            (2,798,500
            )
            
            (244,077
            )Net
                cash provided by (used in) financing activities
            
            
            (235,418
            )
            
            (2,011,587
            )
            
            (1,428,022
            )
            
            (351,998
            )
            
            (830,677
            )**Balance
                Sheet Data**Cash
                and cash equivalents
            
            $
            7,210,560
            
            $
            6,114,311
            
            $
            3,576,529
            
            $
            2,378,848
            
            $
            767,108Working
                capital
            
            
            13,908,560
            
            
            13,374,171
            
            
            12,484,833
            
            
            6,615,537
            
            
            3,089,108Property
                and equipment, net
            
            
            178,883
            
            
            396,862
            
            
            725,936
            
            
            731,142
            
            
            274,459Intangible
                assets, net
            
            
            5,722,604
            
            
            6,108,823
            
            
            3,326,274
            
            
            3,512,952
            
            
            3,578,542Total
                assets
            
            
            26,727,227
            
            
            23,632,916
            
            
            26,289,604
            
            
            20,356,163
            
            
            9,922,716Total
                long term liabilities
            
            
            -
            
            
            -
            
            
            848,498
            
            
            -
            
            
            115,866Total
                stockholders equity
            
            
            22,376,373
            
            
            22,065,266
            
            
            23,572,393
            
            
            15,709,315
            
            
            8,386,853


(1)
            Includes
                an increase to income of approximately $100,000 (net of income taxes
                of
                approximately $54,000) resulting from the cumulative effect of an
                accounting change for forfeitures of restricted stock granted to
                employees, executives and
                consultants





**ITEM7.
      Management’s Discussion and Analysis of Financial
      Condition and Results of Operations**





For
      a
      description of our significant accounting policies and an understanding of
      the
      significant factors that influenced our performance during the fiscal year
      ended
      September 30, 2006, this “Management’s Discussion and Analysis” should be read
      in conjunction with the Consolidated Financial Statements, including the related
      notes, appearing in Item 8 of this Annual Report.




**Forward-Looking
      Statements**




This
      portion of this Annual Report on Form 10-K, includes statements that constitute
      “forward-looking statements.” These forward-looking statements are often
      characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
      statements contained in this portion of the Annual Report include, but are
      not
      limited to our (i ) expectation that our billing cycles will not be disrupted; (ii) expectation
      that
      the number of refund requests will not exceed 40% of customers receiving
      notifications; (iii) expectations that we can quickly ramp our telemarketing
      efforts to continue to attract new customers; (iv) expectation that our
      telemarketing efforts will yield positive customer growth throughout the
      remainder of fiscal 2007; (v) our projected revenues, operating income and
      net
      income for fiscal 2007; (vi) expectation that we can expand our telemarketing
      campaigns in the future; and (vii) belief that our existing cash on hand will
      provide us with sufficient liquidity to meet our operating needs for the next
      twelve months.




Forward-looking
      statements involve risks, uncertainties and other factors, which may cause
      our
      actual results, performance or achievements to be materially different from
      those expressed or implied by such forward-looking statements. Factors and
      risks
      that could affect our results and achievements and cause them to materially
      differ from those contained in the forward-looking statements include those
      identified in *Item
      1A. Risk Factors* ,
      as well
      as other factors that we are currently unable to identify or quantify, but
      that
      may exist in the future.




In
      addition, the foregoing factors may affect generally our business, results
      of
      operations, and financial position. Forward-looking statements speak only as
      of
      the date the statement was made. We do not undertake and specifically decline
      any obligation to update any forward-looking statements.





25
 *Table
            of Contents*





**Executive
      Overview**




This
      section presents a discussion of recent developments and summary information
      regarding our industry and operating trends only. For further information
      regarding the events summarized herein, you should read this Management’s
      Discussion and Analysis of Financial Condition and Results of Operations in
      its
      entirety.




*Recent
      Developments and Outlook*




From
      2001
      to the fourth quarter of fiscal 2005, our primary source of marketing was
      through the use of activation checks mailed to prospective customers. During
      this period, we tracked the effectiveness of these activation checks and noticed
      a decline in their effectiveness from year-to-year. The response rate with
      the
      activation check declined from 2.2% in fiscal 2003 to 0.9% in fiscal 2005,
      causing this to become a more expensive means of attracting customers.
      Therefore, during the fourth quarter of fiscal 2005, we began utilizing
      telemarketing as a supplement to our direct mail activities. In fiscal 2006,
      our
      response rate to the activation check further dropped to 0.7%. Accordingly,
      we
      began a transition to telemarketing as our primary means of sales and marketing
      efforts. We increased our telemarketing efforts such that it accounted for
      approximately 50% of total customer acquisition expenditures during fiscal
      2006.





During
      fiscal 2006, we received numerous inquiries from the Attorney General offices
      of
      several states investigating our promotional activities, specifically, the
      use
      of our check mailer for customer activation. On December 14, 2006, we
      voluntarily entered into a settlement with thirty-four states’ attorneys general
      to address their inquiries and bring finality to the process. We have
      voluntarily agreed to the following:





·
            We
                will pay a settlement fee of $2,000,000 to the state consortium,
                which
                they may distribute among
                themselves;


·
            We
                will discontinue the use of activation checks as a promotional
                incentive;


·
            We
                will suspend billing of any active customer that was acquired in
                connection with the use of an activation check until a letter is
                mailed
                notifying the customer of their legal rights to cancel the service
                and
                providing them a 60-day opportunity to receive a refund equivalent
                to the
                customer’s last two payments; and


·
            We
                will not employ any collection efforts with respect to past-due accounts
                of customers that were secured through the use of an activation check,
                nor
                will we represent our ability to do
                so.




This
      settlement limits our exposure to significant legal fees and costs that may
      have
      been otherwise incurred had we decided to dispute these inquiries. Further,
      we
      have been transitioning a significant amount of our marketing efforts away
      from
      the use of activation checks toward the use of telemarketing and other marketing
      channels during 2005 and 2006. With this settlement, we will be able to
      accelerate this transition away from the use of activation checks and focus
      our
      marketing efforts toward improving the effectiveness and efficiency of our
      telemarketing campaigns and other marketing efforts.





The
      mailings related to the settlement listed above affects approximately 41,000
      customers. However, we have commenced such mailings and do not expect our
      billing cycles to be disrupted. Our maximum exposure on refunds under this
      settlement is $2,500,000, although we do not expect the number of refund
      requests to exceed 40% of such customers. Our
      inability to utilize activation checks will cause a near term disruption in
      our
      marketing efforts. However, as we have been transitioning toward telemarketing
      campaigns, we expect that we can quickly ramp up our telemarketing efforts
      to
      continue to attract new customers.




We
      expect
      that the mailings related to the attorneys general settlement will result in
      a
      decline in revenue in the first quarter of fiscal 2007. However, we also expect
      our telemarketing efforts to yield positive customer growth throughout the
      remainder of fiscal 2007. Although there are many variables that impact our
      future results, including the number of customer cancellations resulting from
      the attorneys general settlement and the success of our future telemarketing
      campaigns, we expect that our gross annual revenues for fiscal 2007 will be
      between $45,000,000 and $49,000,000, with our operating income between
      $11,000,000 and $12,000,000 and net income between $6,000,000 and
      $7,000,000.





26
 *Table
            of Contents*





*Changes
      in Billing Practices*




During
      the end of 2004 and throughout 2005, we had been reducing our use of LEC billing
      channels as the LECs’ policies regarding the use of our check mailer as our
      primary letter of authorization prevented us from billing many existing
      customers through this particular billing channel. Additionally, the major
      LECs
      (i.e. Regional Bell Operating Companies or RBOCs) prevented us from billing
      any
      new customers acquired via check mailers. As such, we transitioned a significant
      number of our customers to alternate billing means, the most significant of
      which was ACH billing. ACH billing is less expensive than LEC billing; however,
      many of our customers view this as a less desirable billing method, leading
      to
      increased cancellations. In situations where we cannot bill a customer via
      LEC
      or ACH billing, or in instances where the customer requests that we bill them
      directly, we utilize direct invoices. Direct billing has a higher percentage
      of
      uncollectible accounts than other billing methods and, therefore, is our least
      attractive billing option.





In
      fiscal
      2006, we began acquiring new customers via telemarketing campaigns, which are
      allowed to be billed via LECs. These telemarketing campaigns have reopened
      certain LEC billing channels. Additionally, our monthly billing rates are higher
      for customers acquired via telemarketing campaigns. For these reasons, as well
      as the cessation of the use of our check activator, we expect to continue to
      expand our telemarketing campaigns in the future.




The
      following represents the breakdown of net billings by channel during recent
      fiscal quarters:




**Q4
                  2006**
              
              **Q3
                  2006**
              
              **Q2
                  2006**
              
              **Q1
                  2006**
              
              **Q4
                  2005**
              
              **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**LEC
                  billing
              63%
              
              62%
              
              49%
              
              35%
              
              32%
              
              23%
              
              26%
              
              49%ACH
                  billing
              33%
              
              33%
              
              43%
              
              54%
              
              54%
              
              64%
              
              56%
              
              42%Direct
                  billing
              4%
              
              5%
              
              8%
              
              11%
              
              14%
              
              13%
              
              18%
              
              9%





*Recent
      Financial Results*


The
      following represents a summary of recent financial results:




**Q4
                2006**
            
            **Q3
                2006**
            
            **Q2
                2006**
            
            **Q1
                2006**
            
            **Q4
                2005**
            
            **Q3
                2005**
            
            **Q2
                2005**
            
            **Q1
                2005**Net
                Revenues
            
            $
            10,082,487
            
            $
            10,172,705
            
            $
            8,999,196
            
            $
            7,626,776
            
            $
            6,052,936
            
            $
            6,517,158
            
            $
            6,444,609
            
            $
            6,190,155Gross
                margin
            
            
            7,047,642
            
            
            7,843,120
            
            
            7,410,732
            
            
            6,510,430
            
            
            4,993,639
            
            
            5,591,353
            
            
            5,583,676
            
            
            5,055,571Operating
                expenses
            
            
            5,878,319
            
            
            6,613,886
            
            
            7,288,932
            
            
            6,906,338
            
            
            5,610,005
            
            
            5,311,145
            
            
            4,674,869
            
            
            4,314,831Operating
                income (loss)
            
            
            1,169,322
            
            
            1,229,234
            
            
            121,800
            
            
            (395,908
            )
            
            (616,366
            )
            
            280,208
            
            
            908,807
            
            
            740,740Net
                income (loss)
            
            
            (1,680,673
            )
            
            826,847
            
            
            129,998
            
            
            (327,092
            )
            
            (386,653
            )
            
            (175,887
            )
            
            627,135
            
            
            660,551





During
      fiscal 2006, we generated net loss of approximately $1,051,000, or ($0.02)
      per
      share on a diluted basis (which includes non-recurring expenses totaling
      approximately $4,144,000 or $0.09 per share consisting of approximately
      $3,687,000 of settlement related matters with attorneys general and with a
      former vendor and approximately $457,000 of severance costs, further described
      below). During fiscal 2005, we generated net income of approximately
      $725,000, or $0.02 per share on a diluted basis (which includes non-recurring
      expenses totaling approximately $527,000 or $0.01 per share, further described
      below).




The
      following non-recurring items are relevant to our fiscal 2006 and 2005 quarterly
      operating results, each of which are further described in this Executive
      Overview:




§
            Fourth
                quarter of fiscal 2006 - includes the following charges associated
                with
                the voluntary agreement with various regulatory agencies surrounding
                the
                use of activation checks (described in Recent Developments and Outlook
                above):





27
 *Table
          of Contents*




o
            $2,000,000
                payment to cover regulatory and related
                expenses


o
            $1,250,000
                of accrued refunds and processing fees for existing customers that
                wish to
                cancel their service in response to the correspondence to be sent
                per the
                terms of the agreement


o
            $275,000
                of legal and professional fees




§
            Third
                quarter of fiscal 2006 - no significant non-recurring expenses were
                incurred.





§
            Second
                quarter of fiscal 2006 - includes an increase of general and
                administrative expenses of approximately $80,000 related to separation
                costs with our former Chief Financial Officer and $39,000 related
                to
                separation costs with other
                employees.





§
            First
                quarter of fiscal 2006 - includes an increase of general and
                administrative expenses totaling approximately $338,000 related to
                separation costs with our former Chief Executive Officer and an increase
                in other expenses associated with an additional expense of $162,000
                relating to an outstanding legal matter.





§
            Fourth
                quarter of fiscal 2005 - includes an increase of general and
                administrative expenses totaling approximately $212,000 relating
                to the
                termination of consulting agreements with certain of our former
                officers offset by a reduction of general and administrative expenses
                of approximately $295,000 associated with the true-up of estimates
                of
                forfeitures of restricted stock grants.





§
            Third
                quarter of fiscal 2005 - includes losses of $328,000 associated with
                a
                litigation settlement and approximately $282,000 associated with
                our
                agreement to settle outstanding amounts due from two of our largest
                stockholders (with the loss being equal to the difference between
                the fair
                value of debt forgiven and the value of the consideration
                received).




**Critical
      Accounting Estimates and Assumptions**




The
      preparation of our financial statements in conformity with accounting principles
      generally accepted in the United States of America requires our management
      to
      make certain estimates and assumptions that affect the reported amounts of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. As such, in accordance with the use of
      accounting principles generally accepted in the United States of America, our
      actual realized results may differ from management’s initial estimates as
      reported. A summary of our significant accounting policies are detailed in
      the
      notes to the financial statements, which are an integral component of this
      filing.





The
      following summarizes critical estimates made by management in the preparation
      of
      the financial statements.





*Revenue
      Recognition.* ****** We
      generate revenue from customer subscriptions for directory and advertising
      services. Our billing and collection procedures include significant involvement
      of outside parties, referred to as aggregators for LEC billing and service
      providers for ACH billing. Such processes are described below.




ACH
      Billing - For
      ACH billing, we submit electronic billing information to our service providers,
      who in turn use this information as a basis for processing direct bank
      withdrawals through an Automated Clearing House. We receive information
      regarding records that are rejected or cannot otherwise be processed on a timely
      basis, and we recognize revenue only for those items that are processed.




LEC
      Billing - When a
      customer subscribes to our service we create an electronic customer file, which
      is the basis for the billing. We submit gross billings electronically to third
      party billing aggregators. These billing aggregators compile and format our
      electronic customer files and forward the billing records to the appropriate
      LECs. The billing for our service flows through to monthly bills of the
      individual LEC customers. The LECs collect our billing and remit amounts to
      the
      billing aggregators, which in turn remit funds to us. The following are
      significant accounting estimates and assumptions used in the revenue recognition
      process with respect to these billings.





28
 *Table
            of Contents*





·
            Customer
                refunds.
                We have a customer refund policy that allows the customer to request
                a
                refund if they are not satisfied with the service within the first
                120
                days of the subscription. We accrue for refunds based on historical
                experience of refunds as a percentage of new billings in that 120-day
                period. Customer refunds are reserved and charged against gross
                revenue.





·
            Non-paying
                customers.
                There are customers who may not pay the fee for our services even
                though
                we believe they are valid subscribers. Included in cost of services
                is an
                accrual for estimated non-paying customers that are recorded at the
                time
                of billing.




·
            Dilution.
                We recognize revenue during the month for which the service is provided
                based on net billings accepted by the billing aggregators. We recognize
                revenue only for accepted records. However, subsequent to this acceptance,
                there are instances in the LEC billing process where a customer cannot
                be
                billed due to changes in telephone numbers, telephone carriers, data
                synchronization issues, etc. These amounts that ultimately cannot
                be
                billed, as well as certain minor billing adjustments by the LECs
                are
                commonly referred to as “dilution.” Dilution is estimated at the time of
                billing and charged to cost of
                services.




