WASHINGTON,
      D.C. 20549





FORM
      10-KSB/A


(Amendment
      No. 3)





(Mark
      one)


x  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      fiscal year ended September 30, 2003





o  TRANSITION
      REPORT UNDER SECTION 13 OR 15 (d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      Transition period from ________ to ____________





Commission
      File Number: 0-24217





YP
      CORP.


(Name
      of
      Small Business Issuer 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)





(480)
      654-9646


(Issuer’s
      telephone number)





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)





YP.NET,
      INC.


(Former
      Name)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o .





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB o .





Registrant’s
      revenues for its most recent fiscal year were $30,767,444.




The
      aggregate market value of the common stock held by non-affiliates computed
      based
      on the closing price of such stock on December 26, 2003 was approximately
      $29,600,000.





The
      number of shares outstanding of the registrant’s classes of common stock, as of
      December 26, 2003 was 48,560,802.





Transitional
      Small Business Disclosure Format: Yes o No x





DOCUMENTS
      INCORPORATED BY REFERENCE: None.
















**EXPLANATORY
      NOTE**




This
      Amendment on Form 10-KSB/A (this “Amendment”) amends the Annual Report on Form
      10-KSB for the year ended September 30, 2003, as originally filed by YP Corp.
      on
      December 31, 2003 (the “Original Filing”), and as amended by Amendment No. 1 on
      Form 10-KSB/A filed on January 30, 2004, and further amended by Amendment No.
      2
      on Form 10-KSB/A filed on September 23, 2004, solely for the purpose of revising
      Part II, Items 6, 7 and 8A to amend and restate the disclosure with
      respect to our accounting for shares issued to, and subsequently recovered
      from,
      certain non-performing consultants during 1999 and 2000. The historical
      financial statements generated by predecessor management reflected an expense
      upon issuance of the shares and a reversal of this expense when it was deemed
      (through a settlement agreement or judgment) that these shares would be
      returned. However, after further analysis and consultation with the Securities
      and Exchange Commission, it was determined to be inappropriate to recognize
      the
      initial expense and its subsequent reversal as no services were rendered by
      these consultants. Instead, the issuance of these shares will be reflected
      as
      temporary equity, together with a related receivable, until the shares were
      returned. The net decrease to cumulative after-tax income of approximately
      $510,000 relates to shares issued in 1999 that were expected to be returned
      but,
      for various reasons, cannot be obtained. Such amounts will continue to be
      reflected as expense in the year granted and our revised statements will no
      longer reflect the reversal of this expense.





In
      addition, in connection with the filing of this Amendment and pursuant to the
      rules of the Securities and Exchange Commission, we are including with this
      Amendment a currently dated consent of our independent public accountants and
      certain currently dated certifications.




Except
      as
      described above, no other changes have been made to the Original Filing. This
      Amendment continues to speak as of the date of the Original Filing, and, except
      a specifically stated herein, we have not updated the disclosures contained
      in
      this Amendment to reflect any events that occurred at a date subsequent to
      the
      filing of the Original Filing. The filing of this Form 10-KSB/A is not a
      representation that any statements contained in items of the Original Filing
      other than that information being amended are true or complete as of any date
      subsequent to the date of the Original Filing. The filing of this Form 10-KSB/A
      shall not be deemed an admission that the Original Filing or the amendments
      made
      thereto, when made, included any untrue statement of a material fact or omitted
      to state a material fact necessary to make a statement not
      misleading.











**TABLE
      OF CONTENTS**





**Item**
            **Page**Part
                II
            1Item
                6.Managements’ Discussion and
                Analysis
            1Item
                7.Financial
                Statements
            24Report of
                Independent Registered Public Accounting
                Firm
            26Consolidated
                Financial Statements:Consolidated
                Balance Sheet at September 30,
                2003
            27Consolidated
                Statements of Operations for the
                Years Ended September 30, 2003 and September 30, 2002
            28Consolidated
                Statements of Stockholder’s Equity for the Years
                Ended September 30, 2003 and September 30, 2002
            29Consolidated
                Statements of Cash Flows for the Years Ended
                September 30, 2003 and September 30, 2002
            31Notes
                to Consolidated Financial Statements
            33Item
                8A.Controls and
                Procedures
            52Part
                III
            53Item
                13.Exhibits
            53Signatures
            53




*Table
          of Contents*




PART
      II





ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS








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, 2003, this “Management’s Discussion and Analysis” should be read
      in conjunction with the Consolidated Financial Statements, including the related
      notes, appearing in Item 7 of this Annual Report.





**Forward-Looking
      Statements**





This
      portion of this Annual Report on Form 10-KSB, 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: (i) our expectation that legal costs relating to the litigation
      involving our CEO will not be significant after December 31, 2003; (ii) our
      projection that capital expenditures will not increase at the same rate in
      the
      future; (iii) our anticipation of the cessation of advances to affiliates and
      the beginning to pay a cash dividend on our common stock in fiscal 2004; (iv)
      our belief that our direct mail marketing costs in fiscal 2004 will be
      consistent with our expenditures in fiscal 2003; and (v) our expectation that
      initial costs incurred in our branding initiative will not immediately result
      in
      financial benefit to the Company.





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 the section below titled “Certain Risk Factors Affecting Our
      Business,” 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.




**Executive
      Overview**





*Business
      Summary*





We
      use a
      business model similar to print Yellow Page publishers. We publish basic
      directory listings, free of charge, exclusively on the Internet. Like Yellow
      Page publishers, we generate virtually all of our revenues from those
      advertisers that desire increased exposure for their businesses by purchasing
      our Internet Advertising Package ’ ,
      or IAP.
      Our basic listings contain the business name, address and phone number for
      almost 18 million U.S. businesses. We strive to maintain a listing for almost
      every business in America in this format.





To
      generate revenues, certain advertisers pay us a monthly fee for our IAP in
      the
      same manner that advertisers pay additional fees to traditional print Yellow
      Page providers for enhanced advertisement font, location or display. The IAP
      includes a Mini-Webpage ’ ,
      map
      directions, a toll-free calling feature, a link to the advertiser’s own webpage
      and, at no additional charge, a priority or preferred placement on our website.
      The users of our website(s) are prospective customers for our
      advertisers.





1
 *Table
            of Contents*





We
      also
      offer other ancillary services and products that currently account for less
      than
      5% of our revenue. These ancillary services and products include website design
      and hosting, and dial-up Internet access.





*Sales
      and Marketing*





We
      employ
      a direct mail marketing program to solicit our IAP advertisers. Currently,
      our
      direct mail marketing program includes a promotional incentive in the form
      of a
      $3.25 activation check that a solicited business simply deposits with its bank
      to activate the service and become an IAP advertiser on a monthly basis. As
      a
      method of third-party verification, the potential IAP advertiser’s bank verifies
      that the depositing party is in fact the solicited business. Upon notice of
      activation by the IAP advertiser’s bank, we contact the business to confirm the
      order. Within 30 days of activation, we also send a confirmation card to the
      business. We offer a cancellation period of 120 days with a full refund. Our
      direct mail marketing program complies with and, in many instances, exceeds
      the
      United States Federal Trade Commission, or “FTC,” requirements as established by
      an agreement between our company and the FTC.





*IAP
      advertisers*





In
      September 2003, we revised the method by which we count our IAP advertisers.
      We
      now differentiate between “paying IAP advertisers” and “activated IAP
      advertisers.” Paying IAP advertisers, as the name implies, are those advertisers
      that are actually currently paying for the IAP service. The terms activated
      IAP
      advertisers or activated advertisers are broader and more inclusive terms.
      They
      include those advertisers that currently are paying for the IAP service, as
      well
      as those advertisers that either have signed-up for the IAP service but have
      not
      yet been billed or have been billed but have not yet remitted to us their fees.





We
      believe that the new methodology is more accurate and can be more consistently
      applied to each period. We also believe that tracking and disclosing the numbers
      of our activated IAP advertisers, in addition to our paying IAP advertisers,
      provides greater clarity into our business by providing an indication or
      forecast of how many activated IAP advertisers may eventually become paying
      IAP
      advertisers. Our average retention rate for paying IAP advertisers is
      approximately 29 months, which, in turn, approaches the average operating life
      expectancy of 36 months for a small business in the U.S., according to the
      U.S.
      Small Business Administration.





*Methods
      of Billing*





We
      bill
      most of our IAP advertisers on their local telephone bill through their Local
      Exchange Carrier, or “LEC.” We are one of only a few independent Internet
      advertisers that are permitted to utilize this unique and cost-efficient method
      of billing. By billing our IAP advertisers on their local telephone bill, we
      believe we are able to realize a greater average rate of collection than direct
      invoice-billing. The amount and frequency of collections on invoice-billed
      IAP
      advertisers historically has been significantly lower than for IAP advertisers
      billed on their monthly telephone bill. Accordingly, our revenues can be
      negatively impacted if the billing method used to bill a IAP advertiser converts
      from monthly telephone bill invoicing to direct invoicing.





We
      are
      not permitted to bill our IAP advertisers through Competitive Local Exchange
      Carriers, or CLECs. Recently, the CLEC’s have been participating in providing
      local telephone services to IAP advertisers at an increasing rate. We have
      begun
      to address this problem and we are implementing data filters to reduce the
      effects of the CLEC’s. We have also sought other billing methods to reduce the
      adverse effects of the CLEC billings, including Automated Clearing House, or
      ACH, which is direct debit from the IAP advertiser’s bank account and credit
      cards. ACH billing now accounts for approximately 12% of our total billings
      and
      has reduced our dependency on LEC billing. We expect this trend to continue
      and
      escalate.





2
 *Table
            of Contents*





*Accounting
      Policies and Procedures*





We
      bill
      our services monthly and recognize revenue for services billed in that month.
      We
      utilize outside billing companies, or billing aggregators, to transmit billing
      data, much of which is forwarded to the LECs for inclusion on the IAP
      advertiser’s monthly local telephone bill. Because we have a 120-day
      cancellation policy on new advertiser sign-ups, we accrue for such refunds
      as a
      liability and net such anticipated refunds against revenue to report a net
      revenue number in our financial statements.





The
      billing aggregators and, subsequently, the LECs filter all billings that we
      submit to them. We
      recognize as revenue and accounts receivable the net billings accepted by the
      LECs. The
      billing aggregators remit payments to us on the basis of cash that the billing
      aggregators ultimately receive from the LECs. The billing aggregators and LECs
      charge fees for their services, which generally are 3% to 7% each on a monthly
      basis. These fees, in turn, are netted against the gross accounts receivable
      balance. The billing aggregators and LECs also apply holdbacks to the
      remittances for potentially uncollectible accounts. These holdbacks and fees
      result in significant dilution to our gross billings and, therefore, may
      significantly affect our cash flow.





Due
      to
      the periods of time for which adjustments may be reported by the LECs and the
      billing aggregators, we estimate and accrue for dilution and fees reported
      subsequent to year-end for initial billings related to services provided for
      periods within the fiscal year. D ilution
      amounts will vary due to numerous factors. Accordingly, we may not be certain
      as
      to the actual amounts of dilution on any specific billing submittal until
      several months after that submittal. We estimate the amount of these fees and
      holdbacks based on historical experience and subsequent information received
      from the billing aggregators. We also estimate uncollectible account balances
      and provide an allowance for such estimates.





We
      process our billings through two primary billing aggregators—PaymentOne, Inc.
      and ACI Communications, Inc. PaymentOne provides the majority of our billings,
      collections, and related services.





With
      respect to our alternative billing methods, we recognize revenue for ACH
      billings when they are accepted. We recognize revenue for direct-invoice
      billings based on estimated future collections on such billings. We continuously
      review these estimates for reasonableness based on our collection
      experience.





Subscription
      receivables that result from direct-invoice billing are valued and reported
      at
      the estimated future collection amount. Determining the expected collections
      requires an estimation of both uncollectible accounts and refunds.





Our
      cost
      of services is comprised, primarily, of variable costs and expenses, including
      the following, which are reported in both cost of services and sales and
      marketing expenses:





·
            allowances
                for bad debt, which are based upon historical experience and reevaluated
                monthly;





·
            billing
                fees, such as the fees charged by our billing aggregators and the
                Local
                Exchange Carriers;





3
 *Table
            of Contents*





·
            billing
                aggregator inquiry fees, which generally are 1% on a monthly basis;





·
            dilution
                resulting from fees and holdbacks due to items such as wrong telephone
                numbers and other indications of
                uncollectibility;





·
            Internet
                expenses, such as dial-up expenses;
                and





·
            direct
                mailer marketing costs and the amortization of such
                costs.





Our
      general and administrative expenses are comprised, primarily, of fixed costs,
      including compensation expenses, which generally equate to 5% to 10% of net
      revenue, as well as other expenses, such as lease payments, telephone,
      professional fees, and office supplies. We recognize revenue for direct-invoice
      billings based on estimated future collections on such billings. We continuously
      review these estimates for reasonableness based on our collection experience.





*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:***





Our
      revenue is generated by customer subscriptions for directory and advertising
      services. Our billing and collection procedures include significant involvement
      of outside parties. We obtain customers through direct mail advertising. 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 the
      information submitted to us and forward the billing records to 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 who in turn remit funds to us. Within this process, there are
      numerous adjustments, charges and holdbacks implemented by the billing
      aggregators and LEC’s.





o
            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. Estimated refunds are reserved and charged to net
                revenue.