·
            Fees.
                Processing fees are charged by both the aggregator and the LEC.
                Additionally, the LEC charges fees for responding to billing inquiries
                by
                its customers, processing refunds, and other customer-related services.
                Such fees are estimated at the time of billing and charged to cost
                of
                services.




Direct
      bill customers - If we are unable to bill via any other means, we bill
      subscribers directly via paper invoices. Our collection rate on these billings
      is significantly lower than those processed through the LECs. We track
      collections on direct billed customers and recognize revenue from those
      customers based on the historical collection rates.




Fulfillment
      contracts - ** Beginning
      in fiscal 2006, we began entering into contracts with several third parties
      whereby we provide hosting, customer service and certain administrative
      functions under a revenue sharing agreements. We recognize revenues only for
      those revenues for which we are entitled to when the related services are
      performed.




*Allowance
      for Doubtful Accounts.* ****** We
      receive cash through the processes discussed above. Under our contractual
      arrangements with our third party aggregators and service providers, the LECs
      and aggregators/service providers deduct from our gross billings amounts for
      returns, nonpaying customers, dilution and fees to arrive at net proceeds
      remitted to us. We estimate an allowance for doubtful accounts on the basis
      of
      information provided by the billing aggregators and service providers. This
      information is an indicator of timely payments made by our subscribers. At
      September 30, 2006 and 2005, the allowance for doubtful accounts was
      approximately 36% and 16% of gross accounts receivable,
      respectively.




*Carrying
      Value of Intellectual Property.* The
      carrying value of our intellectual property at September 30, 2006, relates
      primarily to the purchase of the Yellow-Page.Net Universal Resource Locator,
      or
      URL, from Telco. The URL is recorded at its $5,000,000 purchase price, less
      accumulated amortization of $2,661,000. We have estimated the useful life of
      this asset to be 20 years.




We
      evaluate the recoverability of the carrying amount of this and other intangible
      assets whenever events or changes in circumstances indicate that the carrying
      amount of this asset may not be fully recoverable. In 2006, there have been
      no
      events that indicate that this asset may be impaired and, accordingly, no such
      impairment tests are warranted. In the event of such changes, impairment would
      be assessed if the undiscounted expected cash flows derived for the asset are
      less than its carrying amount. The dynamic economic environment in which we
      operate and the resulting assumptions used to estimate future cash flows would
      impact the outcome of such impairment tests.




*Change
      in Accounting Principle - Capitalization of Customer Acquisition Costs and
      Amortization of those Costs.* We
      purchase mailing lists and send advertising materials to prospective subscribers
      from those mailing lists as well as outbound call campaigns. Customers subscribe
      to the services by affirmatively responding to those advertising materials
      and
      calling campaigns, which serve as the contract for the subscription. Previously,
      we capitalized these customer acquisition costs and amortized them on
      a straight-line basis over the average expected life of our customers based
      on
      historical IAP advertiser attrition rates and other factors.





29
 *Table
            of Contents*





Prior
      to
      fiscal 2006, the majority of our capitalized customer acquisition costs related
      to our mailing campaigns for which we amortized the costs based on historical
      IAP advertiser attrition rates attributable to our entire customer base. During
      fiscal 2006, we began increasing our expenditures for telemarketing campaigns.
      The capitalization of such costs requires that we amortize over the average
      expected life of acquired customers, as determined on a cost-pool by cost-pool
      basis. Our systems do not allow us to efficiently and accurately monitor
      customer lives by method of acquisition. Therefore, we are unable to determine
      the average expected life of those customers acquired via telemarketing versus
      those acquired via mailing campaigns. As we cannot effectively evaluate such
      costs on a cost-pool by cost-pool basis, we determined in fiscal 2006 that
      the
      more preferable method of accounting for these costs is to expense them when
      incurred. We enacted this change in accounting principle during the fourth
      quarter of fiscal 2006 and, in accordance with FAS 154, we have restated all
      periods presented to reflect this new method of accounting for such
      costs.




*Income
      Taxes.* Management
      evaluates the probability of the utilization of the deferred income tax assets.
      We have estimated net deferred income tax assets of $3,117,000 and net deferred
      tax assets of $1,632,000 at September 30, 2006 and 2005, respectively, which
      relate to various timing differences between book and tax expense recognition.
      We are required to make judgments and estimates related to the timing and
      utilization of deferred income tax assets, applicable tax rates, and feasible
      tax planning strategies.




*Stock-Based
      Compensation.* From
      time-to-time, we grant restricted stock awards to employees, directors,
      executives, and consultants. Such awards are recorded as an increase to common
      stock and paid in capital on the grant date with an offsetting amount of
      deferred compensation in stockholders’ equity. This deferred compensation cost
      is amortized on a straight-line basis over the vesting period.  Prior
      to
      October 1, 2004, we recognized forfeitures as they occurred. Upon occurrence,
      we
      reversed the previously recognized expense associated with such grant. Effective
      October 1, 2004, we changed to an expense recognition method that is based
      on an
      estimate of the number of shares that are ultimately expected to vest (see
      discussion below in “ *Results
      of Operations - Cumulative Effect of Accounting Change* ”).
      The
      impact of changes in such estimates on unamortized deferred compensation cost
      are recorded as an adjustment to compensation expense in the period in which
      such estimates are revised.




**Results
      of Operations**




*Net
      Revenues*




**Year
                Ended**
              **September
                30,**
            
            **Net**
              **Revenues**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            36,881,164
            
            $
            11,676,306
            
            
            46.3
            %2005
            
            $
            25,204,858
            
            $
            (31,963,247
            )
            
            (55.9
            )%2004
            
            $
            57,168,105





The
      increase in revenues for fiscal 2006, as compared to 2005, was largely due
      to an
      increased customer count attributable to expanded marketing efforts, the
      reintroduction of the LEC billing channel for new customers, and new fulfillment
      contracts.




Through
      the settlement with the attorneys general described above, we will discontinue
      the use of activation checks in fiscal 2007. During fiscal 2006, such efforts
      constituted roughly half of our marketing expenditures.




Although
      we have concentrations of risk with our billing aggregators (as described in
      the
      Notes to Consolidated Financial Statements included elsewhere in this Annual
      Report) these aggregators bill via many underlying LECs, thereby reducing our
      risk associated with credit concentrations. However, there are a few LECs that
      service a significant number of our customers. To the extent that future changes
      in their billing practices cause a disruption in our ability to bill through
      these channels, our revenues could be adversely affected.




The
      majority of our IAP customers pay between $27.50 and $39.95 per month.




The
      decrease in revenues for the year ended September 30, 2005, as compared to
      the
      year ended September 30, 2004, was largely due to declines in our paying
      subscriber base resulting from our LEC billing issues.





30
 *Table
            of Contents*





The
      success of our business model is based on our ability to retain, add and
      efficiently bill our subscribers.





There
      have been different methodologies employed in the reporting of customer count.
      To more properly reflect customer count we changed our methodology in the first
      quarter of fiscal 2006 to count billed listings. A billed listing is defined
      by
      management as any listing that has successfully been submitted through one
      of
      our billing channels or in the case of listings billed by direct invoice only
      those listings that have paid for their listing at the end of the reporting
      period.





Management
      believes that this change when coupled with the knowledge of our average price
      and percentage of returns and allowances will provide greater insight into
      our
      business model for the public.





The
      following represent our counts for billed listings over the last eight quarters:





**Quarter
                Ended**
            
            **Average**
              **Billed
                Listings**
              **During
                Quarter**
            
            **Gross
                Revenue**
            
            **Returns
                &**
              **Allowances**
              **(%****of
                Gross****Revenue)**
            
            **Net
                Revenues**
            
            **Average
                Monthly**
              **Gross
                Revenue per**
              **Average
                Billed**
              **Listing**September
                30th, 2006
            
            
            130,627
            
            $
            10,672,074
            
            
            5.52
            %
            $
            10,082,487
            
            $
            27.23June
                30th, 2006
            
            
            134,264
            
            
            10,869,020
            
            
            6.41
            %
            
            10,172,705
            
            $
            26.98March
                31st, 2006
            
            
            116,622
            
            
            9,823,664
            
            
            8.39
            %
            
            8,999,196
            
            $
            28.08December
                31st, 2005
            
            
            90,809
            
            
            8,328,583
            
            
            8.43
            %
            
            7,626,776
            
            $
            30.57September
                30th, 2005
            
            
            81,342
            
            
            6,856,082
            
            
            11.71
            %
            
            6,052,936
            
            $
            28.10June
                30th, 2005
            
            
            83,096
            
            
            7,419,827
            
            
            12.17
            %
            
            6,517,158
            
            $
            29.76March
                31st, 2005
            
            
            76,633
            
            
            7,527,086
            
            
            14.38
            %
            
            6,444,609
            
            $
            32.74December
                31st, 2004
            
            
            82,579
            
            
            7,502,125
            
            
            17.49
            %
            
            6,190,155
            
            $
            30.28





Our
      average monthly gross revenue per average billed listing declined recently,
      as a
      significant amount of our increase in billed listings was via a new fulfillment
      contract. Under the terms of this new contract, our gross revenues are, on
      average, approximately $3 lower than comparable billed customers.




*Cost
      of Services*





**Year
                Ended**
              **September
                30,**
            
            **Cost
                of**
              **Services**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            8,069,239
            
            $
            4,088,620
            
            
            102.7
            %2005
            
            $
            3,980,619
            
            $
            (20,777,261
            )
            
            (83.9
            )%2004
            
            $
            24,757,880





The
      increase in cost of services for the year ended September 30, 2006, as compared
      to September 30, 2005, is largely due to an increase in LEC billings, which
      have
      higher costs than other billing channels Billings through LEC channels,
      comprised 64% of total billings during fiscal 2006 as compared to 32% in fiscal
      2005. Increases in dilution expense and adjustments to dilution reserves were
      the primary components of the increase in cost of sales from fiscal 2005 to
      fiscal 2006.




The
      decrease in our cost of services from fiscal 2004 to fiscal 2005 is directly
      attributable to a reduction in our dilution expense as a result of our
      transition from LEC billing to alternative billing methods. Billings through
      LEC
      channels, which drives a substantial majority of our dilution expense, decreased
      to 32% of total billings during fiscal 2005 from over 90% of total billings
      during fiscal 2004. A significant portion of these customers were converted
      to
      ACH and direct billing methods, which have minimal dilution. We expect cost
      of
      services to continue to be directly correlated to our usage of LEC billing
      channels.





31
 *Table
            of Contents*





*Gross
      Profit*





**Year
                Ended**
              **September
                30,**
            
            **Gross**
              **Profit**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            28,811,925
            
            $
            7,587,686
            
            
            35.8
            %2005
            
            $
            21,224,239
            
            $
            (11,185,986
            )
            
            (34.5
            )%2004
            
            $
            32,410,225





The
      increase in our gross profits was due primarily to increased revenues partially
      offset by increased cost of sales associated with higher utilization of LEC
      billing channels. Gross margins decreased to 78% of net revenues in fiscal
      2006
      compared to 84% of net revenues in fiscal 2005 due to increased dilution in
      fiscal 2006 resulting from the increase in LEC billings as previously
      discussed.




The
      decrease in our gross profits from fiscal 2004 to fiscal 2005 was due to
      decreased revenues resulting from a decrease in IAP advertisers, offset in
      part
      by the decreased dilution as discussed above.




*General
      and Administrative Expenses*





**Year
                Ended**
              **September
                30,**
            
            **General
                &**
              **Administrative**
              **Expenses**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            13,800,456
            
            $
            769,842
            
            
            5.9
            %2005
            
            $
            13,030,614
            
            $
            344,278
            
            
            2.7
            %2004
            
            $
            12,686,336





General
      and administrative expenses increased approximately $770,000 for the fiscal
      year
      ended September 30, 2006 compared to the fiscal year ended September 30, 2005.
      The increase in general and administrative expenses for fiscal 2006, as compared
      to fiscal 2005, is largely due to the following:




·
            An
                increase in consulting and professional fees of approximately $1,117,000
                associated with (i) increased consulting expenses of $957,000, associated
                with operational and strategic consulting, and (ii) $162,000 of executive
                search and placement services and other miscellaneous activities.




·
            An
                increase in compensation expense of approximately $476,000 associated
                with
                the general increase in revenues and business activity in fiscal
                2006.
                This increase was comprised of increases of approximately (i) $352,000
                of
                severance costs associated with the termination of former officers
                and
                other personnel, (ii) non-cash compensation costs of $179,000 associated
                with restricted stock awards, (iii) $307,000 for Directors’ compensation
                and Executive bonuses, and (iv) increases in leased and contract
                employees
                and other miscellaneous compensation expenses of $131,000. These
                costs
                were partially offset by a decrease in executive consulting fees
                of
                approximately $493,000.




·
            A
                decrease in mailing and other customer costs of approximately $662,000
                associated with the reduction of paper invoices and other methods
                of
                correspondence with customers for which payment is unlikely to be
                received.




·
            General
                cost reductions of $161,000.





32
 *Table
            of Contents*





General
      and administrative expenses increased 2.7 % during fiscal year 2005 compared
      to
      fiscal 2004. The increase in costs for the year ended September 30, 2005 was
      comprised of approximately $828,000 related to our efforts to reconfirm our
      existing subscriber base and $584,000 associated with increased customer mailing
      costs attributable to an increase in customers that are invoiced directly and
      other customer mailing efforts that took place during fiscal 2005. These
      increases were offset by the combination of $498,000 of decreased legal costs
      in
      fiscal 2005 and general expense reductions associated with cost-containment
      initiatives.




Our
      general and administrative expenses consist largely of fixed and semi-fixed
      expenses such as compensation, rent, utilities, etc .
      Therefore, we do not consider short-term trends of general and administrative
      expenses as a percentage of revenues to be meaningful indicators for evaluating
      operational performance.




The
      following table sets forth our recent operating performance for general and
      administrative expenses:





**Q4
                2006**
            
            **Q3
                2006**
            
            **Q2
                2006**
            
            **Q1
                2006**
            
            **Q4
                2005**
            
            **Q3
                2005**
            
            **Q2
                2005**
            
            **Q1
                2005**Compensation
                for employees,leased
                employees, officers and directors
            
            $
            2,073,646
            
            $
            1,908,099
            
            $
            2,475,244
            
            $
            2,476,713
            
            $
            2,272,287
            
            $
            2,115,672
            
            $
            1,869,134
            
            $
            2,201,308Professional
                fees and other G&A costs
            
            
            1,086,877
            
            
            976,111
            
            
            839,972
            
            
            790,187
            
            
            665,316
            
            
            618,738
            
            
            629,461
            
            
            823,172Reconfirmation,
                mailing, billing and othercustomer-related
                costs
            
            
            39,180
            
            
            245,597
            
            
            396,883
            
            
            491,947
            
            
            407,554
            
            
            517,565
            
            
            614,591
            
            
            295,816




*Sales
      and Marketing Expenses*





**Year
                Ended**
              **September
                30,**
            
            **Sales
                &**
              **Marketing**
              **Expenses**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            11,452,465
            
            $
            6,142,228
            
            
            115.7
            %2005
            
            $
            5,310,237
            
            $
            (2,017,313
            )
            
            (27.5
            )%2004
            
            $
            7,327,550





As
      discussed elsewhere in this section , we enacted a change in accounting
      principle in the fourth quarter of fiscal 2006 to expense such costs when they
      are incurred and have retroactively restated all period presented to reflect
      such a change.