Additionally,
      there are customers who may not pay the fee for our services even though we
      believe they are valid subscribers. We review the trend of non-paying customers
      and include a reserve as a charge to revenue for estimated non-paying
      customers.




o
            Unbillable
                records.
                We recognize revenue during the month for which the service is provided
                based on net billings accepted by the billing aggregators. The billing
                aggregators may reject and return billing records to us if there
                is no
                immediate match in their database as a valid “Billing Telephone Number”
                (“BTN”). We analyze the trend of accepted vs. rejected billing records.
                Only accepted records are recognized as revenue. We then analyze
                the
                reasons for a record being rejected and then attempt to correct the
                record
                for resubmittal. Because there may be a period of 30-60 days to obtain
                information from the billing aggregators that identify BTNs, we estimate
                that amount when billed and those billings are excluded from
                revenue.




4
 *Table
          of Contents*


o
            Direct
                bill customers.
                We bill many subscribers directly. 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. Our recent collection
                experience on these billings is approximately 10% to
                12%.





o
            Dilution
                and Related Reserves.
                We reserve for future fees, chargebacks and holdbacks charged by
                the LECs
                and third party billing aggregators that are related. Because there
                may be
                a period of time from when the billings are initiated and fees and
                holdbacks are adjusted and processed by the billing aggregators,
                we
                estimate those fees based on contractual agreements with the billing
                aggregators and historical experience. Fees and expenses charged
                by the
                LECs and billing aggregators are charged to cost of services and
                netted
                against gross accounts receivable. Total dilution has approximated
                25% to
                30% of gross billings.





·
            ***Allowance
                for Doubtful
                Accounts:***





Cash
      is
      received through the process discussed above. We have contractual advance rates
      with our third party billing aggregators. The billing aggregators report to
      us
      their holdbacks. These holdbacks include those submitted by the LECs. Some
      of
      these holdbacks may take 12-18 months to collect and “true-up” with the billing
      aggregators. We estimate an allowance for doubtful accounts on the basis of
      information provided by the billing aggregators. This information is an
      indicator of timely payments made by our subscribers. At September 30, 2003,
      the
      allowance for doubtful accounts was approximately 30% of gross accounts
      receivable.





·
            ***Carrying
                Value of Intellectual
                Property:***





The
      carrying value of our intellectual property at September 30, 2003, relates
      primarily to the purchase of the Yellow-Page.Net Universal Resource Locator
      (“URL”) from Telco Billing. The URL is recorded at its $5,000,000 purchase price
      less accumulated amortization of $1,820,517. We have estimated the useful life
      of this asset to be 20 years.





We
      believe that based on our current income and cash flow, the carrying value
      of
      the URL is not impaired at September 30, 2003. We believe our customers use
      this
      URL for maintaining their subscriptions to the Company’s service. The Company
      has had an unaffiliated, independent third party appraiser perform a valuation
      of the URL. That valuation also supports the conclusion that the value is not
      impaired at September 30, 2003.





·
            ***Capitalization
                of Direct Response Advertising Costs and Amortization
                Thereof:***





The
      Company purchases mailing lists and sends advertising materials to prospective
      subscribers from those mailing lists. Customers subscribe to the services by
      positively responding to those advertising materials, which serve as the
      contract for the subscription. The Company capitalizes and amortizes the costs
      of direct-response advertising on a straight-line basis over eighteen months,
      the estimated average period of retention for new customers. We believe that
      when a customer is retained through the 120-day refund period, long term
      retention is longer than be 18 month amortization period. However, due to
      attrition in the first months of a new subscription, the amortization period
      has
      been determined to the 18 months. The carrying value of $3,243,241 includes
      the
      gross cost of approximately $6,157,017 less amortization of
      $2,913,776.





5
 *Table
            of Contents*





·
            ***Income
                Taxes:***





Management
      evaluates the probability of the utilization of the deferred income tax assets.
      The Company has estimated a $1,641,000 deferred income tax asset at September
      30, 2003. Of that amount, $979,000 related to net operating loss carryforwards
      at September 30, 2003. Management determined that because the Company has been
      generating taxable income it was appropriate to recognize the deferred income
      tax asset related to the net operating loss carryforward. Management is required
      to make judgments and estimates related to the timing and utilization of net
      operating loss carryforwards, utilization of other deferred income tax assets,
      applicable tax rates and feasible tax planning strategies.




*Future
      Outlook*





We
      expect
      to make progress on a number of initiatives over the next six to twelve months,
      including the following:





·
            attempt
                to get listed on a national exchange or quotation
                system;





·
            add
                additional independent directors to our Board of
                Directors;





·
            establish
                an audit committee that fully complies with the requirements of
                Sarbanes-Oxley and the exchanges;





·
            engage
                a national auditing firm;





·
            obtain
                broader, more sophisticated and more reliable research coverage;
                and





·
            roll
                out our national branding campaign through various mediums of
                advertisement, including, Internet, billboard, radio and cable television
                in select markets to be determined. We have recently engaged a marketing
                firm. We expect to use approximately $2,000,000 on this campaign
                over the
                next 18 months. This may have a negative impact on our margins. However,
                to mitigate any adverse impact, management intends to attempt to
                incur
                these expenses gradually to be commensurate with anticipated increases
                in
                revenues resulting from the branding campaign.





**Recent
      Developments**





*Litigation
      by others against our Chairman and CEO*





By
      order
      of the Board of Directors, we have been funding the litigation defense of our
      Chairman and CEO, Angelo Tullo, as it related to claims made by New Horizon
      Capital, LLC (“New Horizon”), the successor in interest to American Business
      Funding Corp. These claims were not adverse to the Company. However, the Board
      of Directors determined that clearing Mr. Tullo’s name was important to our
      future success because of the results he has achieved on behalf of our
      investors.





6
 *Table
            of Contents*





In
      December 2003, New Horizon agreed to have the litigation against Mr. Tullo
      dismissed. New Horizon was ordered by the judge to pay, and has paid, $10,000
      to
      Mr. Tullo’s lawyers as compensation for certain expert witness fees that were to
      be paid by Mr. Tullo.





We
      will
      finish paying for the expenses relative to this case in the second quarter
      of
      fiscal 2004 and no further significant expenses are expected to be incurred
      after December 31, 2003.





*Termination
      of the Revolving Loan Agreements With Our Major Shareholders—Mathew and Markson
      and Morris & Miller, LTD (“M&M’s”)*





As
      part
      of the original acquisition of our subsidiary, Telco Billing, from the M&Ms,
      we provided them with the right to “put” back to us their shares of Company
      common stock under certain circumstances. We subsequently entered into a new
      arrangement with the M&Ms, whereby their “put” rights were terminated in
      exchange for the establishment of revolving lines of credit. Under these lines
      of credit, we agreed to lend up to $10 million to each of the M&Ms, subject
      to certain limitations.





In
      December 2003, we entered into an agreement with the M&M’s to terminate the
      revolving lines of credit previously provided to them. Under this termination
      agreement, which is effective as of April 9, 2004, we are to make final
      advancements to the M&Ms of approximately $1,300,000. The aggregate of all
      advances made by the Company to these shareholders is to be repaid to the
      Company at the end of three years, along with accrued interest.




The
      schedule of final advances that we are to make to the M&Ms under the
      termination agreement are as follows:





Morris
      & Miller, Ltd.





$275,000
      on January 30, 2004


$300,000
      on February 27, 2004


$500,000
      on March 31, 2004


Sufficient
      funds to pay 3 years interest on April 9, 2004





Mathew
      and Markson, Ltd.





$50,000
      on January 30, 2004


$100,000
      on February 27, 2004


$75,000
      on March 31, 2004


Sufficient
      funds to pay 3 years interest on April 9, 2004





Within
      ten days after April 9, 2004, the M&M’s will prepay all of the interest on
      their loans for the next 36 months. We will continue to retain pledged stock
      as
      collateral for the repayment of all such loans, which, by agreement, mature
      December 2006.





As
      part
      of this new agreement, we have also agreed to pay a quarterly dividend of not
      less than $.01 per share beginning April 30, 2004 for the period ended March
      31,
      2004. We believe this is in the best interests of all of our
      shareholders.





*Termination
      of Our Relationship with Simple.Net.*




7
 *Table
            of Contents*





On
      December 29, 2003, we entered into a separation agreement with Simple.Net,
      a
      company beneficially owned by our Director and Corporate Secretary DeVal
      Johnson, which becomes effective January 31, 2004.





Prior
      to
      this agreement, we purchased Internet Dial Up access from Simple.net and
      performed various services for Simple.Net for a fee. These services included
      Customer Service support for Simple.Net’s customers and Technology Support and
      Billing assistance. At the time the contract(s) were entered into, this was
      beneficial to us because we did not have sufficient dial-up customers to avoid
      a
      minimum fee to the backbone providers, which are companies that own the cable
      and copper wire cables necessary to provide the service. As our customer base
      has grown, we are now able to economically enter into our own wholesale contract
      and in fact have with GlobalPOPs.





In
      addition, at this time, our revenues from the customer support and technology
      assistance was essentially the same as that currently paid to Simple.Net to
      provide the dial up service. We will not be affected by the loss in revenue
      from
      Simple.Net as the new contract from GlobalPOPs, which now has no minimum
      guarantees, is low enough to offset the difference.





**Results
      of Operations**





Fiscal
      Year End September 30, 2003 Compared to Fiscal Year End September
      30,


2002.





Net
      revenue for the year ended September 30, 2003 (“Fiscal 2003”) was $30,767,444
      compared to $12,618,126 for the year ended September 30, 2002 (“Fiscal 2002”)
      representing an increase of approximately 144%. This increase in net revenue
      is
      the result of three factors: an increase in the number of our IAP Advertisers,
      the conversion of certain Advertisers from direct bill invoice to monthly
      telephone billing and an increase in our monthly pricing. These three factors
      are discussed further below.





Our
      IAP
      Advertiser count increased to 255,376 at September 30, 2003 compared to 113,565
      at September 30, 2002, an increase of approximately 125%. Relating to the
      conversion of certain Advertisers to monthly telephone billing, in August,
      2003,
      we analyzed our database of IAP Advertisers that were being billed via direct
      monthly invoice to determine which of these Advertisers were eligible to be
      billed on their monthly telephone bill. As a result of this analysis, we
      determined that 46,717 Advertisers were eligible for monthly telephone billing.
      As previously described under **“** Billing **”** and in
      the Financial Statement footnotes, our revenue recognition and collections
      are
      significantly higher when Advertisers are billed on their monthly telephone
      bills rather than through direct invoice. Relating to our price increase, we
      now
      charge $21.95 monthly versus $17.95 previously for new IAP Advertisers. In
      addition, the monthly charge to existing IAP Advertisers was increased to $24.95
      monthly upon the first anniversary of their listing. This price increase was
      instituted on March 20, 2003.





We
      recently revised the method by which we count our customers. We believe that
      the
      new methodology is more accurate and can be more consistently applied to each
      period. We believe that the disclosure of customer counts including total
      Activated customers and paying customers provides the most insight into our
      business.





Activated
      customers include those Advertisers that are currently paying for the IAP
      service, as well as those Advertisers that have signed-up for the IAP service
      but have not necessarily been billed and begun their payment for the service.
      Based upon these revisions, we had 255,376 Activated IAP customers at September
      30, 2003, 235,162 Activated IAP customers at June 30, 2003, 222,092, Activated
      IAP customers at March 31, 2003 and 168,980 Activated IAP customers at December
      31, 2002.





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Regarding
      Paying customers, the Company had 221,537 Paying customers at September 31,
      2003, 167,000 Paying customers at June 30, 2003, 151,173 paying customers at
      March 31, 2003 and 137,346 Paying customers at December 31, 2002.





Cost
      of
      services for Fiscal 2003 was $8,473,768 compared to $3,497,678, an increase
      of
      142%. The increase in cost of services is due to the increased IAP customer
      count, as well as the increase in our direct mail solicitation effort whereby
      we
      are currently mailing, on average, approximately 1 million mailers to businesses
      each month. Cost of services as a percent of net revenue was approximately
      27%
      for Fiscal 2003 compared to 28% for Fiscal 2002. Gross margins improved to
      73%
      in Fiscal 2003 compared to 72% in Fiscal 2002. The improvement in gross margin
      results from the leveraging of certain fixed costs, included in cost of
      services, over a larger customer base.





General
      and administrative expenses for Fiscal 2003 were $8,657,690 compared to
      $4,754,665 for Fiscal 2002, an increase of approximately 82%. General and
      administrative expenses increased due to an increase in costs and employees
      relating to our previously-described growth in IAP Advertisers, the
      establishment in Fiscal 2003 of our Quality Assurance and Outbound departments
      as well as an increase in certain officers’ compensation relating to employment
      contracts with such officers. In addition, during Fiscal 2003, the Company
      paid
      $410,054 for the costs of defending a civil action filed against its CEO and
      Chairman pursuant to a Board of Directors resolution. The action involved a
      business in which the CEO was formerly involved. The Board believed that it
      was
      important and in our best interests and in the best interests of our
      shareholders to resolve this matter as soon as possible. As described under
      “Recent Developments,” this matter has now been resolved and we no longer expect
      to incur significant legal costs after December 31, 2003 relating to this
      matter. Excluding the previously described legal costs, general and
      administrative expenses increased approximately 67% in Fiscal 2003 over Fiscal
      2003. As a percent of net revenue, general and administrative expenses were
      approximately 28% in Fiscal 2003 compared to approximately 38 % in Fiscal 2002.
      Excluding the previously-described legal costs, general and administrative
      expenses as a percent of net revenue was approximately 26% in Fiscal 2003
      compared to 38% in Fiscal 2002.