Sales
      and
      marketing expense increased in fiscal 2006 as compared to fiscal 2005 primarily
      due to an increase in telemarketing expenditures from $153,000 in fiscal 2005
      to
      $5,245,000 in fiscal 2006. The remaining increase is due to increased mailing
      campaigns partially offset by a decrease in branding activities. As previously
      discussed, in connection with the attorneys general campaign, we have ceased
      utilizing activation checks in early fiscal 2007. We expect telemarketing
      campaigns to be our primary source of sales and marketing expenditures in fiscal
      2007.




Sales
      and
      marketing expenses as a percentage of revenues were 31.1% for fiscal 2006
      compared to 21.1% for fiscal 2005 as we have increased our telemarketing and
      other sales efforts to fuel revenue growth.




*Depreciation
      and Amortization*




**Year
                Ended**
              **September
                30,**
            
            **Depreciation
                &**
              **Amortization**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            1,434,554
            
            $
            (135,445
            )
            
            (8.6
            )%2005
            
            $
            1,569,999
            
            $
            639,606
            
            
            68.7
            %2004
            
            $
            930,393





Depreciation
      and amortization remained largely consistent between the fiscal years ended
      September 30, 2006 and 2005. Expenses for depreciation and amortization consist
      of amortization of fixed assets, capitalized website costs, intangible assets
      and our non-compete agreements.





33
 *Table
            of Contents*





The
      increase in depreciation and amortization expense from fiscal 2004 to fiscal
      2005 is attributable to (i) amortization of a $1,821,000 non-compete agreement
      acquired in April 2005 as part of the Transfer and Repayment Agreement described
      in “Recent Developments” above and in Note 11 of the Notes to Consolidated
      Financial Statements included elsewhere in this report, and (ii) increased
      amortization of intangible assets associated with website development costs
      that
      were capitalized during 2005.




*Operating
      Income*





**Year
                Ended**
              **September
                30,**
            
            **Operating**
              **Income**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            2,124,450
            
            $
            811,061
            
            
            61.8
            %2005
            
            $
            1,313,389
            
            $
            (10,152,557
            )
            
            (88.5
            )%2004
            
            $
            11,465,946





Our
      operating income increased in fiscal 2006 from fiscal 2005 due primarily to
      revenue increases, offset primarily by increased dilution in our LEC billing
      channel and increased sales and marketing activities, as previously described.
      Revenues decreases as previously described in fiscal 2005 as compared to fiscal
      2004 were the predominant factor in our decrease in operating income for the
      year ended September 30, 2005 compared with the year ended September 30, 2004.




*Loss
      on Attorneys General Settlement*





The
      loss
      on attorneys general settlement, unique to fiscal 2006, relates to the
      settlement of matters described in “ *Executive
      Overview - Recent Developments and Outlook* ”
above.
      This loss includes a settlement fee of $2,000,000, $1,250,000 of accrued refunds
      and related expenses and $275,000 of legal fees. Such matters have been
      concluded and we do not expect any additional future charges relating to these
      events.





*Other
      Income (Expense)*





**Year
                Ended**
              **September
                30,**
            
            **Other
                Income**
              **(Expense)**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            (186,325
            )
            $
            364,084
            
            
            (66.1
            )%2005
            
            $
            (550,409
            )
            $
            (1,338,584
            )
            
            (169.8
            )%2004
            
            $
            788,175





Other
      income (expense) in each of the years presented consist primarily of non-related
      matters. Other income (expense) for the year ended September 30, 2006 consists
      primarily of a $162,000 expense related to the settlement of an outstanding
      matter with a vendor.




Other
      income (expense) for the year ended September 30, 2005 includes losses of
      $328,000 associated with a litigation settlement and approximately $282,000
      associated with our agreement to settle outstanding amounts due from two of
      our
      largest stockholders. These agreements were reached in fiscal 2005.




Other
      income in fiscal 2004 consisted of technical and service income from Simple.net
      of $287,000, a nonrecurring reversal of $525,000 of previously accrued
      compensation costs for former executives for which payment is no longer
      required, and other miscellaneous items.





34
 *Table
            of Contents*





*Income
      Tax Benefit (Provision)*





**Year
                Ended**
              **September
                30,**
            
            **Income
                Tax**
              **Benefit
                (Provision)**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            311,779
            
            $
            683,816
            
            
            (183.8
            )%2005
            
            $
            (372,037
            )
            $
            4,005,176
            
            
            (91.5
            )%2004
            
            $
            (4,377,213
            )




The
      change in our income tax benefit (provision) in each of the above years is
      due
      primarily to changes in our pre-tax income. As of September 30, 2006, we have
      utilized all of our net operating loss carryforwards.





*Cumulative
      Effect of Accounting Change*





During
      the first fiscal quarter of 2005, we changed our method of accounting for
      forfeitures of restricted stock awards to employees, officers, and directors.
      Prior to October 1, 2004, we recognized forfeitures as they occurred .
      Upon occurrence, we reversed the previously recognized expense associated with such
      grant. Effective October 1,
      2004 ,
      we
      changed to an expense recognition method that is based on an estimate of the
      number of shares that are ultimately expected to vest. We believe that this
      is a
      preferable method as it provides less volatility in expense recognition.
      Additionally, while both methods of accounting for forfeitures are acceptable
      under current guidance, the implementation of FAS 123R
      (effective during the first
      quarter of fiscal 2006) no longer permits us to recognize forfeitures as they occur .
      This
      change resulted in an increase to net income of $99,848, net of income taxes
      of
      $53,764, during the first quarter of fiscal 2005. Note that this change in
      accounting principle was enacted prior to the adoption of FAS 154, which
      requires the retroactive application of changes in accounting principles to
      all
      periods presented.





*Net
      Income (Loss)*





**Year
                Ended**
              **September
                30,**
            
            **Net
                Income**
              **(Loss)**
            
            **Change
                from**
              **Prior
                Year**
            
            **Percent
                Change**
              **from
                Prior Year**2006
            
            $
            (1,050,920
            )
            $
            (1,776,066
            )
            
            244.9
            %2005
            
            $
            725,146
            
            $
            (7,459,784
            )
            
            (91.1
            )%2004
            
            $
            8,184,930





We
      reported a net loss for fiscal 2006 of $1,051,000 as compared to net income
      for
      fiscal 2005 of $725,000, a decrease of $1,776,000. The substantial decrease
      in
      net income in fiscal 2006 is primarily the result of non-recurring expenses
      totaling approximately $4,144,000 consisting of approximately $3,687,000 of
      settlement related expenditures with attorneys general and with a former vendor
      and approximately $457,000 of severance costs and increased sales and marketing
      expenditures, which were partially offset by increased gross margins due to
      our
      ability to utilize the LEC billing channel as previously discussed. The
      substantial decrease in net income for the year ended September 30, 2005 is
      due
      primarily to decreased revenues.




**Liquidity
      and Capital Resources**




Net
      cash
      provided by operating activities decreased approximately $4,570,000, or 65%,
      to
      $2,420,000 for the year ended September 30, 2006, compared to $6,990,000 for
      the
      year ended September 30, 2005. The decrease in cash generated from operations
      in
      fiscal 2006 is primarily due to an increase in accounts receivable and the
      related provisions resulting from an increased reliance on the LEC billing
      channel. Net cash provided by operating activities was $4,818,000 for the year
      ended September 30, 2004.





35
 *Table
            of Contents*





Our
      primary source of cash inflows is net remittances from our billing channels,
      including ACH billings and LEC billings. For ACH billings, we generally receive
      the net proceeds through our billing service processors within 15 days of
      submission. For LEC billings, we receive collections on accounts receivable
      through the billing service aggregators under contracts to administer this
      billing and collection process. The billing service aggregators generally do
      not
      remit funds until they are collected. Generally, cash is collected and remitted
      to us (net of dilution and other fees and expenses) over a 60- to 120-day period
      subsequent to the billing dates. Additionally, for each monthly billing cycle,
      the billing aggregators and LECs withhold certain amounts, or “holdback
      reserves,” to cover potential future dilution and bad debt expense. These
      holdback reserves lengthen our cash conversion cycle as they are remitted to
      us
      over a 12- to 18-month period of time. We classify these holdback reserves
      as
      current or long-term receivables on our balance sheet, depending on when they
      are scheduled to be remitted to us. As of September 30, 2006, approximately
      31%
      of our accounts receivable are due from a single aggregator.




Our
      most
      significant cash outflows include payments for marketing expenses and general
      operating expenses. General operating cash outflows consist of payroll
      costs, income taxes, and general and administrative expenses that typically
      occur within close proximity of expense recognition.




Net
      cash
      used in investing activities totaled $1,088,000 during fiscal 2006 and consisted
      of investments of excess cash in certificates of deposit and other
      investments, expenditures for intangible assets and minor purchases of
      equipment. During fiscal 2005, cash used for investing activities was
      $2,441,000, and also consisted of investments
      of excess cash in certificates of deposit and other investments,
      expenditures for intangible assets and minor purchases of equipment. During
      fiscal 2004, cash used for investing activities was $2,193,000.




Net
      cash
      used for financing activities was $235,000 during fiscal 2006 and consisted
      of
      the repurchase of our treasury stock. Cash used for financing activities during
      fiscal 2005 were $2,012,000 and consisted predominantly of payments of common
      stock dividends of $1,445,000 and purchases of treasury stock totaling $566,000.
      Cash used for financing activities during fiscal 2004 were $1,428,000.




We
      had
      working capital of $13,705,000 as of September 30, 2006, compared to $13,374,000
      as of September 30, 2005. Our cash position increased to over $7,211,000 at
      September 30, 2006 from approximately $6,114,000 at the end of fiscal
      2005.




During
      2005, our Board of Directors authorized the repurchase of up to $3,000,000
      of
      our common stock from time to time on the open market or in privately negotiated
      transactions. To date, we have purchased 853,850 shares at an aggregate cost
      of
      $686,793 under the program.





During
      fiscal 2006, we entered into a contractual arrangement with an attorney to
      settle previous claims and to engage the future services of this attorney.
      Under
      the terms of the arrangement, we made cash payments during the year totaling
      $145,000 and granted 100,000 shares of restricted stock. We are obligated to
      make future payments over the next two years totaling $234,750 in exchange
      for
      future services. Such amounts have not been accrued in the accompanying
      financial statements as such payments are for future services.





During
      fiscal 2006, we entered into a contractual arrangement with a consulting firm
      to
      provide strategic and operational related consulting services. Under the terms
      of the agreement, we are obligated to make future payments through July 2009
      that vary based on the Company’s billed customer count subject to a minimum of
      $20,000 per month. Current payments are approximately $100,000 per month. Such
      amounts have not been accrued in the accompanying financial statements as such
      payments are for future services.





The
      following table summarizes our contractual obligations at September 30, 2006
      and
      the effect such obligations are expected to have on our future liquidity and
      cash flows:





**Payments
                Due by Fiscal Year****Contractual
                obligations**
            
            **Total**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**Lease
                commitments
            
            $
            777,125
            
            $
            296,209
            
            $
            159,899
            
            $
            116,733
            
            $
            116,733
            
            $
            87,550
            
            $
            -Noncanceleable
                service contracts
            
            
            894,750
            
            
            427,500
            
            
            287,250
            
            
            180,000
            
            
            -
            
            
            -
            
            
            -$
            1,671,875
            
            $
            723,709
            
            $
            447,149
            
            $
            296,733
            
            $
            116,733
            
            $
            87,550
            
            $
            -





We
      believe that our existing cash on hand will provide us with sufficient liquidity
      to meet our operating needs for the next twelve months.





36
 *Table
            of Contents*





At
      September 30, 2006, we had no other off-balance sheet arrangements, commitments
      or guarantees that require additional disclosure or measurement.





**ITEM
      7A. Quantitative and Qualitative Disclosure about Market
      Risk**





As
      of
      September 30, 2006, we did not participate in any market risk-sensitive
      commodity instruments for which fair value disclosure would be required under
      Statement of Financial Accounting Standards No. 107. We believe that we are
      not
      subject in any material way to other forms of market risk, such as foreign
      currency exchange risk or foreign customer purchases (of which there were none
      in fiscal 2006 or 2005) or commodity price risk.





37
 *Table
            of Contents*





**ITEM
      8. Financial Statements and Supplementary Data**





**YP
      CORP.**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**Page**Report
                of Independent Registered Public Accounting Firm
            39Consolidated
                Financial Statements:Consolidated
                Balance Sheets at September 30, 2006 and 2005
            40Consolidated
                Statements of Operations for the years ended September 30, 2006,
                2005, and
                2004
            41Consolidated
                Statements of Stockholders’ Equity for the years ended September 30, 2006,
                2005, and 2004
            42Consolidated
                Statements of Cash Flows for the years ended September 30, 2006,
                2005, and
                2004
            43Notes
                to Consolidated Financial Statements
            44





38
 *Table
            of Contents*





**REPORTOF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








To
      the
      Stockholders and Board


of
      Directors of YP Corp.:




We
      have
      audited the accompanying consolidated balance sheets of YP Corp. and
      subsidiaries as of September 30, 2006 and 2005 and the related statements of
      operations, stockholders’ equity and cash flows for each of the three years in
      the period ended September 30, 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.




We
      conducted our 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. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe 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 YP Corp. and
      subsidiaries as of September 30, 2006 and 2005, and the consolidated results
      of
      its operations and cash flows for each of the three years in the period ended
      September 30, 2006, in conformity with accounting principles generally accepted
      in the United States of America.








/s/
            Epstein,
              Weber & Conover, PLCScottsdale,
                ArizonaDecember
                18, 2006




39
 *Table
            of Contents*




**YP
      CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**September
                30,****Assets**
            
            **2006**
            
            **2005**Cash
                and equivalents
            
            $
            7,210,560
            
            $
            6,114,311Restricted
                cash
            
            
            -
            
            
            500,000Certificates
                of deposit and other investments
            
            
            2,266,268
            
            
            2,004,987Accounts
                receivable, net
            
            
            6,741,781
            
            
            5,338,533Prepaid
                expenses and other current assets
            
            
            259,069
            
            
            602,103Deferred
                tax asset
            
            
            1,781,736
            
            
            381,887Total
                current assets
            
            
            18,259,414
            
            
            14,941,821Accounts
                receivable, long term portion, net
            
            
            1,140,179
            
            
            873,299Property
                and equipment, net
            
            
            178,883
            
            
            396,862Deposits
                and other assets
            
            
            91,360
            
            
            62,029Intangible
                assets, net
            
            
            5,722,604
            
            
            6,108,823Deferred
                tax asset, long term
            
            
            1,334,787
            
            
            1,250,082Total
                assets
            
            $
            26,727,227
            
            $
            23,632,916**Liabilities
                and Stockholders' Equity**Accounts
                payable
            
            $
            773,653
            
            $
            655,527Accrued
                liabilities
            
            
            3,315,439
            
            
            803,268Income
                taxes payable
            
            
            261,762
            
            
            108,855Total
                current liabilities
            
            
            4,350,854
            
            
            1,567,650Series
                E convertible preferred stock, $.001 par value, 200,000 shares authorized,
                127,840 issued and outstanding, liquidation preference
                $38,202
            
            
            10,866
            
            
            10,866Common
                stock, $.001 par value, 100,000,000 shares authorized, 50,021,594
                and
                48,837,694 issued and outstanding
            
            
            50,022
            
            
            48,838Treasury
                stock
            
            
            (2,407,158
            )
            
            (2,171,740
            )Paid
                in capital
            
            
            12,249,166
            
            
            11,044,400Deferred
                stock compensation
            
            
            (2,854,122
            )
            
            (3,247,535
            )Retained
                earnings
            
            
            15,327,599
            
            
            16,380,437Total
                stockholders' equity
            
            
            22,376,373
            
            
            22,065,266Total
                liabilities and stockholders' equity
            
            $
            26,727,227
            
            $
            23,632,916


See
      accompanying notes to consolidated financial statements.