Sales
      and
      marketing expenses for Fiscal 2003 were $3,868,643 compared to $963,868 for
      Fiscal 2002, an increase of approximately 300%. The increase was principally
      the
      result of our re-instituting our marketing efforts in the latter part of Fiscal
      2002 with the full annual cost of such effort in Fiscal 2003. The marketing
      expenses are attributed to our direct response marketing, which is our primary
      source of attracting new Advertisers. As a percent of net revenue, sales and
      marketing expense was approximately 13% in Fiscal 2003 versus approximately
      8%
      in Fiscal 2002.





Depreciation
      and amortization was $660,475 in Fiscal 2003 compared to $581,290 in Fiscal
      2002, an increase of approximately 14%. This increase was primarily the result
      of a substantial upgrade of our information technology systems as well as
      hardware purchased relating to the establishment of our Quality Assurance and
      Outbound marketing departments. These efforts involved capital expenditures
      of
      $736,955 in Fiscal 2003 compared to 77,632 in Fiscal 2002. We do not anticipate
      capital expenditures to grow at this same rate in the future. In addition,
      amortization increased in Fiscal 2003 as a result of our agreement with OnRamp
      Access, Inc. to license the YP.Com Uniform Resource Locator
      (“URL”).





The
      cost
      of the Yellow-Page.Net URL was capitalized at its cost of
      $5,000,000.


The
      URL
      is amortized on an accelerated basis over the twenty-year term of the licensing
      agreement. Amortization expense on the URL was $351,933 for the year ended
      September 30, 2003. Annual amortization expense in future years related to
      this
      URL is anticipated to be approximately $350,000-450,000.





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Operating
      income in Fiscal 2003 was $9,106,890 compared to $2,820,625 in fiscal 2002
      representing an increase of approximately 223%. As a percent of net revenue,
      operating income was approximately 30 % in Fiscal 2003 versus approximately
      22%
      in Fiscal 2002. The increase in operating income resulted from the previously
      mentioned increases in net revenue as well as the leveraging of part of our
      fixed costs, included in cost of services and general and administrative
      expenses, over a larger customer base





Interest
      expense for Fiscal 2003 was $19,728 compared to $92,341 for Fiscal 2002. The
      decrease in interest expense was a result of decreased debt due to the repayment
      of approximately $800,000 of debt in Fiscal 2002.





Interest
      income was $108,995 in Fiscal 2003 compared to $17,682 in Fiscal 2002 resulting
      from our increased profitability and cash.





Other
      expense (income) was a net of $291,002 in income in Fiscal 2003 versus $436,848
      of income in Fiscal 2002. The primary components of other income are technical
      and service income from Simple.net ($618,612 and $300,900, in Fiscal 2003 and
      2002, respectively), offset by legal expenses incurred relating to stock
      settlements of $240,935 in Fiscal 2003.





Income
      before income taxes was $9,487,159 in Fiscal 2003 and $3,182,814 in Fiscal
      2002,
      representing an increase of approximately 198%. As a percent of net revenue,
      income before income taxes was 31% in Fiscal 2003 compared to 25% in Fiscal
      2002.




The
      income tax provision was $1,871,293 in Fiscal 2003 compared to an income tax
      benefit of $342,082 in Fiscal 2002. The increase in the income tax provision
      is
      the result of our increased profitability in Fiscal 2003 offset by the use
      of
      our net operating loss carryforwards. During Fiscal 2003 and 2002, our
      structured certain transactions related to its merger with Telco that allowed
      the Company to utilize net operating losses that were previously believed to
      be
      unavailable or limited under the change of control rules of Internal Revenue
      Code 382.





Net
      income for Fiscal 2003 was $7,615,866, or $0.17 per share, compared to
      $2,840,732 or $0.06 per share for Fiscal 2002, an increase in net profit of
      approximately 114% despite a much higher tax provision in Fiscal 2003. The
      increase in net income resulted from the increased IAP Advertiser count and
      associated revenue cited above with a less than corresponding increase in
      expenses cited above offset by the greater tax provision in Fiscal 2003. Net
      profit as a percent of revenue increased to approximately 25% in Fiscal 2003
      from 23%% in Fiscal 2002.





**Liquidity
      and Capital Resources**





Our
      cash
      balance increased to $2,378,848 for Fiscal 2003 from $767,108 for Fiscal 2002.
      We funded working capital requirements primarily from cash generated from
      operating activities and utilized cash in investing activities and financing
      activities.





*Operating
      Activities* .
      Cash
      provided by operating activities was $4,762,238 for Fiscal 2003 compared to
      $1,158,015 for Fiscal 2002. The principal source of our operations revenue
      is
      from sales of Internet Yellow Page advertising. The increase in cash provided
      from operations resulted from an increase in net profit offset by an increase
      in
      our accounts receivable, deferred income taxes and customer acquisition costs
      which also increased as a result of our increased profitability and the
      continuation of our direct mail marketing solicitation effort.





*Investing
      Activities* .
      Cash
      used by investing activities was $2,798,500 for Fiscal 2003 compared to $244,077
      for Fiscal 2002. Advances to affiliates increased to $1,893,131 in Fiscal 2003
      compared to $116,757 in Fiscal 2002. As described under “Recent Developments,”
advances to affiliates are expected to cease in Fiscal 2004. We intend to
      institute a quarterly $0.01 per share dividend on our common stock at that
      time.
      In Fiscal 2003, we purchased $736,955 of equipment compared to $77,632 in Fiscal
      2002. Increased computer purchases in Fiscal 2003 resulted from the previously
      described upgrade to our information technology systems as well as the
      establishment of our Quality Assurance and Outbound efforts. We do expect
      capital expenditures to increase at this same growth rate in the future.
      Expenditures for intellectual property increased to $261,545 in Fiscal 2003
      compared to $49,688 in Fiscal 2002. This increase primarily resulted from the
      licensing of the YP.Com URL from OnRamp Access, Inc.





10
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*Financing
      Activities* .
      Cash
      flows used from financing activities were $351,998 for Fiscal 2003 compared
      to
      $830,677 for Fiscal 2002. Regarding debt proceeds, we borrowed $378,169 in
      Fiscal 2003 from two credit facilities. These credit facilities are maintained
      primarily for safety and security back-up purposes as our cash flow is generally
      more than sufficient to maintain and grow the business. In Fiscal 2003, we
      established a Trade Acceptance Draft program with Actrade Financial Technologies
      (“Actrade”), which enables us to borrow up to $150,000. A trade acceptance draft
      (“TAD”) is a draft signed by us and made payable to the order of a vendor
      providing us services. AcTrade provides payment to the vendor and collects
      from
      us the amount advanced to the vendor (plus interest) under extended payment
      terms, generally 30, 60 or 90 days. When used, we pay a rate of one percent
      per
      month of the amount of the TAD. There is no term to the agreement with Actrade
      and either party may terminate the agreement at any time.





We
      understand that AcTrade is currently in Chapter 11 bankruptcy. Therefore, the
      availability of this facility is uncertain. During Fiscal 2003, we signed an
      unsecured credit facility of $250,000 with Bank of the Southwest. The facility
      is for one year and interest on borrowings, if any, will be an interest rate
      of
      0.5% above the Prime Rate, as defined. During recent discussions with the Bank
      of the Southwest, it was indicated to us that this credit facility will not
      be
      renewed as a result of their desire to focus on relationships with private
      rather than public companies. In Fiscal 2004, we expect to pursue other credit
      facilities to replace the aforementioned credit facilities.





We
      incurred debt in the acquisition of the license right to the Yellow-Page.Net
      URL. A total of $4,000,000 was borrowed, $2,000,000 from Joseph and Helen Van
      Sickle, $1,000,000 from our shareholders and $2,000,000 as a Note from Mathew
      & Markson Ltd. We had dedicated payments in the amount of $100,000 per month
      for the payment of the Van Sickle note, which was paid in full in early Fiscal
      2003. The original note has been paid in full while a balance of $115,866
      remains on another note to Mathew & Markson.





We
      had
      cash outflow of $685,167 in Fiscal 2003 relating to the repayment of borrowing
      on our credit facilities and the payment of $160,000 on the remaining Van Sickle
      note and cash outflow of $830,677 in Fiscal 2002 resulting from the repayment
      of
      our credit facility relating to Mathew & Markson Ltd.





As
      previously described, collections on accounts receivables are received primarily
      through the billing service aggregators under contract to administer this
      billing and collection process. The billing service aggregators generally do
      not
      remit funds until they are collected. The billing companies maintain holdbacks
      for refunds and other uncertainties. Generally, cash is collected and remitted
      to us over a 90 to 120 day period subsequent to the billing dates. In August
      2002, we entered into a new agreement with its primary billing service provider,
      PaymentOne, whereby cash is remitted to us on a sixty day timetable beginning
      November 2002.





We
      market
      our products primarily through the use of direct mailers to businesses
      throughout the United States. We generally pay for these marketing costs when
      incurred and amortize the costs of direct-response advertising on a
      straight-line basis over eighteen months. The amortization lives are based
      on
      estimated attrition rates. During Fiscal 2003, we paid $4,738,790 in advertising
      and marketing compared to $1,941,037 in Fiscal 2002. We anticipate the outlays
      for direct-response advertising to remain consistent over the next
      year.





11
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We
      have
      an agreement with two of our largest shareholders, Morris & miller, Ltd. and
      Mathew and Markson, Ltd., which is memorialized in a third Amendment to the
      original Stock Purchase Agreement. This agreement cancels the prior revolving
      lines of credit with these parties effective April 9, 2004 upon the payment
      of
      the following final specific advances to each of them:





Morris
      & Miller, Ltd.





$275,000
      on January 30, 2004


$300,000
      on February 27, 2004


$500,000
      on March 31, 2004


Sufficient
      funds to pay 3 years interest on April 9, 2004





Mathew
      and Markson, Ltd.





$50,000
      on January 30, 2004


$100,000
      on February 27, 2004


$75,000
      on March 31, 2004


Sufficient
      funds to pay 3 years interest on April 9, 2004





Prior
      to
      December 31, 2003, our Board of Directors created YP Charities, an Internal
      Revenue Code 501(c)(3) corporation, established to make charitable contributions
      to worthy causes on our behalf and to encourage other companies that are good
      corporate citizens to do the same. YP Charities is not a subsidiary of the
      Company. It is a non-member, non-profit entity controlled and run exclusively
      by
      the board of directors of YP Charities, which is currently comprised of certain
      officers and directors of the Company. As of this filing, we have not remitted
      any amounts to YP Charities but plan to contribute $100,000 during fiscal 2004.




**Certain
      Risk Factors Affecting Our Business**





Our
      business is subject to numerous risks, including those discussed below. If
      any
      of the events described in these risks occurs, our business, financial condition
      and results of operations could be seriously harmed.





**Risks
      Related to Our Business**





**We
      have a relatively limited operating history upon which investors can evaluate
      the likelihood of our success.**





We
      have
      been engaged in the Internet-based Yellow Pages industry through our subsidiary,
      Telco Billing, since 1997. As a result, an investor in our securities must
      consider the uncertainties, expenses, and difficulties frequently encountered
      by
      companies such as ours that are in the early stages of development. Investors
      should consider the likelihood of our future success to be highly speculative
      in
      light of our relatively limited operating history, as well as the challenges,
      limited resources, expenses, risks, and complications frequently encountered
      by
      similarly situated companies in the early stages of development, particularly
      companies in new and rapidly evolving markets such as Internet Yellow Pages.
      To
      address these risks and to sustain profitability, we must, among other
      things:





12
 *Table
            of Contents*





·
            maintain
                and increase our base of
                advertisers;





·
            increase
                the number of users who visit our web sites for online directory
                services;





·
            implement
                and successfully execute our business and marketing
                strategy;





·
            continue
                to develop and upgrade our
                technology;





·
            continually
                update and improve our service offerings and
                features;





·
            provide
                superior IAP advertiser service;





·
            respond
                to industry and competitive developments;





·
            successfully
                manage our growth while controlling expenses;
                and





·
            attract,
                retain, and motivate qualified
                personnel.





We
      may
      not be successful in addressing these risks. If we are unable to do so, our
      business, prospects, financial condition, and results of operations would be
      materially and adversely affected.





**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 IAP
      advertiser 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.





**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 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
      revenue may decline over time.**  ****





We
      have
      experienced a decrease in revenue from the Local Exchange Carriers (LEC) from
      the effects of the Competitive Local Exchange Carriers (CLEC) that are
      participating in providing local telephone services to IAP advertisers. We
      have
      begun to address this problem and we are implementing data filters to reduce
      the
      effects of the CLECs. We have also sought other billing methods to reduce the
      adverse effects of the CLEC billings. These other billing methods may be cheaper
      or more expensive than our current LEC billing and we have not yet determined
      if
      they will be less or more effective. We cannot provide any assurances that
      our
      efforts will be successful and may experience future decreases in revenue.