40
 *Table
            of Contents*





**YPCORP.
      AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**





**Year
                ended September 30,****2006**
            
            **2005**
            
            **2004**Net
                revenues
            
            $
            36,881,164
            
            $
            25,204,858
            
            $
            57,168,105Cost
                of services
            
            
            8,069,239
            
            
            3,980,619
            
            
            24,757,880Gross
                profit
            
            
            28,811,925
            
            
            21,224,239
            
            
            32,410,225Operating
                expenses:General
                and administrative expenses
            
            
            13,800,456
            
            
            13,030,614
            
            
            12,686,336Sales
                and marketing expenses
            
            
            11,452,465
            
            
            5,310,237
            
            
            7,327,550Depreciation
                and amortization
            
            
            1,434,554
            
            
            1,569,999
            
            
            930,393Total
                operating expenses
            
            
            26,687,475
            
            
            19,910,850
            
            
            20,944,279Operating
                income
            
            
            2,124,450
            
            
            1,313,389
            
            
            11,465,946Other
                income (expense):Interest
                expense and other financing costs
            
            
            -
            
            
            (8,610
            )
            
            (19,123
            )Interest
                income
            
            
            224,176
            
            
            242,965
            
            
            327,145Loss
                on attorneys general settlement
            
            
            (3,525,000
            )
            
            -
            
            
            -Other
                income (expense)
            
            
            (186,325
            )
            
            (550,409
            )
            
            788,175Total
                other income (expense)
            
            
            (3,487,149
            )
            
            (316,054
            )
            
            1,096,197Income
                (loss) before income taxes and cumulative effect of accounting
                change
            
            
            (1,362,699
            )
            
            997,335
            
            
            12,562,143Income
                tax benefit (provision)
            
            
            311,779
            
            
            (372,037
            )
            
            (4,377,213
            )Cumulative
                effect of accounting change (net of income taxes of $53,764 in
                2005)
            
            
            -
            
            
            99,848
            
            
            -Net
                income (loss)
            
            $
            (1,050,920
            )
            $
            725,146
            
            $
            8,184,930Net
                income (loss) per common share:Basic:Income
                (loss) applicable to common stock before cumulative effect of accounting
                change
            
            $
            (0.02
            )
            $
            0.01
            
            $
            0.17Cumulative
                effect of accounting change
            
            $
            -
            
            $
            0.00
            
            $
            -Net
                income applicable to common stock
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17Diluted:Income
                (loss) applicable to common stock before cumulative effect of accounting
                change
            
            $
            (0.02
            )
            $
            0.01
            
            $
            0.17Cumulative
                effect of accounting change
            
            $
            -
            
            $
            0.00
            
            $
            -Net
                income (loss) applicable to common stock
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17Weighted
                average common shares outstanding:Basic
            
            
            44,958,683
            
            
            46,390,356
            
            
            47,375,927Diluted
            
            
            44,958,683
            
            
            46,659,918
            
            
            48,075,699




Certain
      amounts may not total due to rounding of individual components.


See
      accompanying notes to consolidated financial statements.





41
 *Table
            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**




**Common
                Stock**
            
            **Preferred
                Stock**
            
            **Treasury**
            
            **Paid-In**
            
            **Deferred**
            
            **Retained****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Stock**
            
            **Capital**
            
            **Compensation**
            
            **Earnings**
            
            **Total**Balance,
                September 30, 2003
            
            
            49,348,287
            
            $
            49,349
            
            
            131,840
            
            $
            11,206
            
            $
            (216,422
            )
            $
            9,359,865
            
            $
            (3,840,843
            )
            $
            10,346,160
            
            $
            15,709,315Common
                stock issued for services
            
            
            1,010,000
            
            
            1,010
            
            
            
            
            
            
            
            
            
            
            
            1,540,430
            
            
            (1,541,440
            )
            
            
            
            
            -Series
                E preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,957
            )
            
            (1,957
            )Common
                stock issued in restricted stock plan
            
            
            515,000
            
            
            515
            
            
            
            
            
            
            
            
            
            
            
            1,520,636
            
            
            (1,521,151
            )
            
            
            
            
            -Amortization
                of deferred stock compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,160,620
            
            
            
            
            
            1,160,620Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            8,184,930
            
            
            8,184,930Preferred
                shares converted to common
            
            
            3,500
            
            
            3
            
            
            (3,500
            )
            
            (297
            )
            
            
            
            
            1,869
            
            
            
            
            
            
            
            
            1,575Common
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,427,640
            )
            
            (1,427,640
            )Treasury
                stock retired
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            216,422
            
            
            (216,422
            )
            
            
            
            
            
            
            
            -Canceled
                stock
            
            
            (18,000
            )
            
            (18
            )
            
            
            
            
            
            
            
            
            
            
            (54,432
            )
            
            
            
            
            
            
            
            (54,450
            )Balance,
                September 30, 2004
            
            
            50,858,787
            
            $
            50,859
            
            
            128,340
            
            $
            10,909
            
            $
            -
            
            $
            12,151,946
            
            $
            (5,742,814
            )
            $
            17,101,493
            
            $
            23,572,393Common
                stock issued for services
            
            
            100,000
            
            
            100
            
            
            
            
            
            
            
            
            
            
            
            119,400
            
            
            
            
            
            
            
            
            119,500Treasury
                stock received as partial settlement of amounts due from
                affiliates
            
            
            (1,889,566
            )
            
            (1,889
            )
            
            
            
            
            
            
            
            (1,606,131
            )
            
            1,889
            
            
            
            
            
            
            
            
            (1,606,131
            )Treasury
                stock acquited as part of stock repurchase program
            
            
            (601,250
            )
            
            (601
            )
            
            
            
            
            
            
            
            (565,609
            )
            
            601
            
            
            
            
            
            
            
            
            (565,609
            )Series
                E preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,439
            )
            
            (1,439
            )Conversion
                of Series E preferred stock
            
            
            500
            
            
            
            
            
            (500
            )
            
            (43
            )
            
            
            
            
            267
            
            
            
            
            
            
            
            
            224Common
                stock issued in restricted stock plan
            
            
            885,723
            
            
            886
            
            
            
            
            
            
            
            
            
            
            
            529,490
            
            
            (530,376
            )
            
            
            
            
            -Amortization
                of deferred stock compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,419,557
            
            
            
            
            
            1,419,557Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            725,146
            
            
            725,146Common
                stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,444,763
            )
            
            (1,444,763
            )Cumulative
                effect of accounting change
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,166,426
            )
            
            1,012,814
            
            
            
            
            
            (153,612
            )Effect
                of change in estimated forteiture rate for restricted stock
                plan
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (593,284
            )
            
            593,284
            
            
            
            
            
            -Canceled
                stock
            
            
            (516,500
            )
            
            (517
            )
            
            
            
            
            
            
            
            
            
            
            517
            
            
            
            
            
            
            
            
            (0
            )Balance,
                September 30, 2005
            
            
            48,837,694
            
            $
            48,838
            
            
            127,840
            
            $
            10,866
            
            $
            (2,171,740
            )
            $
            11,044,400
            
            $
            (3,247,535
            )
            $
            16,380,437
            
            $
            22,065,266Treasury
                stock acquired as part of stock repurchase program
            
            
            (252,600
            )
            
            (253
            )
            
            
            
            
            
            
            
            (134,418
            )
            
            253
            
            
            
            
            
            
            
            
            (134,418
            )Treasury
                stock acquired in connection with URL purchase
            
            
            (100,000
            )
            
            (100
            )
            
            
            
            
            
            
            
            (101,000
            )
            
            100
            
            
            
            
            
            
            
            
            (101,000
            )Series
              E preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,918
            )
            
            (1,918
            )Common
                stock issued in restricted stock plan
            
            
            2,396,500
            
            
            2,397
            
            
            
            
            
            
            
            
            
            
            
            1,288,021
            
            
            (1,290,418
            )
            
            
            
            
            -Amortization
                of deferred stock compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,599,363
            
            
            
            
            
            1,599,363Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,050,920
            )
            
            (1,050,920
            )Effect
                of change in estimated forfeiture rate for restricted stock
                plan
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            (84,468
            )
            
            84,468
            
            
            
            
            
            -Canceled
                stock
            
            
            (860,000
            )
            
            (860
            )
            
            
            
            
            
            
            
            
            
            
            860
            
            
            
            
            
            
            
            
            -Balance,
                September 30, 2006
            
            
            50,021,594
            
            $
            50,022
            
            
            127,840
            
            $
            10,866
            
            $
            (2,407,158
            )
            $
            12,249,166
            
            $
            (2,854,122
            )
            $
            15,327,599
            
            $
            22,376,373




See
      accompanying notes to consolidated financial statements.





42
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**




**Year
                ended September 30,****2006**
            
            **2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            (1,050,920
            )
            $
            725,146
            
            $
            8,184,930Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            1,434,554
            
            
            1,569,999
            
            
            930,392Amortization
                of deferred stock compensation
            
            
            1,599,363
            
            
            1,419,557
            
            
            1,160,620Issuance
                of common stock as compensation for services
            
            
            -
            
            
            119,500
            
            
            -Non-cash
                interest income on advances to affiliates
            
            
            -
            
            
            (110,019
            )
            
            -Non-cash
                loss on transaction with affiliates
            
            
            -
            
            
            281,884
            
            
            -Cumulative
                effect of accounting change
            
            
            -
            
            
            (99,848
            )
            
            -Non-cash
                income recognized on return of common stock related to legal settlements
            
            
            -
            
            
            -
            
            
            (54,450
            )Deferred
                income taxes
            
            
            (1,484,554
            )
            
            (507,259
            )
            
            1,673,829(Gain)
                loss on disposal of equipment
            
            
            (3,221
            )
            
            -
            
            
            3,992Provision
                for uncollectible accounts
            
            
            348,789
            
            
            442,775
            
            
            285,070Changes
                in assets and liabilities:Restricted
                cash
            
            
            500,000
            
            
            (500,000
            )
            
            -Accounts
                receivable
            
            
            (2,018,917
            )
            
            3,783,010
            
            
            (2,270,558
            )Prepaid
                and other current assets
            
            
            343,034
            
            
            (1,365,853
            )
            
            (668,643
            )Deposits
                and other assets
            
            
            (29,331
            )
            
            177,031
            
            
            (90,750
            )Accounts
                payable
            
            
            118,126
            
            
            (554,838
            )
            
            781,941Accrued
                liabilities
            
            
            2,510,253
            
            
            260,786
            
            
            (870,764
            )Income
                taxes payable
            
            
            (152,807
            )
            
            1,348,290
            
            
            (3,928,748
            )Advances
                to affiliates
            
            
            -
            
            
            -
            
            
            (318,658
            )Net
                cash provided by operating activities
            
            
            2,420,083
            
            
            6,990,161
            
            
            4,818,203CASH
                FLOWS FROM INVESTING ACTIVITIES:Advances
                made to affiliates and related parties
            
            
            -
            
            
            -
            
            
            (3,050,000
            )Repayments
                of advances made to affiliates and related parties
            
            
            -
            
            
            -
            
            
            1,600,000Investments
                in certificates of deposit and other investments
            
            
            (261,281
            )
            
            (2,004,987
            )
            
            -Expenditures
                for intangible assets
            
            
            (801,416
            )
            
            (391,077
            )
            
            (391,442
            )Proceeds
                from sale of equipment
            
            
            -
            
            
            -
            
            
            34,320Purchases
                of equipment
            
            
            (25,719
            )
            
            (44,728
            )
            
            (385,378
            )Net
                cash used in investing activities
            
            
            (1,088,416
            )
            
            (2,440,792
            )
            
            (2,192,500
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Series
                E preferred stock dividends
            
            
            -
            
            
            (1,439
            )
            
            (1,957
            )Common
                stock dividends
            
            
            -
            
            
            (1,444,763
            )
            
            (1,427,640
            )Proceeds
                from conversion of preferred stock
            
            
            -
            
            
            224
            
            
            1,575Purchase
                of treasury stock
            
            
            (235,418
            )
            
            (565,609
            )
            
            -Net
                cash used in financing activities
            
            
            (235,418
            )
            
            (2,011,587
            )
            
            (1,428,022
            )INCREASE
                IN CASH AND CASH EQUIVALENTS
            
            
            1,096,249
            
            
            2,537,782
            
            
            1,197,681CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            6,114,311
            
            
            3,576,529
            
            
            2,378,848CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            7,210,560
            
            $
            6,114,311
            
            $
            3,576,529





See
      accompanying notes to consolidated financial statements.





43
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1.
            ORGANIZATION
                AND BASIS OF PRESENTATION





YP
      Corp.
      (the “Company”), formally YP.Net, Inc. and RIGL Corporation, had previously
      attempted to develop software solutions for medical practice billing and
      administration. The Company had made acquisitions of companies performing
      medical practice billing services as test sites for its software and as business
      opportunities. The Company was not successful in implementing its medical
      practice billing and administration software products and looked to other
      business opportunities. The Company acquired Telco Billing, Inc. in June 1999,
      through the issuance of 17,000,000 shares of the Company’s common stock. Prior
      to its acquisition of Telco, the Company had not generated significant or
      sufficient revenue from planned operations.





Telco
      was
      formed in April 1998, to provide advertising and directory listings for
      businesses on its Internet website in a “Yellow Pages” format. Telco provides
      those services to its subscribers for a monthly fee. These services are provided
      primarily to businesses throughout the United States. Telco became a wholly
      owned subsidiary of YP Corp. after the June 1999 acquisition.





At
      the
      time that the transaction was agreed to, the Company had 12,567,770 common
      shares issued and outstanding. As a result of the merger transaction with Telco,
      there were 29,567,770 common shares outstanding, and the former Telco
      stockholders held approximately 57% of the Company’s voting stock. For financial
      accounting purposes, the acquisition was a reverse acquisition of the Company
      by
      Telco, under the purchase method of accounting, and was treated as a
      recapitalization with Telco as the acquirer. Consistent with reverse acquisition
      accounting, (i) all of Telco’s assets, liabilities, and accumulated deficit were
      reflected at their combined historical cost (as the accounting acquirer) and
      (ii) the preexisting outstanding shares of the Company (the accounting acquiree)
      were reflected at their net asset value as if issued on June 16, 1999.





The
      accompanying financial statements represent the consolidated financial position
      and results of operations of the Company and include the accounts and results
      of
      operations of the Company, Telco and Telco of Canada, Inc, the Company’s wholly
      owned subsidiaries, for the years ended September 30, 2006, 2005, and 2004.
      All
      amounts, except share and per share amounts, are rounded to the nearest thousand
      dollars.





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES





Cash
      and Cash Equivalents: This
      includes all short-term highly liquid investments that are readily convertible
      to known amounts of cash and have original maturities of three months or less.
      At times, cash deposits may exceed government insured limits. At September
      30,
      2006 and 2005, cash deposits exceeded those insured limits by $6,699,000 and
      $5,883,000, respectively.





Principles
      of Consolidation: The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries, Telco Billing, Inc and Telco of Canada, Inc. All
      significant intercompany accounts and transactions are eliminated.





Customer
      Acquisition Costs. In
      the
      fourth quarter of fiscal 2006, the Company enacted a change in accounting
      principle to expense customer acquisition costs when incurred. Prior periods
      have been restated to reflect the retroactive application of this change. See
      Note 3.





Property
      and Equipment: Property
      and equipment is stated at cost less accumulated depreciation. Depreciation
      is
      recorded on a straight-line basis over the estimated useful lives of the assets
      ranging from 3 to 5 years. Depreciation expense was $247,000, $374,000, and
      $352,000 for the years ended September 30, 2006, 2005, and 2004,
      respectively.





Revenue
      Recognition :
      The
      Company’s revenue is generated by customer subscriptions of directory and
      advertising services. Revenue is billed and recognized monthly for services
      subscribed in that specific month. The Company utilizes outside billing
      companies to perform billing services through two primary channels:





44
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





·
            direct
                ACH withdrawals; and


·
            inclusion
                on the customer’s local telephone bill provided by their Local Exchange
                Carriers, or LECs.





For
      billings via ACH withdrawals, revenue is recognized when such billings are
      accepted. For billings via LECs, the Company recognizes revenue based on net
      billings accepted by the LECs. Due to the periods of time for which adjustments
      may be reported by the LECs and the billing companies, the Company estimates
      and
      accrues for dilution and fees reported subsequent to year-end for initial
      billings related to services provided for periods within the fiscal year. Such
      dilution and fees are reported in cost of services in the accompanying
      Consolidated Statement of Operations. Customer refunds are recorded as an offset
      to gross revenue.





Revenue
      for billings to certain customers that are billed directly by the Company and
      not through the outside billing companies is recognized based on estimated
      future collections. The Company continuously reviews this estimate for
      reasonableness based on its collection experience.





Income
      Taxes :
      The
      Company provides for income taxes based on the provisions of SFAS No.
      109, *Accounting for Income Taxes,* which,
      among other things, requires that recognition of deferred income taxes be
      measured by the provisions of enacted tax laws in effect at the date of
      financial statements.





Net
      (Loss) / Income Per Share: Net
      income per share is calculated using the weighted average number of shares
      of
      common stock outstanding during the year. The Company has adopted the provisions
      of SFAS No. 128, *Earnings
      Per Share* .





Financial
      Instruments :
      Financial instruments consist primarily of cash, accounts receivable, advances
      to affiliates and obligations under accounts payable, accrued expenses and
      notes
      payable. The carrying amounts of cash, accounts receivable, accounts payable,
      accrued expenses and notes payable approximate fair value because of the short
      maturity of those instruments. The carrying amount of the advances to affiliates
      approximates fair value because the Company charges what it believes are market
      rate interest rates for comparable credit risk instruments. The Company has
      applied certain assumptions in estimating these fair values. The use of
      different assumptions or methodologies may have a material effect on the
      estimates of fair values.





Use
      of
      Estimates :
      The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates.





Significant
      estimates made in connection with the accompanying financial statements include
      the estimate of dilution and fees associated with LEC billings, the estimated
      reserve for doubtful accounts receivable, estimated customer retention period
      used for the amortization of customer acquisition costs, estimated forfeiture
      rates for stock-based compensation, and estimated useful lives for intangible
      assets and property and equipment.





Stock-Based
      Compensation :
      The
      Company from time-to-time grants restricted stock awards to employees and
      executives. Such awards are recorded as an increase to common stock and paid
      in
      capital on the grant date with an offsetting amount of deferred compensation
      in
      stockholders’ equity. This deferred compensation cost is amortized on a
      straight-line basis over the vesting period.





The
      Company accounts for stock awards issued to non-employees in accordance with
      the
      provisions of SFAS 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18 *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling Goods or Services* .
      Under
      SFAS 123 and EITF 96-18, stock awards to non-employees are accounted for at
      fair
      value at their respective measurement date.





45
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Impairment
      of Long-lived Assets :
      The
      Company assesses long-lived assets for impairment in accordance with the
      provisions of SFAS 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets.* SFAS
      144
      requires that the Company assess the value of a long-lived asset whenever there
      is an indication that its carrying amount may not be recoverable. The carrying
      amount of a long lived asset is not recoverable if it exceeds the sum of the
      undiscounted cash flows expected to result from the use and eventual disposition
      of the asset. The amount of impairment loss, if any, is measured as the
      difference between the net book value of the asset and its estimated fair value.
      For purposes of these tests, long-lived assets must be grouped with other assets
      and liabilities for which identifiable cash flows are largely independent of
      the
      cash flows of other assets and liabilities. No long-lived assets were impaired
      during the years ended September 30, 2006, 2005, and 2004.





Recently
      Issued Accounting Pronouncements :





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123R, “Share-Based Payment” (“SFAS 123R”). Under this new standard, companies
      will no longer be able to account for share-based compensation transactions
      using the intrinsic method in accordance with APB 25. Instead, companies will
      be
      required to account for such transactions using a fair-value method and to
      recognize the expense over the service period. This new standard also changes
      the way in which companies account for forfeitures of share-based compensation
      instruments. SFAS 123R became effective for fiscal years beginning after June
      15, 2005 and allowed for several alternative transition methods. In light of
      this new standard, the Company decided
      to change its method of accounting for forfeitures of restricted
      stock , under
      current GAAP rules effective October 1, 2004. See Note
      3. The Company adopted the provisions of SFAS 123R in the first
      quarter of
      fiscal 2006
      on a
      prospective basis and does not have a material effect on its financial condition
      or results of operations.





In
      September of 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”
(SFAS No. 157). SFAS No. 157 establishes a framework for measuring
      fair value under generally accepted accounting procedures and expands
      disclosures on fair value measurements. This statement applies under previously
      established valuation pronouncements and does not require the changing of any
      fair value measurements, though it may cause some valuation procedures to
      change. Under SFAS No. 157, fair value is established by the price that
      would be received to sell the item or the amount to be paid to transfer the
      liability of the asset as opposed to the price to be paid for the asset or
      received to transfer the liability. Further, it defines fair value as a market
      specific valuation as opposed to an entity specific valuation, though the
      statement does recognize that there may be instances when the low amount of
      market activity for a particular item or liability may challenge an entity’s
      ability to establish a market amount. In the instances that the item is
      restricted, this pronouncement states that the owner of the asset or liability
      should take into consideration what affects the restriction would have if viewed
      from the perspective of the buyer or assumer of the liability. This statement
      is
      effective for all assets valued in financial statements for fiscal years
      beginning after November 15, 2007. The Company is currently evaluating the
      impact of SFAS No. 157 to its financial position and result of operations.




In
      September of 2006, the Securities and Exchange Commission released Staff
      Accounting Bulletin No. 108 “Considering the effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” (SAB 108). SAB 108 provides guidance on the consideration of the
      effects of prior year misstatements in quantifying current year misstatements
      for the purpose of a materiality assessment *.* SAB
      108
      suggests that a registrant’s materiality evaluation of an identified unadjusted
      error should quantify the effects of the identified unadjusted error on each
      financial statement and related financial statement disclosure. SAB 108 was
      issued on September 13, 2006. The Company’s adoption of SAB No. 108 is
      not expected to impact its financial position and results of operations.





46
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





3.
            ACCOUNTING
                CHANGES





Change
      in Accounting Principle Subsequent to Adoption of FAS 154 - Accounting for
      Customer Acquisition Costs





Historically,
      the Company has capitalized customer acquisition costs consisting of mailing
      lists and check mailers and amortized them on a straight-line basis over the
      average expected life of the related customers based on historical IAP
      advertiser attrition rates and other factors.




Prior
      to
      fiscal 2006, the majority of the capitalized customer acquisition costs related
      to the Company’s mailing campaigns for which the Company amortized the costs
      based on historical IAP advertiser attrition rates attributable to its entire
      customer base. During fiscal 2006, the Company began increasing its expenditures
      for telemarketing campaigns. The capitalization of such costs requires that
      the
      Company amortize them over the average expected life of acquired customers,
      as
      determined on a cost-pool by cost-pool basis. The Company’s systems do not allow
      us to efficiently and accurately monitor customer lives by method of
      acquisition. Therefore, the Company is unable to determine the average expected
      life of those customers acquired via telemarketing versus those acquired via
      mailing campaigns and cannot assess the value of the future benefits. As it
      cannot effectively evaluate such costs on a cost-pool by cost-pool basis, the
      Company determined in fiscal 2006 that the more preferable method of accounting
      for these costs is to expense them when incurred. The Company enacted this
      change in accounting principle during the fourth quarter of fiscal 2006 and,
      in
      accordance with FAS 154, it has restated all periods presented to reflect this
      new method of accounting for such costs.




The
      following tables set forth the impact of such a change on the Company’s
      financial statements:





47
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Income
                Statement**
            
            **Year
                Ended September 30, 2006**As
                computed prior
              to
                change
            
            As
                reported after
              change
            
            Effect
                of changeSales
                and marketing expense
            
            $
            8,959,000
            
            $
            11,452,000
            
            $
            2,493,000Income
                tax expense (benefit)
            
            $
            620,000
            
            $
            (312,000
            )
            $
            (932,000
            )Net
                income (loss)
            
            $
            511,000
            
            $
            (1,051,000
            )
            $
            (1,562,000
            )Net
              income (loss) per common share:Basic
            
            $
            0.01
            
            $
            (0.02
            )
            $
            (0.03
            )Diluted
            
            $
            0.01
            
            $
            (0.02
            )
            $
            (0.03
            )





**Year
                Ended September 30, 2005**As
                Originally
              Reported
            
            As
                Adjusted
            
            Effect
                of changeSales
                and marketing expense
            
            $
            7,455,000
            
            $
            5,310,000
            
            $
            (2,145,000
            )Income
                tax expense (benefit)
            
            $
            (429,000
            )
            $
            372,000
            
            $
            801,000Net
                income (loss)
            
            $
            (618,000
            )
            $
            725,000
            
            $
            1,343,000Net
              income (loss) per common share:Basic
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.03Diluted
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.03





**Year
                Ended September 30, 2004**As
                Originally
              Reported
            
            As
                Adjusted
            
            Effect
                of changeSales
                and marketing expense
            
            $
            6,089,000
            
            $
            7,328,000
            
            $
            1,239,000Income
                tax expense (benefit)
            
            $
            4,840,000
            
            $
            4,377,000
            
            $
            (463,000
            )Net
                income (loss)
            
            $
            8,961,000
            
            $
            8,185,000
            
            $
            (776,000
            )Net
              income (loss) per share:Basic
            
            $
            0.19
            
            $
            0.17
            
            $
            0.02Diluted
            
            $
            0.19
            
            $
            0.17
            
            $
            0.02





**Balance
                Sheet**
            
            **September
                30, 2006**As
                computed prior
              to
                change
            
            As
                reported after
              change
            
            Effect
                of changeCustomer
                acquisition costs, net
            
            $
            4,831,000
            
            $
            -
            
            $
            (4,831,000
            )Deferred
                tax asset (liability), long term
            
            $
            (470,000
            )
            $
            1,335,000
            
            $
            1,805,000Retained
                earnings
            
            $
            18,354,000
            
            $
            15,328,000
            
            $
            (3,026,000
            )Total
                stockholders' equity
            
            $
            25,402,000
            
            $
            22,376,000
            
            $
            (3,026,000
            )




48
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**September
                30, 2005**As
                Originally
              Reported
            
            As
                Adjusted
            
            Effect
                of changeCustomer
                acquisition costs, net
            
            $
            2,338,000
            
            $
            -
            
            $
            (2,338,000
            )Deferred
                tax asset (liability), long term
            
            $
            377,000
            
            $
            1,250,000
            
            $
            873,000Retained
                earnings
            
            $
            17,845,000
            
            $
            16,380,000
            
            $
            (1,464,000
            )Total
                stockholders' equity
            
            $
            23,530,000
            
            $
            22,065,000
            
            $
            (1,464,000
            )$
            -
            
            $
            -
            
            $
            -





**Statement
                of Cash Flows**
            
            **Year
                Ended September 30, 2006**As
                computed prior
              to
                change
            
            As
                reported after
              change
            
            Effect
                of changeNet
                income (loss)
            
            $
            511,000
            
            $
            (1,051,000
            )
            $
            (1,562,000
            )Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Deferred
                income taxes
            
            $
            (86,000
            )
            $
            (1,018,000
            )
            $
            (932,000
            )Changes
                in assets and liabilities:Customer
                acquisition costs
            
            $
            (2,493,000
            )
            $
            -
            
            $
            2,493,000Net
                cash provided by operating activities
            
            $
            2,420,000
            
            $
            2,420,000
            
            $
            -





**Year
                Ended September 30, 2005**As
                Originally
              Reported
            
            As
                Adjusted
            
            Effect
                of changeNet
                income (loss)
            
            $
            (618,000
            )
            $
            725,000
            
            $
            1,343,000Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activitiesDeferred
                income taxes
            
            $
            (1,308,000
            )
            $
            (507,000
            )
            $
            801,000Changes
                in assets and liabilities:Customer
                acquisition costs
            
            $
            2,145,000
            
            $
            -
            
            $
            (2,145,000
            )Net
                cash provided by operating activities
            
            $
            6,990,000
            
            $
            6,990,000
            
            $
            -





**Year
                Ended September 30, 2004**As
                Originally
              Reported
            
            As
                Adjusted
            
            Effect
                of changeNet
                income (loss)
            
            $
            8,961,000
            
            $
            8,185,000
            
            $
            (776,000
            )Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Deferred
                income taxes
            
            $
            2,137,000
            
            $
            1,674,000
            
            $
            (463,000
            )Changes
                in assets and liabilities:Customer
                acquisition costs
            
            $
            (1,239,000
            )
            $
            -
            
            $
            1,239,000Net
                cash provided by operating activities
            
            $
            4,818,000
            
            $
            4,818,000
            
            $
            -





Change
      in Accounting Principle Prior to Adoption of FAS 154 - Accounting for
      Forfeitures of Restricted Stock





Effective
      October 1, 2004, the Company changed its method of accounting for forfeitures
      of
      restricted stock granted to employees, executives and consultants. Prior to
      this
      date, the Company recognized forfeitures as they occurred. Upon occurrence,
      the
      Company reversed the previously recognized expense associated with such grant.
      Effective October 1, 2004, the Company changed to an expense recognition method
      that is based on an estimate of the number of shares for which the service
      is
      expected to be rendered. The Company believes that this is a preferable method
      as it provides less volatility in expense recognition.





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      impact of this change for periods prior to October 1, 2004 was an increase
      to
      income of $100,000 (less than $0.01 per share), net of taxes of $54,000, and
      has
      been reflected as a cumulative effect of a change in accounting principle in
      the
      Company’s consolidated statement of operations for the year ended September 30,
      2005. Because stock grants are now recorded net of estimated forfeitures, the
      cumulative effect of this change also reduced Additional Paid in Capital and
      Deferred Compensation by $1,013,000 and $1,166,000, respectively, at October
      1,
      2004. The effect of the change was to increase net income by $108,000 (net
      of
      income taxes of $64,000) for the year ended September 30, 2005.