13
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**Our
      quarterly results of operations could fluctuate due to factors outside of our
      control, which may cause corresponding fluctuations in the price of our
      securities.**





Our
      net
      sales may grow at a slower rate on a quarter-to-quarter basis than we have
      experienced in recent periods. Factors that could cause our results of
      operations to fluctuate in the future 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 IAP advertisers on their monthly telephone
                bills, ACH or credit card rather than through direct
                invoicing;





·
            timing
                of new service or product introductions and market acceptance of
                new or
                enhanced versions of our services or products;





·
            our
                ability to develop and implement new services and technologies in
                a timely
                fashion to meet market demand;





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





·
            new
                product offerings or other actions by our
                competitors;





·
            month-to-month
                variations in the billing and receipt of amounts from Local Exchange
                Carriers (LEC), such that billing and revenues may fall into the
                subsequent fiscal quarter;





·
            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
                fact that our expenses are only partially based on our expectations
                regarding future revenue and are largely fixed in nature, particularly
                in
                the short term.





The
      fluctuation of our quarterly operating results, as well as other factors, could
      cause the market price of our securities to fluctuate significantly in the
      future. Some of these factors include:





14
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·
            the
                announcement of new IAP advertisers or strategic alliances or the
                loss of
                significant IAP advertisers or strategic
                alliances;





·
            announcements
                by our competitors;





·
            sales
                or purchases of our securities by officers, directors and
                insiders;





·
            government
                regulation;





·
            announcements
                regarding restructuring, borrowing arrangements, technological
                innovations, departures of key officers, directors or employees,
                or the
                introduction of new products;





·
            political
                or economic events and governmental actions affecting Internet operations
                or businesses; and





·
            general
                market conditions and other factors, including factors unrelated
                to our
                operating performance or that of our
                competitors.





Investors
      in our securities should be willing to incur the risk of such price
      fluctuations.





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





We
      currently use three check processing companies to provide us with advertiser
      information at the point of sign-up for our Internet Advertising Package. One
      of
      these processors has indicated that it will be outsourcing this function in
      the
      future. Therefore, we have refrained from sending new business to this check
      processor. 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 to efficiently bill and collect monies
      from
      the Local Exchange Carriers (LEC) relating to the LEC’s billing and collection
      of our monthly charges from advertisers. We currently have agreements with
      two
      billing aggregators. Any disruption in our billing aggregators’ ability to
      perform these functions could adversely affect our financial condition and
      results of operations.





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





Our
      business model depends heavily upon our ability to bill advertisers on their
      telephone bills through their respective Local Exchange Carriers (LEC). 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. Finally, 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, accordingly, would again obviate the need for
      and access to the LECs. Our inability to use the LECs to bill our advertisers
      through their monthly telephone bills would have a material adverse impact
      on
      our results of operations.





**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.**





15
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            of Contents*





We
      currently outsource to third parties certain of the services that we provide,
      including the work of producing usable templates for and hosting of the
      QuickSites, website templates known as Ezsites, and wholesale Internet access.
      These relationships may not provide us benefits that outweigh the costs of
      the
      relationships. If any strategic supplier demands a greater portion of revenue
      derived from the services it provides or increases charges for its services,
      we
      may decide to terminate or refuse to renew that relationship, even if it
      previously had been profitable or otherwise beneficial. If we lose a significant
      strategic supplier, we may be unable to replace that relationship with other
      strategic relationships with comparable revenue potential. The loss or
      termination of any strategic relationship with one of these third-party
      suppliers could significantly impair our ability to provide services to our
      advertisers and users.





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 and is still evolving.**





Internet
      Yellow Pages services are evolving rapidly and are characterized by an
      increasing number of market entrants. Our future revenues and profits will
      depend substantially upon the widespread acceptance and the use of the Internet
      and other online services as an effective medium of commerce by merchants and
      consumers. Rapid growth in the use of and interest in the Internet may not
      continue on a lasting basis, which may negatively impact Internet-based
      businesses such as ours. In addition, 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. The demand and market acceptance for recently
      introduced services generally is subject to a high level of uncertainty.





Most
      potential advertisers have only limited, if any, experience advertising on
      the
      Internet and have not devoted a significant portion of their advertising
      expenditures to Internet advertising. 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, 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;





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·
            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.





**We
      must manage our growth and maintain procedures and controls on our business.**





We
      have
      rapidly and significantly expanded our operations and we anticipate further
      significant expansion to accommodate the expected growth in our IAP advertiser
      base and market opportunities. We have increased the number of our personnel
      from the inception of our operations to the present. This expansion has placed,
      and is expected to continue to place, a significant strain on our management
      and
      operational resources. As a result, we may not be able to effectively manage
      our
      resources, coordinate our efforts, supervise our personnel or otherwise
      successfully manage our resources. We have recently added a number of key
      managerial, technical, and operations personnel and we expect to add additional
      key personnel in the future. We also plan to continue to increase our personnel
      base. These additional personnel may further strain our management
      resources.





The
      rapid
      growth of our business could in the future strain our ability to meet IAP
      advertiser demands and manage our IAP advertiser relationships. This could
      result in the loss of IAP advertisers and harm our business
      reputation.





In
      order
      to manage the expected growth of our operations and personnel, we must continue
      maintaining and improving or replacing existing operational, accounting, and
      information systems, procedures, and controls. Further, we must manage
      effectively our relationships with our IAP advertisers, as well as other third
      parties necessary to our business. Our business could be adversely affected
      if
      we are unable to manage growth effectively.





**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.





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**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 or exceed existing requirements of the United States Federal
      Trade
      Commission (FTC). 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. As a result, we could be subject 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
      face intense competition, including from companies with greater resources,
      which
      could adversely affect our growth and could lead to decreased revenues.**





Several
      companies, including Verizon, Yahoo and Microsoft, currently market Internet
      Yellow Pages 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, IAP advertiser service,
                and IAP
                advertiser support capabilities than we
                have;





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





·
            some
                competitors may be able to better adapt to changing market conditions
                and
                IAP advertiser 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.





**We
      may face risks as we expand our business into international
      markets.**





We
      currently are exploring opportunities to offer our services in other
      English-speaking countries. We have limited experience in developing and
      marketing our services internationally, and we may not be able to successfully
      execute our business model in markets outside the United States. We will face
      a
      number of risks inherent in doing business in international markets, including
      the following:





·
            international
                markets typically experience lower levels of Internet usage and Internet
                advertising than the United States, which could result in
                lower-than-expected demand for our
                services;





·
            unexpected
                changes in regulatory requirements;





·
            potentially
                adverse tax consequences;





18
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·
            difficulties
                in staffing and managing foreign
                operations;





·
            changing
                economic conditions;





·
            exposures
                to different legal standards, particularly with respect to intellectual
                property and distribution of information over the
                Internet;





·
            burdens
                of complying with a variety of foreign laws;
                and





·
            fluctuations
                in currency exchange rates.





To
      the
      extent that international operations represent a significant portion of our
      business in the future, our business could suffer if any of these risks
      occur.





**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.





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:





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·
            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.





**Current
      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 web
      sites. 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 adversely affect our business,
      prospects, financial condition, and results of operations.





**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





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·
            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 will depend on continued growth in the use of the
      Internet.**





Because
      Internet Yellow Pages is a 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.





**We
      will 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.





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**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.





**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 and
“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.





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**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 risen significantly over the past twelve
      months and could continue to be volatile 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.





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.





23
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**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:





·
            our
                board is classified into three classes of directors as nearly equal
                in
                size as possible, with staggered three
                year-terms;





·
            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 IAP advertisers 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 IAP
      advertiser’s accounts. The bid and offer quotation and compensation information
      must be provided prior to effecting the transaction and must be contained on
      the
      IAP advertiser’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
        7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


24
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**YP.NET,
        INC.**


**TABLE
                OF CONTENTS**
            **Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            26CONSOLIDATED
                FINANCIAL STATEMENTS:Consolidated
                Balance Sheet at September 30, 2003
            27Consolidated
                Statements of Operations for the years ended September 30, 2003 and
                September 30, 2002
            28Consolidated
                Statements of Stockholders’ Equity for the years ended September 30, 2003
                and September 30, 2002
            29Consolidated
                Statements of Cash Flows for theyears
                ended September 30, 2003 and September 30, 2002
            31NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            33





25
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            of Contents*




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
 
 To
        the
        Stockholders and Board
 of
        Directors of YP Corp.:
  We
        have
        audited the accompanying consolidated balance sheet of YP Corp. and subsidiaries
        as of September 30, 2003 and the related statements of operations, stockholders’
equity and cash flows for the each of the two years in the period then ended.
        These financial statements are the responsibility of the Company’s management.
        Our responsibility is to express an opinion on these financial statements
        based
        on our audits.
 
 We
        conducted our audit in accordance with the auditing standards generally accepted
        in the 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, 2003, and the consolidated results of its
        operations and cash flows for each of the two years in the period ended
        September 30, 2003, in conformity with accounting principles generally accepted
        in the United States of America.
 
 As
        described in Note 1, the Company restated its financial statements for
        the years ended September 30, 2003 and 2002.
 
 
 /s/ 
                   Epstein, Weber & Conover, PLCScottsdale,
                  ArizonaDecember
                  5, 2003(except
                  for the restatement of financial statementsdescribed
                  in Note 1, for which the date is November 18,
                  2005)




26
 *Table
            of Contents*





**YP.NET,
INC.**





**CONSOLIDATED
      BALANCE SHEET**


**SEPTEMBER
      30, 2003**


ASSETS:CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              2,378,848Accounts
                  receivable, net
              
              
              7,328,624Prepaid
                  expenses and other current assets
              
              
              154,276Deferred
                  tax asset
              
              
              1,400,637Total
                  current assets
              
              
              11,262,385ACCOUNTS
                  RECEIVABLE - long term portion
              
              
              1,123,505CUSTOMER
                  ACQUISITION COSTS, net of accumulated amortization of
                  $2,913,776
              
              
              3,243,241PROPERTY
                  AND EQUIPMENT, net
              
              
              731,142DEPOSITS
                  AND OTHER ASSETS
              
              
              148,310INTELLECTUAL
                  PROPERTY- URL, net of accumulated amortization of
                  $1,868,283
              
              
              3,512,952ADVANCES
                  TO AFFILIATES
              
              
              2,126,204DEFERRED
                  INCOME TAXES
              
              
              239,952TOTAL
                  ASSETS
              
              $
              22,387,691LIABILITIES
                  AND STOCKHOLDERS' EQUITY:CURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              428,423Accrued
                  liabilities
              
              
              1,413,245Notes
                  payable - current portion
              
              
              115,868Income
                  taxes payable
              
              
              2,689,312Total
                  current liabilities
              
              
              4,646,848Total
                  liabilities
              
              
              4,646,848STOCKHOLDERS'
                  EQUITY:Series
                  E convertible preferred stock, $.001 par value, 200,000 shares
                  authorized,
                  131,840 issued and outstanding, liquidation preference
                  $39,552
              
              
              11,206Common
                  stock, $.001 par value, 100,000,000 shares authorized, 55,265,136
                  issued,
                  49,348,287 outstanding
              
              
              49,348Paid
                  in capital
              
              
              9,359,866Deferred
                  stock compensation
              
              
              (3,840,843
              )Treasury
                  stock at cost
              
              
              (216,422
              )Retained
                  earnings
              
              
              12,377,688Total
                  stockholders' equity
              
              
              17,740,843TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              22,387,691
 ****


**** The
      accompanying notes are an integral part of these consolidated financial
      statements.





27
 *Table
            of Contents*





**YP.NET,
      INC.**





**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


**FOR
      THE YEARS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002**


2003
            
            2002NET
                REVENUES
            
            $
            30,767,444
            
            $
            12,618,126OPERATING
                EXPENSES:Cost
                of services
            
            
            8,473,746
            
            
            3,497,678General
                and administrative expenses
            
            
            8,657,690
            
            
            4,754,665Sales
                and marketing expenses
            
            
            3,868,643
            
            
            963,868Depreciation
                and amortization
            
            
            660,475
            
            
            581,290Total
                operating expenses
            
            
            21,660,554
            
            
            9,797,501OPERATING
                INCOME
            
            
            9,106,890
            
            
            2,820,625OTHER
                (INCOME) AND EXPENSESInterest
                expense and other financing costs
            
            
            19,728
            
            
            92,341Interest
                income
            
            
            (108,995
            )
            
            (17,682
            )Other
                expense/(income)
            
            
            (291,002
            )
            
            (436,848
            )Total
                other income
            
            
            (380,269
            )
            
            (362,189
            )INCOME
                BEFORE INCOME TAXES
            
            
            9,487,159
            
            
            3,182,814INCOME
                TAX PROVISION (BENEFIT)
            
            
            1,871,293
            
            
            342,082NET
                INCOME
            
            $
            7,615,866
            
            $
            2,840,732NET
                INCOME PER SHARE:Basic
            
            $
            0.17
            
            $
            0.06Diluted
            
            $
            0.17
            
            $
            0.06WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING:Basic
            
            
            45,591,590
            
            
            41,753,464Diluted
            
            
            45,591,590
            
            
            41,753,464




The
      accompanying notes are an integral part of these consolidated financial
      statements.





28
 *Table
            of Contents*




**YP.NET,
      INC.**





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY FOR
      THE**


**YEARS
      ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002**


**Common
                Stock**
            
            **Preferred
                E**
            
            
            
            **Treasury**
            
            **Paid-in**
            
            **Retained****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Stock**
            
            **Capital**
            
            **Earnings**
            
            **Total**___________BALANCE
                OCTOBER 1, 2001
            
            
            40,801,449
            
            $
            40,802
            
            
            -
            
            $
            -
            
            $
            (171,422
            )
            $
            4,595,609
            
            $
            1,923,562
            
            $
            6,388,551Common
                  stock issued forservices
            
            
            100,000
            
            
            100
            
            
            
            
            
            
            
            
            
            
            
            8,900
            
            
            
            
            
            9,000Series
                  E preferred stock issued in exchange for common
                  shares
            
            
            (131,840
            )
            
            (132
            )
            
            131,840
            
            
            11,206
            
            
            
            
            
            (11,074
            )
            
            
            
            
            -Series
                E preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (494
            )
            
            (494
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,840,732
            
            
            2,840,732BALANCE
                  SEPTEMBER 30, 2002
            
            
            40,769,609
            
            $
            40,770
            
            
            131,840
            
            $
            11,206
            
            $
            (171,422
            )
            $
            4,593,435
            
            $
            4,763,800
            
            $
            9,237,789





**(CONTINUED)**





The
      accompanying notes are an integral part of these consolidated financial
      statements





29
 *Table
            of Contents*





**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE**


**YEARS
      ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30,
      2002**  **(continued)**








**Common
                Stock**
            
            **Preferred
                E**
            
            
            
            **Treasury**
            
            **Paid-in**
            
            **Deferred**
            
            **Retained****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Stock**
            
            **Capital**
            
            **Compensation**
            
            **Earnings**
            
            **Total**___________BALANCE
                OCTOBER 1, 2002
            
            
            40,769,609
            
            $
            40,770
            
            
            131,840
            
            $
            11,206
            
            $
            (171,422
            )
            $
            4,593,435
            
            $
            -
            
            $
            4,763,800
            
            $
            9,237,789Common
                stock issued for services
            
            
            7,005,678
            
            
            7,006
            
            
            
            
            
            
            
            
            
            
            
            712,678
            
            
            
            
            
            
            
            
            719,684Common
                stock issued for URL
            
            
            100,000
            
            
            100
            
            
            
            
            
            
            
            
            
            
            
            59,900
            
            
            
            
            
            
            
            
            60,000Purchase
                of treasury stock
            
            
            (500,000
            )
            
            (500
            )
            
            
            
            
            
            
            
            (45,000
            )
            
            500
            
            
            
            
            
            
            
            
            (45,000
            )Series
                E preferred stock dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,978
            )
            
            (1,978
            )Common
                  stock issued in restricted stock plan
            
            
            1,973,000
            
            
            1,973
            
            
            
            
            
            
            
            
            
            
            
            3,993,352
            
            
            (3,995,325
            )
            
            
            
            
            -Amortization
                  of deferred stock compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            154,482
            
            
            
            
            
            154,482Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,615,866
            
            
            7,615,866BALANCE
                  SEPTEMBER 30, 2003
            
            
            49,348,287
            
            $
            49,349
            
            
            131,840
            
            $
            11,206
            
            $
            (216,422
            )
            $
            9,359,865
            
            $
            (3,840,843
            )
            $
            12,377,688
            
            $
            17,740,843





**(CONTINUED)**




The
      accompanying notes are an integral part of these consolidated financial
      statements




30
 *Table
            of Contents*





**YP.NET,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR
      THE**


**YEARS
      ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002**


CASH
                  FLOWS FROM OPERATING ACTIVITIES:
              
              2003
              
              2002Net
                  income
              
              $
              7,615,866
              
              $
              2,840,732Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              660,475
              
              
              581,290Amortization
                  of deferred stock compensation
              
              
              154,482Issuance
                  of common stock as compensation for services
              
              
              719,684
              
              
              9,000Gain
                  on settlement of debt
              
              
              (45,362
              )
              
              -Deferred
                  income taxes
              
              
              (1,631,774
              )
              
              1,078,157Loss
                  on disposal of equipment
              
              
              6,932Provision
                  for uncollectible accounts
              
              
              1,688,058
              
              
              1,375,226Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (6,064,894
              )
              
              (2,580,410
              )Customer
                  acquisition costs
              
              
              (1,825,014
              )
              
              (1,224,983
              )Prepaid
                  and other current assets
              
              
              (183,196
              )
              
              (44,042
              )Deposits
                  and other assets
              
              
              2,415
              
              
              (127,438
              )Accounts
                  payable
              
              
              233,027
              
              
              (119,511
              )Accrued
                  liabilities
              
              
              1,228,470
              
              
              106,069Income
                  taxes payable
              
              
              2,203,069
              
              
              (736,075
              )Net
                  cash provided by operating activities
              
              
              4,762,238
              
              
              1,158,015CASH
                  FLOWS FROM INVESTING ACTIVITIES:Advances
                  made to affiliate
              
              
              (1,800,000
              )
              
              (116,757
              )Expenditures
                  for intellectual property
              
              
              (261,545
              )
              
              (49,688
              )Purchases
                  of equipment
              
              
              (736,955
              )
              
              (77,632
              )Net
                  cash used for investing activities
              
              
              (2,798,500
              )
              
              (244,077
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from debt
              
              
              378,169
              
              
              -Principal
                  repayments on notes payable
              
              
              (685,167
              )
              
              (830,677
              )Purchase
                  of treasury stock
              
              
              (45,000
              )
              
              -Net
                  cash used for financing activities
              
              
              (351,998
              )
              
              (830,677
              )INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              1,611,740
              
              
              83,261CASH
                  AND CASH EQUIVALENTS, beginning of year
              
              
              767,108
              
              
              683,847CASH
                  AND CASH EQUIVALENTS, end of year
              
              $
              2,378,848
              
              $
              767,108





The
      accompanying notes are an integral part of these consolidated financial
      statements.





31
 *Table
            of Contents*




**YP.NET,
      INC.**





**CONSOLIDATED
      STATEMENT OF CASH FLOWS, (continued)**


**FOR
      THE YEARS ENDED SEPTEMBER 30, 2003 and 2001**


SUPPLEMENTAL
      CASH FLOW INFORMATION:


**2003**
            
            **2002**Interest
                Paid
            
            $
            11,258
            
            $
            99,541Income
                taxes paid
            
            $
            1,300,000
            
            $
            -0-






SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:





**2003**
            
            **2002**Common
                stock issued for services
            
            $
            719,684
            
            $
            9,000Common
                stock issued to purchase intellectual property
            
            $
            60,000
            
            $
            -0-Common
                stock exchanged for Series E Convertible Preferred Stock
            
            $
            -
                0 -
            
            $
            11,206




The
      accompanying notes are an integral part of these consolidated financial
      statements.





32
 *Table
            of Contents*





**YP.NET,
      INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002**


1.
            ORGANIZATION
                AND BASIS OF PRESENTATION





YP.Net,
      Inc. (the “Company”), formally 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. (“Telco”) in June 1999, through the issuance
      of 17,000,000 shares of the Company’s common stock. Prior to its acquisition of
      Telco, RIGL 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
      Page* *”* 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.Net, Inc. after the June 16, 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 and Telco, its wholly owned subsidiary, for the years
      ended September 30, 2003 and September 30, 2002. Certain reclassifications
      have
      been made to the September 30, 2002 balances to conform to the 2003
      presentation. These reclassifications to the 2002 financial statements
      include:





·
            Customer
                refunds of $313,716 in 2002 have been reclassified by moving them
                from
                cost of services to netting them in revenue. As a result of better
                reporting by the third party billing aggregator, these refunds were
                specifically identified when they were previously included as a general
                charge back by the billing
                aggregator.





·
            It
                was determined that $300,901 of revenue generated by providing services
                to
                an affiliate, Simple.net, which encompassed loaning personnel to
                the
                affiliate on a contract basis, did not represent customer revenue
                in the
                Company’s product line and that those related billings should therefore be
                excluded from customer revenue. The Company reduced revenue as previously
                reported by $300,901 and reclassified that amount in other
                income.





·
            It
                was discovered in the year ended September 30, 2003, that 3,081,500
                shares
                of issued common stock had been improperly included in the outstanding
                shares. These shares were actually treasury shares and therefore
                should be
                excluded from the number of shares outstanding. The Company corrected
                the
                error by reclassifying the par value of those shares of $3,082 from
                the
                common stock account to the paid in capital account. The incorrect
                number
                of treasury shares also had the effect of incorrectly reporting the
                weighted average shares outstanding for purposes of the earnings
                per share
                calculation. The weighted average shares outstanding was previously
                reported as 44,024,329 and has been corrected to 41,753,464. The
                effect of
                the corrected weighted average shares outstanding on the basic and
                diluted
                earnings per share for the year ended September 30, 2002 was an increase
                from $0.06 to $0.07.




Restatement
      of Financial Statements




Subsequent
        to the issuance of the Company’s financial statements as of September 30, 2003,
        and the year then ended, the Company determined that the accounting for its
        common stock issued to, and subsequently recovered from, certain non-performing
        consultants during 1999 and 2000 should not have been expensed when originally
        issued as had been previously reported. The subsequent recovery of these
        shares
        was recorded as an item in other income at the same value at which they were
        originally issued. It has been determined to be inappropriate to recognize
        the
        initial expense and its subsequent reversal as no services were rendered
        by
        these consultants. Instead, the issuance of these shares will be reflected
        as
        temporary equity, together with a related receivable, until the shares were
        returned. The change in accounting for the recovery of the shares has the
        effect
        in the year ended September 30, 2003 of a decrease in net income of $308,025
        from $7,923,891 to $7,615,866 and a decrease in the net income per share
        from
        per share from $0.18 to $0.17.





33
 *Table
            of Contents*




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,
      2003, cash deposits exceeded those insured limits by $2,255,000.





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





Customer
      Acquisition Costs: These
      costs represent the direct response marketing costs that are incurred as the
      primary method by which customers subscribe to the Company’s services. The
      Company purchases mailing lists and sends advertising materials to prospective
      subscribers from those lists. Customers subscribe to the services by positively
      responding to those advertising materials, which serve as the contract for
      the
      subscription. The Company capitalizes and amortizes the costs of direct-response
      advertising on a straight-line basis over eighteen months, the estimated average
      period of retention for new customers. The Company capitalized costs of
      $4,739,000 and $1,941,000 during the years ended September 30, 2003 and 2002
      respectively. The Company amortized $2,914,000 and $719,000, respectively,
      of
      these capitalized costs during the years ended September 30, 2003 and 2002.
      The
      Company also analyzes these capitalized costs for impairment and believes that
      there was no impairment of the carrying cost at September 30, 2003 on the basis
      of customer retention and revenue generated per customer.





The
      Company also incurs advertising costs that are not considered direct-response
      advertising. These other advertising costs are expensed when incurred. These
      advertising expenses were $955,000 and $248,000 for the years ended September
      30, 2003 and 2002 respectively.





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 $273,340 and $178,058 for
      the years ended September 30, 2003 and 2002 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 transmit billing data, much of which is forwarded to Local Exchange
      Carriers (“LEC’s”) that provide local telephone service. Monthly subscription
      fees are generally included on the telephone bills of the customers. The Company
      recognizes revenue based on net billings accepted by the LEC’s. Due to the
      periods of time for which adjustments may be reported by the LEC’s 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. Customer refunds are recorded
      as an
      offset to gross revenue.





34
 *Table
            of Contents*





Revenue
      for billings to certain customers whom are billed directly by the Company and
      not through the LEC’s, 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 Statement of
      Financial Accounting Standards 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
      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 and the estimated
      reserve for doubtful accounts receivable.





Stock-Based
      Compensation :
      Statements of Financial Accounting Standards No. 123, *Accounting
      for Stock-Based Compensation* ,
      (“SFAS
      123”) established accounting and disclosure requirements using a fair-value
      based method of accounting for stock-based employee compensation. In accordance
      with SFAS 123, the Company has elected to continue accounting for stock based
      compensation using the intrinsic value method prescribed by Accounting
      Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."





From
      time
      to time, the Company issues stock options to executives, key employees and
      members of the Board of Directors. Generally, when the Company grants stock
      options to employees, there is no intrinsic value of those options on the date
      of grant. Accordingly, no compensation cost has been recognized for stock
      options granted to employees. There were no options granted in the years ended
      September 30, 2003 and 2002 nor was there any additional vesting of options
      previously granted. Because no options were granted during the years ended
      September 30, 2003 and 2002, there is no presentation of pro forma information
      regarding net income.





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The
      Company accounts for stock awards issued to nonemployees 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 nonemployees are accounted for at
      their
      fair value as determined under Black-Scholes option pricing model.





Temporary
      Equity: During
      fiscal 1999 and 2000, the Company issued 925,000 shares and 600,000 shares,
      respectively, to consultants and other third parties whereupon it was
      subsequently determined that the consultants did not perform under the terms
      of
      the related agreements. The Company has pursued legal action against the
      consultants and third parties and ultimately such shares were retrieved. The
      value of such shares, totaling $1,689,239, was not recorded as expense but
      rather was reflected as temporary equity, together with a related receivable
      until such times that the shares were retrieved. No such shares were outstanding
      at September 30, 2003.





Impairment
      of Long-lived Assets :
      The
      Company assesses long-lived assets for impairment in accordance with the
      provisions of SFAS 121, *Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      Of.* SFAS
      121
      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. Recoverability
      of the asset is determined by comparing the forecasted undiscounted cash flows
      generated by said asset to its carrying value. 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.