The
      estimated pro forma effects of the accounting change on the Company’s results of
      operations for the year ended September 30, 2004 is as follows:





**Year
                Ended September 30, 2004**As
                reported:Net
                income
            
            $
            8,185,000Basic
                net income per share
            
            $
            0.17Diluted
                net income per share
            
            $
            0.17Pro
                forma amounts reflecting the accounting change applied
                retroactively:Net
                income
            
            $
            8,301,000Basic
                net income per share
            
            $
            0.18Diluted
                net income per share
            
            $
            0.17Weighted
                average common shares outstanding:Basic
            
            
            47,375,927Diluted
            
            
            48,075,699




4.
            BALANCE
                SHEET INFORMATION





Balance
      sheet information is as follows:





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**September
                30,****2006**
            
            **2005**Receivables,
                current, netAccounts
                receivable, current
            
            $
            11,027,000
            
            $
            6,451,000Less:
                Allowance for doubtful accounts
            
            
            (4,285,000
            )
            
            (1,112,000
            )$
            6,742,000
            
            $
            5,339,000Receivables,
                long term, netAccounts
                receivable, long term
            
            $
            1,374,000
            
            $
            982,000Less:
                Allowance for doubtful accounts
            
            
            (234,000
            )
            
            (109,000
            )$
            1,140,000
            
            $
            873,000Total
                receivables, netGross
                receivables
            
            $
            12,401,000
            
            $
            7,433,000Gross
                allowance for doubtful accounts
            
            
            (4,519,000
            )
            
            (1,221,000
            )$
            7,882,000
            
            $
            6,212,000Components
                of allowance for doubtful accounts are as follows:Allowance
                for dilution and fees on amounts due from billing
                aggregators
            
            $
            2,288,000
            
            $
            923,000Allowance
                for customer refunds
            
            
            2,231,000
            
            
            298,000$
            4,519,000
            
            $
            1,221,000Property
                and equipment, netLeasehold
                improvements
            
            $
            448,000
            
            $
            439,000Furnishings
                and fixtures
            
            
            296,000
            
            
            295,000Office,
                computer equipment and other
            
            
            1,055,000
            
            
            1,040,0001,799,000
            
            
            1,774,000Less:
                Accumulated depreciation
            
            
            (1,620,000
            )
            
            (1,377,000
            )$
            179,000
            
            $
            397,000Intangible
                assets, netDomain
                name
            
            $
            5,709,000
            
            $
            5,510,000Non-compete
                agreement
            
            
            3,465,000
            
            
            3,465,000Website
                development
            
            
            1,009,000
            
            
            781,000Software
                licenses
            
            
            428,000
            
            
            53,00010,611,000
            
            
            9,809,000Less:
                Accumulated amortization of intangible
            
            
            (4,888,000
            )
            
            (3,700,000
            )$
            5,723,000
            
            $
            6,109,000Accrued
                liabilitiesLitigation
                accrual
            
            $
            2,958,000
            
            $
            382,000Deferred
                revenue
            
            
            188,000
            
            
            291,000Accrued
                expenses - other
            
            
            169,000
            
            
            130,000$
            3,315,000
            
            $
            803,000




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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





5.
            ACCOUNTS
                RECEIVABLE





The
      Company provides billing information to third party billing companies for the
      majority of its monthly billings. Two billing channels account for the majority
      of the Company’s accounts receivable. Billings submitted are “filtered” by these
      billing companies and the LECs. Net accepted billings are recognized as revenue
      and accounts receivable. The billing companies remit payments to the Company
      on
      the basis of cash ultimately received from the LECs by those billing companies.
      The billing companies and LECs charge fees for their services, which are netted
      against the gross accounts receivable balance. The billing companies also apply
      holdbacks to the remittances for potentially uncollectible accounts. These
      amounts will vary due to numerous factors and the Company may not be certain
      as
      to the actual amounts on any specific billing submittal until several months
      after that submittal. The Company estimates the amount of these charges and
      holdbacks based on historical experience and subsequent information received
      from the billing companies. The Company also estimates uncollectible account
      balances and provides an allowance for such estimates. The billing companies
      retain certain holdbacks that may not be collected by the Company for a period
      extending beyond one year. These balances have been classified as long-term
      assets in the accompanying balance sheet.





The
      Company experiences significant dilution of its gross billings by the billing
      companies. The Company negotiates collections with the billing companies on
      the
      basis of the contracted terms and historical experience. The Company’s cash flow
      may be affected by holdbacks, fees, and other matters, which are determined
      by
      the LECs and the billing companies.





The
      handling and processing of cash receipts pertaining to trade accounts receivable
      is maintained primarily by three third-party billing companies. The gross
      receivable due from such billing services providers represented 27%, 27% and
      27%, respectively, of the Company’s total gross accounts receivable at September
      30, 2006.




Subscription
      receivables that are directly billed by the Company are valued and reported
      at
      the estimated future collection amount. Determining the expected collections
      requires an estimation of both uncollectible accounts and refunds. The net
      direct-billed subscriptions receivable at September 30, 2006 and 2005,
      respectively, were $260,000 and $372,000.





Certain
      receivables have been classified as long-term because issues arise whereby
      the
      billing companies change holdback terms and collection experience is such that
      collection can extend beyond one year. The breakdown of current and long-term
      receivables and their respective allowances is in Note 4 above.





6.
            INTANGIBLE
                ASSETS





The
      Company’s intangible assets consist of licenses for the use of Internet domain
      names or Universal Resource Locators, or URLs, capitalized website development
      costs, and other information technology licenses. All such licenses are
      capitalized at their original cost and amortized over their estimated useful
      lives.





In
      connection with the Company’s acquisition of Telco, the Company was required to
      provide an accelerated payment of license fees for the use of the URL
      Yellow-page.net. The URL is recorded at its cost of $5,000,000, net of
      accumulated amortization. The URL is amortized on an accelerated basis over
      the
      twenty-year term of the licensing agreement. Amortization expense on the URL
      was
      $238,000, $285,000, and $317,000 for the years ended September 30, 2006, 2005,
      and 2004, respectively.





In
      July
      2003, the Company entered into a licensing agreement with a vendor to license
      the use of the URL www.yp.com in
      exchange for cash and restricted shares of the Company’s common stock. Under the
      terms of this agreement, the licensor had the option of transferring the rights
      to the URL and the restricted shares to the Company in exchange for $300,000.
      In
      July 2006, the licensor exercised this option, and transferred ownership of
      the
      URL and the restricted shares to the Company. As this option was deemed to
      be a
      purchase commitment, no liability was reflected in the Company’s financial
      statements prior to the exercise of the option. The Company capitalized the
      URL
      at its net acquisition price, computed as the $300,000 cash payment less the
      fair market value of the shares acquired (determined based on the stock price
      on
      the date of reacquisition) and will amortize this asset on a straight-line
      basis
      over its estimated useful life.





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      following summarizes the estimated future amortization expense related to
      intangible assets:





Years
                ended September 30,2007
            
            $
            1,266,0002008
            
            
            1,185,0002009
            
            
            1,063,0002010
            
            
            590,0002011
            
            
            186,000Thereafter
            
            
            1,433,000Total
            
            $
            5,723,000





7.
            STOCKHOLDERS’
                EQUITY





Common
      Stock Issued for Services





The
      Company historically has granted shares of its common stock to officers,
      directors and consultants as payment for services rendered. The value of those
      shares was determined based on the trading value of the stock at the dates
      on
      which the agreements were made for the services. During the year ended September
      30, 2006, there were no shares granted to officers directors and consultants
      other than grants of restricted stock as described in Note 13. During the year
      ended September 30, 2005, the Company issued 100,000 shares to a consulting
      firm
      valued at $119,500. During the year ended September 30, 2004, the Company issued
      1,010,000 shares of common stock to officers and directors, or entities
      controlled by those individuals, valued at $1,541,000.





Common
      Shares Received and Retired Under Legal Settlements





During
      the year ended September 30, 2004, the Company settled litigation with a former
      officer which involved, among other things, the return of 18,000 shares of
      the
      Company’s common stock. This transaction resulted in a net gain of $54,000
      included in other income in the accompanying consolidated statement of
      operations. These shares were canceled when received.





Common
      Stock Repurchased from Vendor





The
      Company recorded these shares as treasury stock based on their fair market
      value
      at the date of acquisition.





Series
      E Convertible Preferred Stock





During
      the year ended September 30, 2002, pursuant to an existing tender offer, holders
      of 131,840 shares of the Company’s common stock exchanged said shares for an
      equal number of the Series E Convertible Preferred shares, at the then $0.085
      market value of the common stock. The shares carry a $0.30 per share liquidation
      preference and accrue dividends at the rate of 5% per annum on the liquidation
      preference per share, payable quarterly from legally available funds. If such
      funds are not available, dividends shall continue to accumulate until they
      can
      be paid from legally available funds. Holders of the preferred shares are
      entitled, after two years from issuance, to convert them into common shares
      on a
      one-to-one basis together with payment of $0.45 per converted share.





Treasury
      Stock





The
      Company’s treasury stock consists of shares repurchased on the open market or
      shares received through various agreements with third parties. The value of
      such
      shares is determined based on cash paid or quoted market prices. During fiscal
      2004, all then-outstanding treasury shares, valued at $216,000 were retired.
      On
      April 1, 2005, the Company acquired 1,889,566 shares valued at $1,606,000 as
      partial settlement of amounts due from affiliates as described in Note 11.
      On
      May 18, 2005, the Company’s Board of Directors authorized a plan to repurchase
      up to $3,000,000 of common stock from time to time on the open market or in
      privately negotiated transactions. In fiscal 2006 the Company acquired 252,600
      shares for $134,000 and in fiscal 2005, the Company acquired 601,250 shares
      for
      $566,000 under this plan. In July 2006, the Company acquired 100,000 shares
      valued at $101,000 in connection with an option agreement as described in Note
      6.





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Dividends





During
      the years ended September 30, 2006 and 2005, the Company paid dividends of
      $0
      and $1,445,000, respectively, to holders of common stock, including restricted
      stock, and $1,900 and $1,400, respectively, to holders of Series E preferred
      stock. Dividends paid on unvested shares of common stock are charged to
      compensation expense. The amount of dividends charged to compensation expense
      in
      fiscal 2006 and 2005 were $0 and $76,000, respectively.





8.
            NET
                INCOME PER SHARE





Net
      income per share is calculated using the weighted average number of shares
      of
      common stock outstanding during the year. Preferred stock dividends are
      subtracted from net income to determine the amount available to common
      stockholders.





The
      following table presents the computation of basic and diluted loss per share
      from continuing operations:





**Year
                Ended**
              **September
                30, 2006**
            
            **Year
                Ended**
              **September
                30, 2005**
            
            **Year
                Ended**
              **September
                30, 2004**Income
                (loss) before cumulative effect of accounting change
            
            $
            (1,051,000
            )
            $
            625,000
            
            $
            8,185,000Less:
                preferred stock dividends
            
            
            (2,000
            )
            
            (1,000
            )
            
            (2,000
            )Income
                (loss) applicable to common stock before cumulative effect of accounting
                change
            
            
            (1,053,000
            )
            
            624,000
            
            
            8,183,000Cumulative
                effect of accounting change
            
            
            -
            
            
            100,000
            
            
            -Net
                income (loss) applicable to common stock
            
            $
            (1,053,000
            )
            $
            724,000
            
            $
            8,183,000Basic
                weighted average common shares outstanding:
            
            
            44,958,683
            
            
            46,390,356
            
            
            47,375,927Add
                incremental shares for:Unvested
                restricted stock
            
            
            -
            
            
            186,470
            
            
            510,745Series
                E convertible preferred stock
            
            
            -
            
            
            73,577
            
            
            104,032Outstanding
                warrants
            
            
            -
            
            
            9,515
            
            
            84,995Diluted
                weighted average common shares outstanding:
            
            
            44,958,683
            
            
            46,659,918
            
            
            48,075,699Net
                income (loss) per share:Basic:Income
                (loss) applicable to common stock before cumulative effect of accounting
                change
            
            $
            (0.02
            )
            $
            0.01
            
            $
            0.17Cumulative
                effect of accounting change
            
            $
            -
            
            $
            0.00
            
            $
            -Net
                income (loss) applicable to common stock
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17Diluted:Income
                (loss) applicable to common stock before cumulative effect of accounting
                change
            
            $
            (0.02
            )
            $
            0.01
            
            $
            0.17Cumulative
                effect of accounting change
            
            $
            -
            
            $
            0.00
            
            $
            -Net
                income (loss) applicable to common stock
            
            $
            (0.02
            )
            $
            0.02
            
            $
            0.17




Note:
      Certain amounts may not total due to rounding of individual
      components





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      following potentially dilutive securities were excluded from the calculation
      of
      net income (loss) per share because the effects are antidilutive:





**September
                30,****2006**
            
            **2005**
            
            **2004**Warrants
                to purchase shares of common stock
            
            
            -
            
            
            437,500
            
            
            -Series
                E convertible preferred stock
            
            
            127,840
            
            
            -
            
            
            -Shares
                of non-vested restricted stock
            
            
            3,718,575
            
            
            1,614,035
            
            
            -4,346,415
            
            
            1,614,035
            
            
            -





9.
            COMMITMENTS
                AND CONTINGENCIES





The
      Company leases its office space and certain equipment under long-term operating
      leases expiring through fiscal year 2008. Rent expense under these leases was
      $341,000, $365,000, and $370,000 for the years ended September 30, 2006, 2005
      and 2004, respectively.





At
      September 30, 2006, future minimum annual lease payments under operating lease
      agreements for fiscal years ended September 30 are as follows:





Fiscal
                2007
            
            $
            296,000Fiscal
                2008
            
            
            160,000Fiscal
                2009
            
            
            117,000Fiscal
                2010
            
            
            117,000Fiscal
                2011
            
            
            88,000Thereafter
            
            
            -$
            778,000





Termination
      and Employment Agreements with Related Parties




See
      Note
      11.




Litigation





The
      Company is party to certain legal proceedings incidental to the conduct of
      its
      business. Management believes that the outcome of pending legal proceedings
      will
      not, either individually or in the aggregate, have a material adverse effect
      on
      its business, financial position, and results of operations, cash flows or
      liquidity.





During
      the second quarter of fiscal 2006, the Company settled outstanding
      litigation with a former vendor, resulting in a cash payment of $490,000. As
      $328,000 of the settlement was previously accrued, there was $162,000 of expense
      incurred in the year ended September 30, 2006 associated with this settlement.
      In connection with this payment, the Company is no longer required to
      maintain our bond that was previously reflected as restricted cash in the
      accompanying balance sheet included elsewhere in this Annual Report.
      Accordingly, the bond has been released and this amount has been reclassified
      from restricted cash to cash in the balance sheet as of September 30,
      2006.





The
      Company has received numerous inquiries from the Attorney General offices of
      several states investigating its promotional activities, specifically, the
      use
      of its check mailer for customer activation. On December 14, 2006, the Company
      voluntarily entered into a settlement with thirty-four states’ attorneys general
      to address their inquiries and bring finality to the process. The Company has
      voluntarily agreed to the following:





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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





·
            The
                Company will pay a settlement fee of $2,000,000 to the state consortium,
                which they may distribute among
                themselves;


·
            The
                Company will discontinue the use of activation checks as a promotional
                incentive;


·
            The
                Company will suspend billing of any active customer that was acquired
                in
                connection with the use of an activation check until a letter is
                mailed
                notifying the customer of their legal rights to cancel the service
                and
                providing them a 60-day opportunity to receive a refund equivalent
                to the
                customer’s last two payments; and


·
            The
                Company will not employ any collection efforts with respect to past-due
                accounts of customers that were secured through the use of an activation
                check, nor will it represent its ability to do
                so.




The
        Company has recorded a charge of $3,525,000 in other income and expense in
        the
        accompanying consolidated statement of operations for fiscal 2006, consisting
        of
        a settlement accrual of $2,000,000, a reserve for refunds to existing customers
        covered by the 60 day opportunity mentioned above and other related costs
        of $1,250,000 and legal fees of $275,000. Management has analyzed the number
        of
        customers eligible and applied probabilities to estimate additional $1,250,000
        in refunds and costs. Customers have through February 2007 to apply these
        refunds. Actual refunds may differ from these estimates.