Recently
      Issued Accounting Pronouncements :
      In July
      2002, the FASB issued SFAS No. 146, *"Accounting
      for Costs Associated With Exit or Disposal Activities"* .
      This
      Standard requires costs associated with exit or disposal activities to be
      recognized when they are incurred. The Company estimates the impact of adopting
      these new rules will not be material.





In
      October 2002, the FASB issued SFAS No. 147, *"Acquisitions
      of Certain Financial Institutions."* SFAS No.
      147 is effective October 1, 2002. The adoption of SFAS No. 147 did not have
      a
      material effect on the Company’s financial statements.





In
      April
      2003, the FASB issued SFAS No. 149, *"Amendment
      of Statement 133 on Derivative Instruments and Hedging
      Activities,"* effective for contracts entered into or modified after June 30, 2003. This
      amendment clarifies when a contract meets the characteristics of a derivative,
      clarifies when a derivate contains a financing component and amends certain
      other existing pronouncements. The Company believes the adoption of SFAS No.
      149
      will not have a material effect on the Company’s financial
      statements.





In
      May
      2003, the FASB issued SFAS No. 150, *"Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity."* SFAS No.
      150 is effective for financial instruments entered into or modified after May
      31, 2003, and otherwise is effective at the beginning of the first interim
      period beginning after June 15, 2003. SFAS No. 150 requires the classification
      as a liability of any financial instruments with a mandatory redemption feature,
      an obligation to repurchase equity shares, or a conditional obligation based
      on
      the issuance of a variable number of its equity shares. The Company does not
      have any financial instruments with a mandatory redemption feature. The Company
      believes the adoption of SFAS No. 150 will not have a material effect on the
      Company’s financial statements.





In
      November 2002, the FASB issued FASB Interpretation No. 45, *"Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others"* (FIN
      45). FIN 45 clarifies the requirements for a guarantor’s accounting for and
      disclosure of certain guarantees issued and outstanding. The initial recognition
      and initial measurement provisions of FIN 45 are applicable to guarantees issued
      or modified after December 31, 2002. The disclosure requirements of FIN 45
      are
      effective for financial statements for periods ending after December 15, 2002.
      The adoption of FIN 45 did not have a significant impact on the Company’s
      financial statements. See Note 10.





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In
      January 2003, the FASB issued FIN No. 46, *"Consolidation
      of Variable Interest Entities"* (FIN
      46). FIN No. 46 states that companies that have exposure to the economic risks
      and potential rewards from another entity’s assets and activities have a
      controlling financial interest in a variable interest entity and should
      consolidate the entity, despite the absence of clear control through a voting
      equity interest. The consolidation requirements apply to all variable interest
      entities created after January 31, 2003. For variable interest entities that
      existed prior to February 1, 2003, the consolidation requirements are effective
      for annual or interim periods beginning after June 15, 2003. Disclosure of
      significant variable interest entities is required in all financial statements
      issued after January 31, 2003, regardless of when the variable interest was
      created. The Company is presently reviewing arrangements to determine if any
      variable interest entities exist but does not anticipate the adoption of FIN
      46
      will have a significant impact on the Company’s financial
      statements.




3.
            ACCOUNTS
                RECEIVABLE





The
      Company provides billing information to third party billing companies for the
      majority of its monthly billings. Billings submitted are “filtered” by these
      billing companies and the LEC’s. 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 LEC’s by those billing companies.
      The billing companies and LEC’s 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
      dilution amounts will vary due to numerous factors and the Company may not
      be
      certain as to the actual amounts of dilution 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 LEC’s and the billing companies. The Company processes its billings through
      two primary billing companies.





EBillit,
      Inc. (“EBI”) provides the majority of the Company’s billings, collections, and
      related services. The net receivable due from EBillit at September 30, 2003
      was
      $6,457,998, net of  an
      allowance for doubtful accounts of $2,269,027. The net receivable from EBI
      at
      September 30, 2003, represents approximately 76% of the Company’s total net
      accounts receivable at September 30, 2003.




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
      subscriptions receivable at September 30, 2003 was $214,994.





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Accounts
      receivable at September 30, 2003 is summarized as follows:




Current
            
            Long-Term
            
            TotalGross
                accounts receivable
            
            $
            10,317,029
            
            $
            1,518,251
            
            $
            11,835,280Allowance
                for doubtful accounts
            
            
            (2,988,405
            )
            
            (394,746
            )
            
            (3,383,151
            )Net
            
            $
            7,328,624
            
            $
            1,123,505
            
            $
            8,452,129





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
      allowance for doubtful accounts is attributable to the following categories
      at
      September 30, 2003:





Holdback
                reserves of Local Exchange Carriers
            
            $
            2,221,441Reserves
                held by active third party billing aggregators
            
            
            757,673Reserves
                held by inactive third party billing aggregator
            
            
            154,037Reserve
                for refunds
            
            
            250,000$
            3,383,151




4.
            INTELLECTUAL
                PROPERTY





In
      connection with the Company’s acquisition of Telco, the Company was required to
      provide accelerated payment of license fees for the use of the Internet domain
      name or **U** niversal **R** esource **L** ocator
      (URL) *Yellow-page.
      net* .
      Telco
      had previously entered into a 20-year license agreement for the use of the
      URL
      with one of its two 50% stockholders. The original license agreement required
      annual payments of $400,000. However, the agreement stated that upon a change
      in
      control of Telco, a $5,000,000 accelerated payment is required to maintain
      the
      rights under the licensing agreement. The URL holder agreed to discount the
      accelerated payments from $8,000,000 to $5,000,000 at the time of the
      acquisition. The Company agreed to make that payment upon effecting the
      acquisition of Telco.





The
      Company made a $3,000,000 cash payment and issued a note payable for $2,000,000
      to acquire the licensing rights of the URL. The Company also issued 2,000,000
      shares of its common stock to be held as collateral on the note. The note
      payable was originally due on July 15, 1999. The Company failed to make the
      $2,000,000 payment when due. The repayment terms were renegotiated to extend
      the
      due date to January 15, 2000. The Company was required to pay an extension
      fee
      of $200,000 at that time. The Company again renegotiated the repayment terms
      on
      April 26, 2000, to a demand note, with monthly installments of $100,000, subject
      to all operating requirements, which, management believes, have subsequently
      been met by the Company.





In
      the
      year ended September 30, 2002, the former URL holder claimed that it was due
      additional amounts for the prior loan extensions. The Company reached a
      settlement with the former URL holder that required the Company to issue to
      the
      former URL holder, 4,000,000 shares of the Company’s common stock, warrants to
      purchase 500,000 shares of the Company’s common stock and a note payable for
      $550,000. The Company recorded an expense of approximately $917,000 related
      to
      the settlement representing the principal amount of the note payable, $360,000
      as the fair value of the 4,000,000 common shares and $7,176 as the fair value
      of
      the warrants. The value of the common stock was determined on the basis of
      the
      quoted trading price of the shares on the date of the agreement. The fair value
      of the warrants was determined on the using the Black-Scholes option pricing
      model.





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The
      URL
      is recorded at its cost net of accumulated amortization. Management believes
      that the Company’s business is dependent on its ability to utilize this URL
      given the recognition of the Y *ellow
      page* term.
      Also, its current customer base relies on the recognition of this term and
      URL
      as a basis for maintaining the subscriptions to the Company’s service.
      Management believes that the current revenue and cash flow generated through
      use
      of *Yellow-page.net* supports
      the carrying of the asset. The Company periodically analyzes the carrying value
      of this asset to determine if impairment has occurred. No such impairments
      were
      identified during the year ended September 30, 2003. The URL is amortized on
      an
      accelerated basis over the twenty-year term of the licensing agreement.
      Amortization expense on the URL was $387,135 and $403,232 for the years ended
      September 30, 2003 and 2002 respectively.





During
      the year ended September 30, 2003, the Company acquired a three year license
      for
      the domain name, “YP.com” for $250,000 cash and 100,000 shares of the Company’s
      common stock valued at $60,000.





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





Years
                ended September 30,2004
            
            $
            431,0222005
            
            
            398,5282006
            
            
            343,9862007
            
            
            236,2122008
            
            
            213,035Thereafter
            
            
            1,890,169Total
            
            $
            3,512,952





5.
            PROPERTY
                AND EQUIPMENT





Property
      and equipment consisted of the following at September 30, 2003:





Leasehold
                improvements
            
            $
            376,287Furnishings
                and fixtures
            
            
            167,706Office
                and computer equipment
            
            
            857,869Total
            
            
            1,401,862Less
                accumulated depreciation
            
            
            (670,720
            )Property
                and equipment, net
            
            $
            731,142




6.
            NOTES
                PAYABLE AND LINE OF CREDIT




Notes
      payable at September 30, 2003 are comprised of the following:





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Note
                payable to former Telco stockholders, original balance of $550,000,
                interest at 10.5% per annum. Repayment terms require monthly installments
                of principal and interest of $19,045 beginning December 15, 2002.
                Stated
                maturity September 25, 2004. Collateralized by all assets of the
                Company.
            
            $115,868




The
      note
      payable to the former Telco stockholders totaled $550,000 at the beginning
      of
      the fiscal year ending September 30, 2002. In accordance with instructions
      that
      the Company received from said stockholders, the Company has made payments
      to
      third parties on behalf of the stockholders and applied those payments as
      reductions to the note payable. Said stockholders are not a part of management
      or on the Board of Directors of the Company. Payments on the note were
      accelerated at the option of the Company. Although the note calls for monthly
      payments of $19,045, the Company would not be required to make another payment
      until February 2004 under the original repayment provisions of the note. The
      full remaining balance of $115,866 is due in the year ended September 30,
      2004.




7.
            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.





During
      the years ended September 30, 2003 and 2002, the Company structured certain
      transactions related to its merger with Telco that allowed the Company to
      utilize net operating losses that were previously believed to be unavailable
      or
      limited under the change of control rules of Internal Revenue Code 382. The
      deferred income tax asset of approximately $1,463,000 related to these net
      operating losses recorded at September 30, 2001, was partially offset by a
      valuation allowance of approximately $773,000. The Company also amended prior
      year tax returns reflecting a higher net operating loss carryforward that had
      initially been estimated. The additional net operating loss carryforwards
      previously not recognized resulted in an income tax benefit of $979,000 that
      was
      utilized to offset some of the income tax provision for the year ended September
      30, 2003. Additionally, as a result of these changes and the elimination of
      the
      valuation allowance an income tax benefit of approximately $917,000 was
      recognized during the year ended September 30, 2002. At September 30, 2003
      the
      Company had a federal net operating loss carryforward of $2,880,000 and no
      state
      net operating losses. Those operating loss carryforwards expire in 2019 and
      2020.




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





2003
            
            2002Current
                Provision
            
            $
            3,337,208
            
            $
            376,582Deferred
                (Benefit) Provision
            
            
            (1,465,915
            )
            
            77,836Net
                income tax provision
            
            $
            1,871,293
            
            $
            454,418




40
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A
      reconciliation of the differences between the effective and statutory income
      tax
      rates for years ended September 30, is as follows:





2003
            
            
            
            2002Federal
                statutory rates
            
            $
            3,226,019
            
            
            34
            %
            $
            1,082,228
            
            
            34
            %State
                income taxes
            
            
            114,807
            
            
            1
            %
            
            222,811
            
            
            7
            %Utilization
                of valuation allowance
            
            
            -
            
            
            -
            
            
            (661,088
            )
            
            (43
            )%Change
                in estimate of NOL due to changes in structuring and state income
                tax
                rates used
            
            
            (1,465,381
            )
            
            (15
            )%
            
            (143,575
            )
            
            (4
            )%Other
            
            
            (4,153
            )
            
            -
            
            
            (45,958
            )
            
            (1
            )%Effective
                rate
            
            $
            1,871,293
            
            
            20
            %
            $
            (454,418
            )
            
            (7
            )%








At
      September 30, 2003, deferred income tax assets and liabilities were comprised
      of:





Deferred
                Income Tax Assets:Book/tax
                differences in accounts receivable
            
            $
            1,184,103Deferred
                and stock-based compensation
            
            
            640,347Book/tax
                differences in intangible assets
            
            
            72,140Net
                operating loss carryforward
            
            
            979,138Total
                deferred income tax asset
            
            
            2,875,728Deferred
                Income Tax Liabilities:Book/tax
                differences in depreciation
            
            
            100,006Book/tax
                differences in customer acquisition costs
            
            
            1,135,134Total
                deferred income tax liability
            
            
            1,235,140Net
                income tax asset
            
            $
            1,640,588




During
      the year ended September 30, 2003, the Company moved certain operations and
      revenue generating assets to a state without corporate income taxes thereby
      reducing the statutory rate used for state income taxes.





During
      the year ended September 30, 2002, the valuation allowance was reduced by
      approximately $773,000.




8.
            LEASES





The
      Company leases its office space and certain equipment under long-term operating
      leases expiring through fiscal year 2006. Rent expense under these leases was
      $222,418 and $145,052 for the years ended September 30, 2003 and 2002,
      respectively.