Other
      Contractual Commitments





During
      the second quarter of fiscal 2006, the Company entered into a contractual
      arrangement with an attorney to settle previous claims and to engage the future
      services of this attorney. Under the terms of the arrangement, the Company
      made
      cash payments during the year totaling $145,000 and granted 100,000 shares
      of
      restricted stock. Under the terms of the agreement, the Company is obligated
      to
      make future payments over the next two years totaling $339,750 in exchange
      for
      future services. Future amounts payable under this agreement have not been
      accrued in the accompanying financial statements as such payments are for future
      services.





During
      the third quarter of fiscal 2006, we entered into a contractual arrangement
      with
      a consulting firm to provide strategic and operational related consulting
      services. Under the terms of the agreement, we are obligated to make future
      payments through July 2009 that vary based on the Company’s billed customer
      count subject to a minimum of $20,000 per month. Current payments are
      approximately $100,000 per month. Future amounts payable under this agreement
      have not been accrued in the accompanying financial statements as such payments
      are for future services.





10.
            PROVISION
                FOR 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 amounts used for income tax purposes.




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      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Income
      taxes for years ended September 30, is summarized as follows:





**2006**
            
            **2005**
            
            **2004**Current
                provision
            
            $
            1,173,000
            
            $
            880,000
            
            $
            3,682,000Deferred
                (benefit) provision
            
            
            (1,485,000
            )
            
            (508,000
            )
            
            695,000Net
                income tax (benefit) provision
            
            $
            (312,000
            )
            $
            372,000
            
            $
            4,377,000





A
      reconciliation of the differences between the effective and statutory income
      tax
      rates for years ended September 30, is as follows:





**2006**
            
            **2005**
            
            **2004****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**Federal
                statutory rates
            
            $
            (463,000
            )
            
            34
            %
            $
            339,000
            
            
            34
            %
            $
            4,271,000
            
            
            34
            %State
                income taxes
            
            
            (46,000
            )
            
            3
            %
            
            34,000
            
            
            3
            %
            
            301,000
            
            
            2
            %Write
                off of deferred tax asset related to vested restricted
                stock
            
            
            217,000
            
            
            (16
            %)Other
            
            
            (20,000
            )
            
            1
            %
            
            (1,000
            )
            
            (0
            )%
            
            (195,000
            )
            
            (2
            )%Effective
                rate
            
            $
            (312,000
            )
            
            22
            %
            $
            372,000
            
            
            37
            %
            $
            4,377,000
            
            
            35
            %





At
      September 30, deferred income tax assets and liabilities were comprised
      of:





**2006**
            
            **2005**Deferred
                income tax assets:Book
                to tax differences in accounts receivable
            
            $
            1,315,000
            
            $
            286,000Book
                to tax differences in accrued expenses
            
            
            467,000
            
            
            119,000Book
                to tax differences for stock based compensation
            
            
            1,280,000
            
            
            1,235,000Book
                to tax differences in intangible assets
            
            
            122,000
            
            
            118,000Total
                deferred income tax asset
            
            
            3,184,000
            
            
            1,758,000Deferred
                income tax liabilities:Book
                to tax differences in depreciation
            
            
            67,000
            
            
            126,000Book
                to tax differences in prepaid assets
            
            
            -
            
            
            -Book
                to tax differences in customer acquisition costs
            
            
            -Total
                deferred income tax liability
            
            
            67,000
            
            
            126,000Net
                deferred income tax asset (liability)
            
            $
            3,117,000
            
            $
            1,632,000


57
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            of Contents*


**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





11.
            RELATED
                PARTY TRANSACTIONS





Changes
      in Officers and Directors





Prior
      to
      fiscal 2004, the Company entered into Executive Consulting Agreements with
      four
      entities, each of which was controlled by one of the Company’s four former
      executive officers. These agreements called for fees to be paid for the services
      provided by these individuals as officers of the Company, as well as their
      respective staffs. During fiscal 2004, the Company terminated the Executive
      Consulting Agreements with the entities controlled by its former CEO, former
      Executive Vice President of Marketing, and former CFO. In fiscal 2005, the
      Company terminated the remaining Executive Consulting Agreement with the entity
      controlled by a former Executive Vice President. These
      termination agreements provided for cash payments totaling $2,145,000 in
      exchange for consulting services and non-compete agreements. Approximately
      $1,643,000 of
      the
      settlement payments described above has been allocated to non-compete
      agreements. The values attributed to the non-compete agreements are being
      amortized on a straight line basis over the six-year life of the non-compete
      agreements .
      The
      remaining $502,000 was allocated to the consulting service portion of the
      termination agreements, which were originally expected to be rendered over
      a
      two-year period, In the fourth quarter of fiscal 2005, however, the Company
      concluded all matters with respect to these parties, made all remaining payments
      owed under the termination agreements, and expensed the remaining unamortized
      amount of $212,000 attributed to the consulting services. All
      amounts related to these agreements were paid by September 30,
      2005.





During
      the fourth quarter of fiscal 2005, the Company entered into a separation
      agreement with its Chief Operating Officer. Under the agreement, the Company
      made a cash payment of $80,000. No further amounts are owed under this
      agreement.





On
      November 3, 2005, the Company entered into a Separation Agreement with its
      Chief
      Executive Officer. Under the terms of the agreement, the Company made a cash
      payment of $337,500 in the second quarter of fiscal 2006. The agreement also
      provides for the continued vesting of 700,000 shares of the Chief Executive
      Officers’ restricted stock awards that were granted in fiscal 2004 and 2005.





At
      a
      meeting of the Board of Directors of the Company, held on January 8, 2006,
      John
      T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each
      resigned from the Board of Directors of the Company and the respective
      committees of the Board of Directors on which they were serving. Subsequent
      to
      the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse
      were
      elected to the Board of Directors of the Company. In addition, Daniel L. Coury,
      Sr., a current member of the Board of Directors, was elected Chairman of the
      Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit
      Committee of the Board of Directors.





On
      January 19, 2006, the Company entered into a Separation Agreement & General
      Release with its Chief Financial Officer. Under the terms of the agreement,
      the
      Company made a cash payment of approximately $95,000 in the second quarter
      of
      fiscal 2006. The agreement also provides for the continued vesting of the Chief
      Financial Officers’ restricted stock awards (totaling 150,000 shares) that were
      granted in fiscal 2004 and 2005.





On
      August
      12, 2006, the Company elected Benjamin Milk and Richard Butler as new
      independent members of the Company’s Board of Directors. Mr. Milk is a past
      Executive Director of the SEC and will sit on the Nominating and Corporate
      Governance Committee. Mr. Butler is a past president of two California financial
      institutions and will serve as Chairman of the Company’s Compensation Committee.





Effective
      September 19, 2006, the Company appointed Mr. Coury to serve as its permanent
      Chief Executive Officer and President, subject to the terms of his employment
      agreement. Mr. Coury will remain a member of the Company’s Board of Directors;
      however, he has resigned his position as Chairman of the Board. Joseph
      Cunningham, the Chairman of the Company’s Audit Committee, will also assume the
      title of Chairman of the Board.





On
      September 19, 2006, the Company entered into an employment agreement with Daniel
      L. Coury, Sr., which calls for Mr. Coury to serve as the Chief Executive Officer
      and President of the Company. Mr. Coury has acted as interim Chief Executive
      Officer since January 25, 2006. As permanent Chief Executive Officer and
      President, Mr. Coury will receive a salary of $420,000, plus 10% annual salary
      increases, beginning with the Company’s fiscal year ending September 30, 2008;
      an annual bonus of $150,000, provided the Company obtains certain performance
      measures as established by the Company’s Board of Directors; a one time bonus of
      $150,000 if and when the common stock of the Company is listed on a national
      exchange; and a grant of 1,000,000 shares of restricted stock of the Company
      (“Restricted Shares”), which vest upon the earlier to occur of three years or a
“change of control” (as defined in the Company’s 2003 Stock Plan); provided,
      however, that Mr. Coury is obligated to return 1/3 of the Restricted Shares
      at
      the end of each fiscal year unless certain performance targets are reached
      for
      that fiscal year.





58
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Additionally,
      in the event that Mr. Coury terminates his employment for “good reason” or the
      Company terminates his employment other than for “Cause” or on account of his
      death or “disability,” as each of those terms is defined in the employment
      agreement, Mr. Coury will receive 12 months of continuing salary, and all
      restricted stock granted to the employee prior to the employment agreement
      and
      the portion of the Restricted Shares that remain unvested and for which the
      annual risk of forfeiture has lapsed due to annual performance targets being
      achieved will be immediately accelerated.





On
      September 19, 2006, the Company also amended the employment agreements of Gary
      Perschbacher, the Company’s Chief Financial Officer, and John Raven, the
      Company’s Chief Operating Officer. Mr. Perschbacher’s amended employment
      agreement provides for an extension of the term until September 20, 2009; 10%
      annual salary increases, beginning with the Company’s fiscal year ending
      September 30, 2008; and a grant of 100,000 shares of restricted stock of the
      Company pursuant to the Company’s 2003 Stock Plan. Mr. Raven’s amended
      employment agreement provides for an extension of the term until September
      20,
      2009; an annual salary of $220,000, plus 10% annual salary increases, beginning
      with the Company’s fiscal year ending September 30, 2008; a $25,000 cash bonus
      upon execution of the employment agreement; and a grant of 25,000 shares of
      restricted stock of the Company pursuant to the Company’s 2003 Stock Plan.





On
      September 19, 2006, the Company also granted to Joseph Cunningham, a member
      of
      the Company’s Board of Directors, 100,000 shares of restricted stock of the
      Company in connection with his appointment to serve as Chairman of the Board
      of
      Directors and Chairman of the Company’s Audit Committee. Mr. Cunningham will
      receive an aggregate of $6,000 per month in lieu of all other director
      compensation for his service as Chairman of the Board and Chairman of the Audit
      Committee.





12.
            CONCENTRATION
                OF CREDIT RISK





The
      Company maintains cash balances at banks in Arizona and Nevada. Accounts are
      insured by the Federal Deposit Insurance Corporation up to $100,000. At
      September 30, 2006 and 2005, the Company had bank balances exceeding those
      insured limits of $6,699,000 and $5,883,000, respectively.





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk are primarily trade accounts receivable. The trade accounts receivable
      are
      due primarily from business customers over widespread geographical locations
      within the LEC billing areas across the United States. The Company historically
      has experienced significant dilution and customer credits due to billing
      difficulties and uncollectible trade accounts receivable. The Company estimates
      and provides an allowance for uncollectible accounts receivable. The handling
      and processing of cash receipts pertaining to trade accounts receivable is
      maintained primarily by three third-party billing companies. The Company is
      dependent upon these billing companies for collection of its accounts
      receivable. The
      gross
      receivable due from such billing services providers represented 27%, 27% and
      27%, respectively, of the Company’s total gross accounts receivable at September
      30, 2006.




13.
            STOCK
                BASED COMPENSATION





During
      the year ended September 30, 2003, the Company’s board of directors and a
      majority of it stockholders voted to terminate the Company’s 2002 Employees,
      Officers & Directors Stock Option Plan and approved the Company’s 2003 Stock
      Plan. The 3,000,000 shares of Company common stock previously allocated to
      the
      2002 Plan were re-allocated to the 2003 Plan. During the year ended September
      30, 2004, an additional 2,000,000 shares were authorized by the board of
      directors and approved by the Company’s stockholders to be issued under the 2003
      Plan. All Company personnel and contractors are eligible to participate in
      the
      plan.





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**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


As
        of
        September 30, 2006, 4,879,750 shares authorized under the 2003 Plan were
        granted
        and remain outstanding, of which 999,750 have vested and 3,879,750 are in
        the
        form of restricted stock. These shares of restricted stock were granted to
        the
        Company’s service providers, executives and directors. Of the 3,879,750,
        2,923,750 shares vest on a cliff basis 3 years from the date of grant, 537,500
        vest on a cliff basis 5 years from the date of grant, and 419,000 vest on
        a
        cliff basis 10 years from the date of grant. Certain market performance criteria
        may accelerate the vesting of a portion of these awards if the stock price
        exceeds $5 per share. As of September 30, 2006, total unrecognized compensation
        cost related to nonvested awards was $2,854,122. The weighted average period
        over which such compensation cost is to be recognized is 3.2
        years.




The
      vesting of substantially all shares of restricted stock accelerates upon a
      change of control, as defined in the 2003 Plan. Compensation expense is
      determined at the date of grant, is equal to the stock price at the date of
      grant, and is deferred and recognized on a straight-line basis over the vesting
      period. The weighted-average grant-date fair value of the shares outstanding
      is
      $1.34 per share.





During
      the year ended September 30, 2004, the Company issued an additional 1,000,000
      shares of restricted common stock outside of the 2003 Plan to an officer of
      the
      Company valued at $1,540,000. At September 30, 2006, 600,000 of these shares
      remain outstanding. During the year ended September 30, 2004, the Company issued
      10,000 shares to an employee valued at $1,000 that were not subject to any
      vesting provisions.





During
      the years ended September 30, 2006, 2005, and 2004, the Company recognized
      compensation expense of $1,599,000, $1,420,000, and $1,161,000, respectively,
      under the 2003 Plan and other restricted stock issuances.





At
      September 30, 2006, there were no options exercisable or outstanding. No options
      were granted in the years ended September 30, 2006, 2005 and 2004.





The
      Company has issued warrants in connection with certain debt and equity
      transactions. Warrants outstanding are summarized as follows:





**2006**
            
            **2005**
            
            **2004****Number
                of**
              **Warrants**
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            **Number
                of**
              **Warrants**
            
            **Weighted
                Average**
              **Exercise
                Price**
            
            **Number
                of**
              **Warrants**
            
            **Weighted
                Average**
              **Exercise
                Price**Warrants
                outstanding at beginning of year
            
            
            500,000
            
            $
            2.12
            
            
            500,000
            
            $
            2.12
            
            
            500,000
            
            $
            2.12Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            (500,000
            )
            
            2.12
            
            
            -
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Warrants
                outstanding at September 30,
            
            
            -
            
            $
            -
            
            
            500,000
            
            $
            2.12
            
            
            500,000
            
            $
            2.12




The
      warrants were granted in the year ended September 30, 2001 in connection with
      the settlement with the former URL holder (See Note 6). The exercise prices
      of
      the warrants range from $1.00 to $3.00. The fair value of these options at
      the
      date of grant was negligible, estimated using the Black-Scholes option-pricing
      model. The 500,000 warrants outstanding at September 30, 2005, expire in
      September 2006.





14.
            EMPLOYEE
                BENEFIT PLAN





The
      Company maintains a 401(k) profit sharing plan for its employees and service
      providers who are eligible to participate in the plan upon reaching age 21
      and
      completion of three months of service. The Company made contributions of $8,000,
      $7,000, and $7,000 to the plan for the years ended September 30, 2006, 2005,
      and
      2005, respectively.





15.
            OTHER
                INCOME (EXPENSE)





In
      addition to interest income and interest expense, other income (expense)
      includes the following items:




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**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Year
        ended September 30, 2006


a.
            A
                loss of $3,525,000 consisting of a settlement accrual of $2,000,000,
                a
                reserve for refunds of $1,250,000 and legal fees of $275,000 related
                to
                the attorneys general settlement described in Note 9;
                and




b.
            A
                loss of $162,000 consisting of an additional accrual for the settlement
                of
                a matter with a former public relations
                vendor;




Year
      ended September 30, 2005




·
            A
                loss of $282,000 from the Transfer and Repayment Agreement as described
                above in Note 11 above. This amount is equal to the difference between
                the
                carrying value of Advances to Affiliates and the value of the
                consideration received;




·
            A
                loss of $328,000 from an arbitration judgment involving disputed
                fees
                associated with a former public relations firm described in Note
                9 above;
                and




·
            The
                elimination of $287,000 in other income in fiscal 2005 as the result
                of a
                termination agreement with Simple.Net, Inc. See Note 11 above for
                further
                discussion.