Future
      minimum annual lease payments under operating lease agreements for years ended
      September 30 are as follows:





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2004
            
            $
            427,5972005
            
            
            383,6792006
            
            
            292,125Total
            
            $
            1,103,401





9.
            STOCKHOLDERS’
                EQUITY





Common
      Stock Issued for Services





The
      Company has historically 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, 2003, the Company issued 6,300,000 shares of common stock to officers and
      directors, or entities controlled by those individuals, valued at $478,750.
      Additionally, shares were granted under the Company’s Restricted Stock Plan (see
      Note 14).





During
      the year ended September 30, 2002, the Company issued 100,000 shares of common
      stock to officers, directors and consultants valued at $9,000





Common
      Stock Issued for URL





During
      the year ended September 30, 2003, the Company acquired a three year license
      for
      the domain name, “YP.com” for $250,000 cash and 100,000 shares of the Company’s
      common stock valued at $60,000.





Series
      E Convertible Preferred Stock





During
      the year ended September 30, 2002, the Company created a new series of capital
      stock, the Series E Convertible Preferred Stock. The Company authorized 200,000,
      $0.001 par value shares. 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 shall
      be
      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.





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. As of September 30, 2003, the liquidation
      preference value of the outstanding Series E Convertible Preferred Stock was
      $39,552, and dividends totaling $2,472 had been accrued associated with said
      shares.





Treasury
      Stock





During
      the year ended September 30, 2003, the Company acquired 500,000 shares of its
      common stock from a former consultant to the Company for $45,000, which was
      the
      approximate trading value of those shares at the time the settlement was
      reached.





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10.
            COMMITMENTS
                AND CONTINGENCIES





Telco
      Billing





The
      acquisition of Telco by the Company called for the issuance of 17,000,000 new
      shares of stock in exchange of the existing shares of Telco. As part of that
      agreement, the Company gave the former shareholders the right to “Put” back to
      the Company certain shares of stock at a minimum stock price of 80% of the
      current trading price with a minimum strike price of $1.00. The net effect
      of
      which was that the former Telco shareholders could require the Company to
      repurchase shares of stock of the Company at a minimum cost of $10,000,000.
      The
      agreement required the Company to attain certain market share
      levels.





The
“Put”
      feature has renegotiated and retired. As part of the renegotiated settlement,
      the Company provided a credit facility of up to $20,000,000 to the former Telco
      shareholders, collateralized by the stock held by these shareholders, with
      interest at least 0.25 points higher than the Company’s average cost of
      borrowing. Additional covenants warrant that no more that $1,000,000 can be
      advanced at any point in time and no advances can be made in excess with out
      allowing at least 30 days operating cash reserves or if the Company is in an
      uncured default with any of its lenders. At September 30, 2003, the Company
      had
      advanced $2,126,204 under this agreement. The former Telco shareholders have
      been making interest payments on the advances but, as allowed under the
      agreement, have not made any principal repayments.





Subsequent
      to September 30, 2003, the Company and the former Telco shareholders agreed
      to
      amend the arrangement whereby the Company will be required to advance only
      an
      additional $1,300,000 through April 2004 and the ability to draw on that
      facility will cease at that time. However, the Company made a commitment in
      connection with that amendment to begin paying dividends to all of its common
      stockholders in the fiscal year ended September 30, 2004.





Billing
      Service Agreements





The
      Company has entered into a customer billing service agreement with EBillit,
      Inc.
      (EBI). EBI provides billing and collection and related services associated
      to
      the telecommunications industry. The agreement term is for two years,
      automatically renewable in two-year increments unless appropriate notice to
      terminate is given by either party. The agreement will automatically renew
      on
      September 1, 2005, unless either party gives notice of termination 90 days
      prior
      to that renewal date. Under the agreement, EBI bills, collects and remits the
      proceeds to Telco net of reserves for bad debts, billing adjustments, telephone
      company fees and EBI fees. If either the Company’s transaction volume decreases
      by 25% from the preceding month, less than 75% of the traffic is billable to
      major telephone companies, EBI may at its own discretion increase the reserves
      and holdbacks under this agreement. EBI handles all billing information and
      collection of receivables. The Company’s cash receipts on trade accounts
      receivable are dependent upon estimates pertaining to holdbacks and other
      factors as determined by EBI. EBI may at its own discretion increase the
      reserves and holdbacks under this agreement.





The
      Company has also entered into an agreement with ACI Communications, Inc. ACI
      provides billing and collection and related services associated to the
      telecommunications industry.





These
      agreements with the billing companies provide significant control to the billing
      companies over cash receipts and ultimate remittances to the Company. The
      Company estimates the net realizable value of its accounts receivable on
      historical experience and information provided by the billing companies
      reflecting holdbacks and reserves taken by the billing companies and
      LEC’s.





43
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            of Contents*





Line
      of Credit Facilities





The
      Company has a line of credit arrangement with a financial institution for a
      total of $250,000. Interest on borrowings is at the prime rate plus 0.5% The
      facility expires in May 2004. There were no outstanding borrowings under this
      arrangement at September 30, 2003.





The
      Company also has a facility to borrow from a financial institution that allows
      borrowings based on qualifying trade accounts receivable. The advances made
      under the arrangement are made on a basis of individually negotiated
      transactions. The advances are generally short-term, being repaid within 30
      to
      60 days. Advances are limited to $150,000 and accrued interest at an effective
      rate of 1% per month. There is no specified expiration date on the facility.
      There were no outstanding borrowings under this arrangement at September 30,
      2003.





Other





The
      Company’s Board of Directors has committed the Company to pay for the costs of
      defending a civil action filed against its CEO and Chairman. The action involves
      a business that the CEO was formerly involved in. The Company and at least
      one
      officer have received subpoenas in connection with this matter and the Board
      believes that it is important to help resolve this matter as soon as possible.
      The Board action includes the payment of legal and other fees for any other
      officers and directors that may become involved in this civil action. Through
      September 30, 2003, the Company has paid $732,500 on behalf of its CEO relative
      to this matter. This amount is presented as compensation expense within general
      and administrative expenses in the accompanying statement of operations for
      the
      year ended September 30, 2003. The Company believes that all civil actions
      against the CEO related to this matter have been dismissed subsequent to
      September 30, 2003. However, additional legal costs will be incurred to address
      all matters in finalizing this issue and, at this time, the Company cannot
      estimate what additional costs may be incurred to continue covering the costs
      related to this matter, but all such costs shall be deemed to be additional
      compensation to the CEO. There can be no assurance that the Company may not
      be
      named a defendant in this action in the future.





The
      Company has entered into “Executive Consulting Agreements” with four entities
      controlled by four of the Company’s officers individually. These agreements call
      for fees to be paid for the services provided by these individuals as officers
      of the Company as well as their respective staffs. These agreements are not
      personal service contracts of these officers individually. The agreements extend
      through 2007 and require annual performance bonuses that aggregate up to
      approximately $320,000 depending upon available cash and meeting of certain
      performance criteria.





The
      Company is named as a defendant in proceedings that including alleged wrongful
      discharge of certain former employees and a purported class action proceeding
      related to the Company’s mailings of marketing materials. The Company intends to
      defend these actions and does not believe that these claims have merit nor
      will
      the resolution of such have a material adverse effect on the Company’s financial
      condition and results of operations.





The
      Company has entered into several agreements with third parties to distribute
      and
      enhance the services its provides to its customers. These agreements have terms
      for up to three years and call for payments of approximately $110,000 per month.
      Generally these agreements are cancelable within 30 to 60 days upon written
      notice from either party.





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11.
            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 the net income to determine the amount available to common
      shareholders. There were $1,978 and $494 preferred stock dividends in the years
      ended September 30, 2003 and 2002, respectively. Warrants to purchase 500,000
      shares of common stock were excluded from the calculation for the year ended
      September 30, 2002. The exercise price of those warrants was greater than the
      average trading value of the common stock and therefore inclusion of such would
      be anti-dilutive. Also excluded from the calculation were 131,840 shares of
      Series E Convertible Preferred Stock issued during the year ended September
      30,
      2002, which are considered anti-dilutive due to the cash payment required by
      the
      holders of the securities at the time of conversion.





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


2003
              
              2002Income
              
              Shares
              
              PerShare
              
              Income
              
              Shares
              
              PershareNet
                  Income
              
              $
              7,615,866
              
              
              
              
              
              
              
              $
              2,840,731Preferred
                  stock dividends
              
              
              (1,978
              )
              
              
              
              
              
              
              
              (494
              )Income
                    available to common Stockholders
              
              $
              7,613,888
              
              
              
              
              
              
              
              $
              2,840,237**Basic
                  Earnings Per Share:**Income
                  available to common stockholders
              
              $
              7,613,888
              
              
              45,591,590
              
              $
              0.17
              
              $
              2,840,237
              
              
              41,753,464
              
              $
              0.07Effect
                  of dilutive securities
              
              
              N/A
              
              
              
              
              
              
              
              
              N/A
              
              
              N/A**Diluted
                  Earnings Per Share**
              
              $
              7,613,888
              
              
              45,591,590
              
              $
              0.17
              
              $
              2,840,237
              
              
              41,753,464
              
              $
              0.07





12.
            RELATED
                PARTY TRANSACTIONS




During
      the years ended September 30, 2003 and 2002, the Company entered into the
      related party transactions with Board members, officers and affiliated entities
      as described below:





Directors
      & Officers





Board
      of
      Director fees for the years ended September 30, 2003 and 2002 were $160,000
      and
      $101,120 respectively. These amounts are in addition to the amounts discussed
      below. At September 30, 2002, $40,000 of the 2002 amount was accrued but unpaid.
      The Company also granted 50,000 shares of common stock to a director as part
      of
      their Board of Director fees for the year ended September 30, 2002.





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During
      the year ended September 30, 2002, the Company had made loans to its Chief
      Executive Officer and its former Chief Financial Officer. The Board of Directors
      approved the loans as part of the officers’ respective compensation packages.
      The loans carried an 8% interest rate and were collateralized by shares of
      Company common stock owned by the officers’ valued at the greater of $1.00 per
      share or the current market price of the shares. The loans to the CEO and former
      CFO totaled approximately $200,000 and $17,000 respectively. At September 30,
      2002, the loan to the CEO was repaid. In May 2002, the former CFO resigned.





The
      CEO,
      Executive Vice President of Marketing, Corporate Secretary/Vice President of
      Corporate Image and CFO are paid for their services and those of their
      respective staffs through separate entities controlled by these individuals
      which pre-date their association with the Company. The following describes
      the
      compensation paid to these entities.





Sunbelt
      Financial Concepts, Inc.





Sunbelt
      Financial Concepts, Inc. (“Sunbelt”) provides the services of the Chairman and
      CEO and his staff to the Company.





Sunbelt
      provides the strategic and overall planning as well as the operations management
      to the Company. Sunbelt’s team is experienced in all areas of management and
      administration.





During
      the year ended September 30, 2003, the Company paid a total of approximately
      $1,933,000 to Sunbelt. That amount includes $410,054 as reimbursement of legal
      fees incurred by Sunbelt related to the personal legal matters discussed in
      Note
      10. Also included in that amount is $597,000 in fees for services rendered
      by
      Sunbelt. Additionally, the CEO and Sunbelt were awarded grants of the Company’s
      common stock valued at approximately $603,000. Approximately $443,322 (including
      the taxes on these amounts) of the total remains accrued at September 30,
      2003.





Advertising
      Management Specialists, Inc.





Advertising
      Management Specialists, Inc. (“AMS”) provides the services of the Executive Vice
      President of Marketing, a Director of the Company, and his staff to the Company.
      AMS is a marketing and advertising company experienced in designing Direct
      Marketing Pieces, insuring compliance with regulatory authorities for those
      pieces and designing new products that can be mass marketed through the mail.
      AMS’ president is a director of the Company.





The
      Company outsources the design and testing of its many direct mail pieces to
      AMS
      for a fee. AMS is also solely responsible for the new products that have been
      added to the Company’s website and is working on new mass-market products to
      offer the Company’s customers.





Total
      amount paid and accrued to this director and AMS during the year ended September
      30, 2003 was $957,000. Of that amount, $477,000 was compensation for services
      and a stock award valued at $480,000. Of the total, $125,816 is accrued at
      September 30, 2003.





Advanced
      Internet Marketing, Inc.





Advanced
      Internet Marketing, Inc. (“AIM”) provides the services of the Vice President of
      Corporate Image, a Director of the Company, and his staff to the Company. The
      Company outsources the design and marketing of it’s website on the World Wide
      Web to AIM. AIM’s team of designers are experienced in all areas of web design
      and has created all of the Company’s logos and images for branding.





46
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The
      total
      amount paid and accrued to AIM during the year ended September 30, 2003 was
      $754,750. Of that amount, $74,750 was compensation for services and a stock
      award valued at $480,000. Of the total, $98,294 is accrued at September 30,
      2003.





MAR
      & Associates





The
      services of the Company’s Chief Financial Officer and his staff are paid to MAR
& Associates (“MAR”). The total amount paid and accrued to MAR during the
      year ended September 30, 2003 was $851,000. Of that amount, $215,000 was
      compensation for services and a stock award valued at $636,000. Of the total,
      $46,198 is accrued at September 30, 2003.





Other





The
      Company made additional advances to former Telco shareholders of $1,800,000
      during the year ended September 30, 2003. Interest earned on these advances
      was
      $92,245 for the year ended September 30, 2003. Advances to affiliates are
      summarized as follows at September 30, 2003:





Morris
                & Miller
            
            $
            1,089,485Mathew
                & Markson
            
            
            1,036,719Total
            
            $
            2,126,204





On
      December 22, 2003, the Company entered into an agreement with the former Telco
      shareholders that terminates the line of credit agreement effective April 9,
      2004.





Simple.Net,
      Inc. (“SN”)





The
      Company has contracted with Simple.Net, Inc. (“SN”), an internet service
      provider owned by a director of the Company, to provide internet dial-up and
      other services to its customers. SN has sold said services to the Company at
      below market rate prices from time to time. During the years ended September
      30,
      2003 and 2002, the Company paid SN approximately $419,000 and $55,000,
      respectively for said services. At September 30, 2003, $80,000 due SN was
      accrued in accounts payable.





In
      addition, SN pays a monthly fee to the Company for technical support and
      customer service provided to SN’s customers by the Company’s employees. The
      Company charges SN for these services according to a per customer pricing
      formula:





Customer
      Service & Management Agreement fees are calculated by number of customer
      records of SN multiplied by a base cost of $1.02.





Technical
      Support fees are calculated by number of customer records of SN multiplied
      by a
      base cost of 60 cents.





For
      the
      years ended September 30, 2003 and 2002, the Company recorded revenues of
      approximately $618,611 and $300,901, respectively, from SN for these
      services.





Prior
      to
      July 2002, the Company provided accounting functions to SN for a $2,500 monthly
      fee. This arrangement was canceled in July 2002.




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13.
            CONCENTRATION
                OF CREDIT RISK





The
      Company maintains cash balances at banks in Arizona. Accounts are insured by
      the
      Federal Deposit Insurance Corporation up to $100,000. At September 30, 2003,
      the
      Company had bank balances exceeding those insured limits of
      $2,255,000.





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 two third party billing companies. The Company is
      dependent upon these billing companies for collection of its accounts
      receivable. As discussed in Note 3, the net receivable due from a single billing
      services provider at September 30, 2003 was $6,457,998, net of  an
      allowance for doubtful accounts of $2,269,027. The net receivable from that
      billing services provider at September 30, 2003, represents approximately 76%
      of
      the Company’s total net accounts receivable at September 30, 2003.




14.
            STOCK
                BASED COMPENSATION





During
      the year ended September 30, 2002, the Company’s shareholders approved the 2002
      Employees, Officers & Directors Stock Option Plan (the 2002 Plan). Under the
      2002 Plan, the total number of shares of common stock that may be granted is
      3,000,000. The Plan provides that shares granted come from the Corporation’s
      authorized but unissued common stock. The price of the options granted under
      this plan shall not be less than 100% of the fair market value, or in the case
      of a grant to a principal shareholder, not less than 110% of the fair market
      value of such common shares at the date of grant. The options expire 10 years
      from the date of grant. At September 30, 2002, no stock options had been granted
      under the 2002 Plan.





During
      the year ended September 30, 2003, the Company’s Board of Directors and a
      majority of it shareholders voted to terminate the 2002 Plan and approved the
      Company’s 2003 Stock Plan ("2003 Plan"). The 3,000,000 shares of Company common
      stock previously allocated to the 2002 Plan were re-allocated to the 2003 Plan.
      Substantially all Company employees are eligible to participate in the plan.
      On
      August 12, 2003, 2,048,000 shares authorized under the 2003 Plan were granted
      in
      the form of Restricted Stock. These shares of Restricted Stock were granted
      to
      the Company’s service providers as well as the Company’s executives. Of the
      2,048,000 shares of Restricted Stock granted, 1,049,000 shares vest at the
      end
      of three years, an additional 599,000 shares vest either at the end of ten
      years
      or upon the Company’s common stock attaining an average bid and ask price of $10
      per share for three consecutive trading days and an additional 400,000 shares
      vest upon the common stock attaining various average bid and ask prices with
      80,000 shares vesting for each $1 price increase at prices beginning from $5
      per
      share up to $9 per share. The vesting of all shares of Restricted Stock
      accelerates upon a Change of Control, as defined in the 2003 Plan. The value
      of
      the shares granted was $2.02 per share, the trading value of the shares on
      the
      grant date. The Company deferred the expense and is recognizing the expense
      over
      the vesting periods. During the year ended September 30, 2003, the Company
      expensed $154,482 under the 2003 Plan. Of the 2,048,000 granted in August 2003,
      75,000 of those shares were forfeited unvested as of September 30, 2003.





Under
      the
      Employee Incentive Stock Option Plan approved by the stockholders in 1998,
      the
      total number of shares of common stock that may be granted is 1,500,000. The
      plan provides that shares granted come from the Corporation’s authorized but
      unissued common stock. The price of the options granted pursuant to this plan
      shall not be less than 100 percent of the fair market value of the shares on
      the
      date of grant. The options expire from five to ten years from date of grant.
      At
      September 30, 2002, the Company had granted an aggregate of 1,212,000 options
      under this plan, all of which had expired as of September 30, 2001.





48
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In
      addition to the Employee Incentive Stock Option Plan, the Company will
      occasionally grant options to consultants and members of the board of directors
      under specific stock option agreements. There were no such options granted
      in
      the years ended September 30, 2003 and 2002.





At
      September 30, 2003, there were no options exercisable or outstanding. No options
      were granted in the years ended September 30, 2003 and 2002.





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




2003
            
            2002Weighted
                Average ExercisePrice
            
            
            
            Weighted
                Average ExercisePriceWarrants
                outstanding at beginning of year
            
            
            500,000
            
            $
            2.12
            
            
            500,000
            
            $
            2.12Granted
            
            
            -0-
            
            
            
            
            
            -0-Expired
            
            
            -0-
            
            
            
            
            
            -0-Exercised
            
            
            -0-
            
            
            
            
            
            -0-Outstanding
                at September 30,
            
            
            500,000
            
            $
            2.12
            
            
            500,000
            
            $
            2.12





The
      warrants granted in the year ended September 30, 2001 were issued in connection
      with the settlement with the former URL holder (NOTE 4). The exercise prices
      of
      the warrants range from $1.00 to $3.00. The fair values of these warrants were
      estimated at the date of grant using the Black-Scholes option-pricing model
      with
      the following assumptions:





Dividend
                yield
            NoneVolatility
            0.491Risk
                free interest rate
            4.18%Expected
                asset life
            2.5
                years





The
      500,000 warrants outstanding at September 30, 2003, expire in September
      2006.




15.
            EMPLOYEE
                BENEFIT PLAN





The
      Company maintains a 401(k) profit sharing plan for its employees. Employees
      are
      eligible to participate in the plan upon reaching age 21 and completion of
      three
      months of service. The Company made contributions of $5,427 and $3,400 to the
      plan for the years ended September 30, 2003 and 2002, respectively.




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16.
            OTHER
                INCOME





Other
      income for the year ended September 30, 2003 includes $618,000 of income earned
      from an affiliate for technical services provided to that affiliate. The total
      income is reduced by expenses incurred in other legal settlements. Also, in
      the
      year ended September 30, 2002, is a gain of $130,000, net of legal costs,
      resulting from the settlement of a dispute with one of the Company’s former
      billing companies.





17.
            QUARTERLY
                FINANCIAL DATA (UNAUDITED)





Subsequent
      to filing the interim financial statements included on Form 10-QSB for the
      periods ending December 31, 2001, March 31, 2002, June 30, 2002, December 31,
      2002, March 31, 2003, and June 30, 2003, the Company has changed its accounting
      treatment of shares issued to non-performing consultants. The previously filed
      interim statements reflected an expense upon issuance of the shares and a
      reversal of this expense when it was deemed (through a settlement agreement
      or
      judgment) that these shares would be returned. However, after further analysis
      and consultation with the Securities and Exchange Commission, it was determined
      to be inappropriate to recognize the initial expense and its subsequent reversal
      as no services were rendered by these consultants. Instead, the issuance of
      these shares will be reflected as temporary equity, together with a related
      receivable, until the shares were returned. Such treatment is described in
      Note
      2.





The
      following table sets forth the impact of this change on the following three
      month periods:





50
 *Table
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**Quarter
                    Ended****December
                    31,**
                  **2002**
                
                **March
                    30,**
                  **2003**
                
                **June
                    30,**
                  **2003**
                
                **September
                    30,**
                  **2003****Quarterly
                    Data Per 10-Q Filings**Net
                    revenues
                
                $
                5,741,455
                
                $
                6,849,044
                
                $
                8,013,845
                
                
                naGross
                    profit
                
                
                3,919,305
                
                
                5,000,078
                
                
                5,952,616
                
                
                naNet
                    income
                
                
                1,092,892
                
                
                1,504,921
                
                
                1,676,830
                
                
                naEarnings
                    per share information:Basic
                
                $
                0.02
                
                $
                0.03
                
                $
                0.04
                
                
                naDiluted
                
                $
                0.02
                
                $
                0.03
                
                $
                0.04
                
                
                na**Revised
                    Quarterly Data**Net
                    revenues
                
                $
                5,741,455
                
                $
                6,849,044
                
                $
                8,013,845
                
                $
                10,163,100Gross
                    profit
                
                
                3,803,327
                
                
                5,000,078
                
                
                5,952,616
                
                
                7,537,677Net
                    income
                
                
                1,017,506
                
                
                1,504,921
                
                
                1,676,830
                
                
                3,416,609Earnings
                    per share information:Basic
                
                $
                0.02
                
                $
                0.03
                
                $
                0.04
                
                $
                0.07Diluted
                
                $
                0.02
                
                $
                0.03
                
                $
                0.04
                
                $
                0.07
   **Quarter
                    Ended****December
                    31,**
                  **2001**
                
                **March
                    30,**
                  **2002**
                
                **June
                    30,**
                  **2002**
                
                **September
                    30,**
                  **2002****Quarterly
                    Data Per 10-Q Filings**Net
                    revenues
                
                $
                2,992,993
                
                $
                2,839,438
                
                $
                3,416,953
                
                
                naGross
                    profit
                
                
                1,808,716
                
                
                2,106,037
                
                
                2,248,557
                
                
                naNet
                    income
                
                
                306,349
                
                
                620,288
                
                
                798,742
                
                
                naEarnings
                    per share information:Basic
                
                $
                0.01
                
                $
                0.01
                
                $
                0.02
                
                
                naDiluted
                
                $
                0.01
                
                $
                0.01
                
                $
                0.02
                
                
                na**Revised
                    Quarterly Data**Net
                    revenues
                
                $
                2,992,993
                
                $
                2,839,438
                
                $
                3,416,953
                
                $
                3,368,742Gross
                    profit
                
                
                1,808,716
                
                
                2,106,036
                
                
                2,248,557
                
                
                2,957,139Net
                    income
                
                
                306,349
                
                
                620,286
                
                
                640,728
                
                
                1,273,369Earnings
                    per share information:Basic
                
                $
                0.01
                
                $
                0.01
                
                $
                0.01
                
                $
                0.03Diluted
                
                $
                0.01
                
                $
                0.01
                
                $
                0.01
                
                $
                0.03





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ITEM
      8A. CONTROLS AND
      PROCEDURES




Disclosure
      controls are procedures that 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-KSB,
      is recorded, processed, summarized and reported within the time periods
      specified by the Securities and Exchange Commission. Disclosure controls are
      also 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 principal executive officer and
      principal 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 a date within 90 days of the filing of this
      Form 10-KSB, 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. 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.





**Subsequent
      Review of Disclosure Controls**





Subsequent
      to the foregoing conclusions, we concluded that shares granted to consultants
      in
      1999 and 2000, most of which were subsequently recovered for nonperformance
      of
      services from 2001 to 2003, required different accounting treatment than was
      previously applied. This discovery has lead us to amend and restate our
      previously issued financial statements and other financial information for
      the
      fiscal year and quarter to date periods for the fiscal years ended September
      30,
      1999 through September 30, 2004.





At
      the
      time of filing the Original Filing, which was filed on December 31, 2003, our
      management was not aware of the internal control weaknesses relating to the
      accounting for shares issued to non-performing consultants. Subsequent to the
      filing of the Original Filing and after considering these internal control
      weaknesses, our chief executive officer and chief financial officer reevaluated
      the effectiveness of our disclosure controls and procedures as of September
      30,
      2003 for this Form 10-KSB/A. Based upon this reevaluation, our chief executive
      officer and chief financial officer concluded that our disclosure controls
      and
      procedures were not effective as of September 30, 2003.





The
      historical financial statements generated by predecessor management reflected
      an
      expense upon issuance of the non-performing consultant shares and a reversal
      of
      this expense when it was deemed (through a settlement agreement or judgment)
      that these shares would be returned. However, after further analysis, it was
      determined to be inappropriate to recognize the initial expense and its
      subsequent reversal as no services were rendered by these consultants. Instead,
      the issuance of these shares will be reflected as temporary equity, together
      with a related receivable, until the shares were returned. Such amounts will
      continue to be reflected as expense in the year granted and our revised
      statements will no longer reflect the reversal of this expense.





52
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PART
      III





ITEM
      13. EXHIBITS





The
      following exhibits are either attached hereto.





Exhibit
                Number
            
            Description23
            
            Consent
                of Epstein, Weber and Conover P.L.C31
            
            Certification
                pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 200232
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002




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:
                November 30, 2005
            
            */s/
                Peter J. Bergmann*Peter
                J. Bergmann, Chief Executive Officer




53