Year
      ended September 30, 2004





·
            Other
                income of $287,000 from an agreement with Simple.Net, Inc. for technical
                services provided to an affiliate;





·
            $54,000
                from the receipt of stock in accordance with the settlement of a
                dispute;
                and





·
            $600,000
                relating to the reversal of previously accrued compensation cost
                for
                former executives, for which payment is no longer expected, offset
                by
                other miscellaneous amounts.





16.
            SELECTED
                QUARTERLY FINANCIAL DATA
                (UNAUDITED)




Quarterly
      financial information for 2006 and 2005 follows:





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**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Quarter
                Ended****December
                31,**
              **2005**
            
            **March
                31,**
              **2006**
            
            **June
                30,**
              **2006**
            
            **September
                30,**
              **2006**Net
                revenues
            
            $
            7,626,776
            
            $
            8,999,196
            
            $
            10,172,705
            
            $
            10,082,487Gross
                profit
            
            
            6,510,430
            
            
            7,410,732
            
            
            7,843,120
            
            
            7,047,642Net
                income (loss)
            
            
            (327,092
            )
            
            129,998
            
            
            826,847
            
            
            (1,680,673
            )Earnings
                (loss) per share information:Basic
                income (loss) per share
            
            $
            (0.01
            )
            $
            0.00
            
            $
            0.02
            
            $
            (0.04
            )Diluted
                income (loss) per share
            
            $
            (0.01
            )
            $
            0.00
            
            $
            0.02
            
            $
            (0.04
            )





**Quarter
                Ended****December
                31,**
              **2004**
            
            **March
                30,**
              **2005**
            
            **June
                30,**
              **2005**
            
            **September
                30,**
              **2005**Net
                revenues
            
            $
            6,190,155
            
            $
            6,444,609
            
            $
            6,517,158
            
            $
            6,052,936Gross
                profit
            
            
            5,055,571
            
            
            5,583,676
            
            
            5,591,353
            
            
            4,993,639Net
                income (loss) before cumulativeeffect
                of accounting change
            
            
            560,703
            
            
            627,135
            
            
            (175,887
            )
            
            (386,653
            )Net
                income (loss)
            
            
            660,551
            
            
            627,135
            
            
            (175,887
            )
            
            (386,653
            )Earnings
                (loss) per share information:Basic
                before cumulative effectof
                accounting change
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.00
            )
            $
            (0.01
            )Diluted
                before cumulative effectof
                accounting change
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.00
            )
            $
            (0.01
            )Basic
                income (loss) per share
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.00
            )
            $
            (0.01
            )Diluted
                income (loss) per share
            
            $
            0.01
            
            $
            0.01
            
            $
            (0.00
            )
            $
            (0.01
            )





17.
            SUBSEQUENT
                EVENTS





On
      December 14, 2006, the Company settled an outstanding matter with a consortium
      of attorneys general. See Note 9.





62
 *Table
            of Contents*





**ITEM
      9. Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosures**





Not
      applicable.





**ITEM9A.
      Controls and Procedures**





Disclosure
      controls and procedures are designed with an objective of ensuring that
      information required to be disclosed in our periodic reports filed with the
      Securities and Exchange Commission, such as this Annual Report on Form 10-K,
      is
      recorded, processed, summarized, and reported within the time periods specified
      by the Securities and Exchange Commission. Disclosure controls also are designed
      with an objective of ensuring that such information is accumulated and
      communicated to our management, including our chief executive officer and chief
      financial officer, in order to allow timely consideration regarding required
      disclosures.





The
      evaluation of our disclosure controls by our chief executive officer and chief
      financial officer included a review of the controls’ objectives and design, the
      operation of the controls, and the effect of the controls on the information
      presented in this Annual Report. Our management, including our chief executive
      officer and chief financial officer, does not expect that disclosure controls
      can or will prevent or detect all errors and all fraud, if any. A control
      system, no matter how well designed and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Also,
      projections of any evaluation of the disclosure controls and procedures to
      future periods are subject to the risk that the disclosure controls and
      procedures may become inadequate because of changes in conditions, or that
      the
      degree of compliance with the policies or procedures may
      deteriorate.





Based
      on
      their review and evaluation as of the end of the period covered by this Form
      10-K, and subject to the inherent limitations all as described above, our
      principal executive officer and principal financial officer have concluded
      that
      our disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934) are effective as of the
      end
      of the period covered by this report. They are not aware of any significant
      changes in our disclosure controls or in other factors that could significantly
      affect these controls subsequent to the date of their evaluation, including
      any
      corrective actions with regard to significant deficiencies and material
      weaknesses. During the period covered by this Form 10-K, there have not been
      any
      changes in our internal control over financial reporting that have materially
      affected, or that are reasonably likely to materially affect, our internal
      control over financial reporting.





**ITEM
      9B. Other Information**





On
      November 30, 2006, YP Corp. awarded its Chief Executive Officer, Daniel L.
      Coury, Sr., a cash bonus in the amount of $150,000 as a reward for his
      performance in fiscal 2006, pursuant to his Employment Agreement.





On
      December 15, 2006, YP Corp. awarded its Chief Operating Officer, John Raven,
      a
      cash bonus in the amount of $5,000 as a reward for his performance in fiscal
      2006.





**PART
      III**





Certain
      information required by Part III is omitted from this Annual Report on Form
      10-K
      because we will file our definitive Proxy Statement for our 2007 Annual Meeting
      of Shareholders to be filed pursuant to Regulation 14A of the Exchange Act
      (the
“2007 Proxy Statement”) not later than 120 days after the end of the fiscal year
      covered by this Annual Report. Certain information included in the 2007 Proxy
      Statement is incorporated herein by reference.





**ITEM
      10. Directors and Executive Officers**





The
      information required by this Item relating to our executive officers and
      directors and the disclosure required by Item 405 of Regulation S-K concerning
      Section 16(a) Beneficial Ownership Reporting Compliance will be set forth under
      the captions “Election of Directors,” and “Section 16(a) Beneficial Ownership
      Reporting Compliance” in our 2007 Proxy Statement.





The
      Company has adopted a Code of Ethics that applies to its officers, directors
      and
      employees.





63
 *Table
            of Contents*





**ITEM11.
      Executive Compensation**





Information
      regarding director and executive compensation will be set forth under the
      captions “Election of Directors” and “Executive Officers and Compensation” in
      our 2007 Proxy Statement.





**ITEM
                12.**
            **Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**





Information
      regarding security ownership of certain beneficial owners and management will
      be
      set forth under the captions “Security Ownership of Principal Stockholders and
      Management” and “Equity Compensation Plan Information,” respectively, in our
      2007 Proxy Statement.





**ITEM13.
      Certain Relationships and Related
      Transactions**





Information
      regarding certain relationships and related transactions of management will
      be
      set forth under the caption “Certain Relationships and Related Transactions” in
      the 2007 Proxy Statement.





**ITEM14.
      Principal Accountant Fees and
      Services**





Information
      regarding this item will be set forth under the caption “Principal Accountant
      Fees and Services” in the 2007 Proxy Statement.





**PART
      IV**





**ITEM
      15. Exhibits and Financial Statement
      Schedules**





(1)
            Financial
                Statements are listed on the Index to Consolidated Financial Statements
                on
                page 40 of this Annual Report.


(2)
            There
                are no financial statement schedules required to be filed with this
                Annual
                Report.


(3)
            The
                following exhibits are filed with or incorporated by reference into
                this
                Annual Report.





64
 *Table
            of Contents*





Exhibit
              Number
            Description
            
            Previously
                Filed as Exhibit
            
            File
              Number
            Date
              Previously
              Filed3.1
            Amended
                and Restated Articles of Incorporation
            
            Attached
                hereto3.2
            Amended
                and Restated Bylaws
            
            Attached
                hereto10.1
            YP
                Corp. Amended and Restated 2003 Stock Plan
            
            Exhibit
                10 to the Registrant’s Quarterly Report on Form 10-QSB for the fiscal
                quarter ended December 31, 2003
            
            000-24217
            2/11/0410.2
            Form
                of 2003 Stock Plan Restricted Stock Agreement
            
            Exhibit
                10 to the Registrant’s Quarterly Report on Form 10-QSB for the fiscal
                quarter ending March 31, 2005
            
            000-24217
            5/16/0510.3
            Standard
                Industrial/Commercial Multi-Tenant Lease for Mesa facility, dated
                June 1,
                1998, between the Registrant and Art Grandlich, d/b/a McKellips Corporate
                Square
            
            Exhibit
                10.5 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                ended September 30, 1999
            
            000-24217
            9/19/0010.4
            Amendment
                No. 1 to Standard Industrial/Commercial Multi-Tenant Lease for Mesa
                facility, dated August 17, 1998, between the Registrant and Arthur
                Grandlich, d/b/a McKellips Corporate Square
            
            Attached
                hereto10.4.1
            Amendment
                No. 2 to Standard Industrial/Commercial Multi-Tenant Lease for Mesa
                facility, dated January 7, 2003, between the Registrant and Arthur
                Grandlich, d/b/a McKellips Corporate Square
            
            Exhibit
                10.14 to Amendment No. 2 to the Registrant’s Annual Report on Form
                10-KSB/A for the fiscal year ended September 30, 2002
            
            000-24217
            7/8/0310.4.2
            Amendment
                No. 3 to Standard Industrial/Commercial Multi-Tenant Lease for Mesa
                facility, dated March 23, 2006, between the Registrant and J3 Harmon,
                LLC, successor in interest to The Estate of Arthur
                Grandlich
            
            Attached
                hereto10.4.3
            Amendment
                No. 4 to Standard Industrial/Commercial Multi-Tenant Lease for Mesa
                facility, dated April 12, 2006, between the Registrant and J3 Harmon,
                LLC, successor in interest to The Estate of Arthur
                Grandlich
            
            Attached
                hereto10.5
            Standard
                Industrial Lease for Nevada facility, dated September 3, 2003, between
                the
                Registrant and Tomorrow 33 Convention, LP
            
            Exhibit
                10.4 to the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                ended September 30, 2003
            
            000-24217
            12/31/0310.6
            Amendment
                No. 1 to Standard Industrial Lease for Nevada facility, dated October
                4,
                2006, between the Registrant and Tomorrow 33 Convention,
                LP
            
            Attached
                hereto10.7
            Loan
                and Security Agreement, dated April 13, 2004, between the Registrant
                andMerrill
                Lynch Business Financial Services, Inc.
            
            Exhibit
                10.1 to Amendment No. 1 to the Registrant’s Quarterly Report on Form
                10-QSB for the fiscal quarter ended June 30, 2004
            
            000-24217
            12/29/0410.8
            Separation
                Agreement, dated January 19, 2006, between the Registrant and Chris
                Broquist
            
            Exhibit
                10.1 to the Registrant’s Current Report on Form 8-K
            
            000-24217
            1/25/0610.9
            Employment
                Agreement, dated September 19, 2006, between the Registrant and Daniel
                L.
                Coury
            
            Attached
                hereto10.10
            Employment
                Agreement, dated September 19, 2006, between the Registrant and Gary
                Perschbacher
            
            Attached
                hereto10.11
            Wholesale
                Fulfillment Agreement, dated March 1, 2005, between Registrant and
                Fulfillment House and Company
            
            Exhibit
                10.1 to the Registrant’s Current Report on Form 8-K
            
            000-2417
            5/4/0610.12
            Separation
                Agreement, dated November 3, 2005, between the Registrant and Peter
                J.
                Bergmann
            
            Exhibit
                10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal
                quarter ending December 31, 2005
            
            000-24217
            2/14/06





65
 *Table
            of Contents*




10.13
              Employment
                  Agreement, dated February 6, 2006, between the Registrant and John
                  Raven
              
              Exhibit
                  10.1 to the Registrant’s Current Report on Form 8-K
              
              000-24217
              2/21/0610.13.1
              First
                  Amendment to Employment Agreement, dated September 19, 2006, between
                  the
                  Registrant and John Raven
              
              Attached
                  hereto10.14
              Exclusive
                  Domain Name Licensing Agreement, dated July 8, 2003, between the
                  Registrant and Onramp Access, Inc.
              
              Exhibit
                  10.1 to the Registrant’s Current Report on Form 8-K
              
              000-24217
              7/22/0310.15
              Stock
                  Repurchase and Domain Name Transfer Agreement, dated July 21, 2006,
                  between Registrant and Onramp Access, Inc.
              
              Attached
                  hereto10.16
              Processing
                  Agreement, dated August 26, 2003, between the Registrant and Integrated
                  Payment Systems Inc., d/b/a First Data
              
              Exhibit
                  10.2 to the Registrant’s Current Report on Form 8-K
              
              000-24217
              10/24/0310.17
              Master
                  Services Agreement, dated August 1, 2002, between the Registrant
                  and
                  eBillit, Inc.
              
              Exhibit
                  10.24 to Amendment No. 1 to the Registrant’s Quarterly Report on Form
                  10-QSB/A for the fiscal quarter ended March 31, 2003
              
              000-24217
              7/8/0310.18
              Billings
                  and Related Services Agreement, dated September 1, 2001, between
                  the
                  Registrant and ACI Communications, Inc.
              
              Exhibit
                  10.33 to Amendment No. 2 to the Registrant’s Annual Report on Form
                  10-KSB/A for the fiscal year ended September 30, 2002
              
              000-24217
              7/8/0314
              Code
                  of Business Conduct and Ethics, Adopted December 31, 2003
              
              Exhibit
                  14 to the Registrant’s Quarterly Report on Form 10-QSB for the period
                  ended March 31, 2004
              
              000-24217
              5/13/0418
              Preferability
                Letter
              
              Attached
                hereto21
              Company
                  Subsidiaries
              
              Exhibit
                  21 to Registrant’s Annual Report on Form 10-K for the period ending
                  September 30, 2005
              
              000-24217
              12/19/0523
              Consent
                  of Epstein, Weber and Conover P.L.C
              
              Attached
                  hereto31
              Certification
                  pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002
              
              Attached
                  hereto32
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
              
              Attached
                  hereto





66
 *Table
            of Contents*





SIGNATURES





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





Dated:
                December 28, 2006
            
            */s/****Daniel
                L. Coury, Sr.*Daniel
                L. Coury, Sr.Chief
                Executive Officer






BOARD
                    OF DIRECTORS**Signature**
                
                **Title**
                
                **Date***/s/
                    Daniel L. Coury, Sr.*
                
                Chief
                    Executive Officer*(Principal
                    Executive Officer)*
                
                December
                    28, 2006Daniel
                    L. Coury, Sr.*/s/
                    Gary L. Perschbacher*
                
                Chief
                    Financial Officer*(Principal
                    Financial Officer and Principal Accounting Officer)*
                
                December
                    28, 2006Gary
                    L. Perschbacher*/s/
                    Joseph F. Cunningham, Jr.*
                
                Chairman
                    of the Board
                
                December
                    28, 2006Joseph
                    F. Cunningham, Jr.*/s/
                    Richard D. Butler.*
                
                Director
                
                December
                    28, 2006Richard
                    D. Butler*/s/
                    Elisabeth DeMarse*
                
                Director
                
                December
                    28, 2006Elisabeth
                    DeMarse*/s/
                    Benjamin Milk.*
                
                Director
                
                December
                    28, 2006Benjamin
                    Milk






67