U.S.
      SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-KSB/A


(Amendment
      No. 1)





(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, 2004





 ̈ 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  ̈ .





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  ̈ .
















Registrant’s
      revenues for its most recent fiscal year were $57,168,105.





The
      aggregate market value of the common stock held by non-affiliates computed
      based
      on the closing price of such stock on December 1, 2004 was approximately
      $19,482,743





The
      number of shares outstanding of the registrant’s classes of common stock, as of
      December 1, 2004 was 50,891,302.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Proxy Statement for the Registrant’s 2005 Annual Meeting of Shareholders
      to be held in March 2005 are incorporated by reference in Part III of this
      Form
      10-KSB.





Transitional
      Small Business Disclosure Format: Yes  ̈ No x











**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, 2004, as originally filed by YP Corp.
      on
      December 29, 2004 (the “Original Filing”), 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 certain currently dated consents and 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
            27Report
                of Independent Registered Public Accounting
                Firm
            28Consolidated
                Financial Statements:Consolidated
                Balance Sheet at September 30,
                2004
            29Consolidated
                Statements of Operations for the Years
                Ended September 30, 2004 and September 30, 2003
            30Consolidated
                Statements of Cash Flows for the Years Ended
                September 30, 2004 and September 30, 2003
            31Consolidated
                Statements of Stockholder’s Equity for the
                Years Ended September 30, 2004 and September 30, 2003
            32Notes
                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, 2004, 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 the Company’s (i) belief that any progress it has made in addressing
      the various challenges it faced during the past year will help preserve its
      financial and operational integrity; (ii) belief that Mr. Bergmann’s background
      in the management of advertising and marketing companies will be helpful to
      the
      Company; (iii) expectation that the trend away from billing through LECs will
      continue in the future; (iv) belief that the fragmented online Yellow Pages
      market will experience some consolidation in the future; (v) expectation that
      it
      will keep its prices stable for the near future; (vi) plan to continue to take
      active measures to reconfirm its existing subscriber base and to convert
      customers from LEC billing to ACH billing; (vii) expectation that near-term
      revenues may continue to decline; and (viii) expectation that dilution may
      continue to decrease as the Company continues to convert more customers to
      ACH
      billing.





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 titled “Risk Factors,” as well as other factors that
      we are currently unable to identify or quantify, but that may exist in the
      future.





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





**Challenges
      and Solutions**





*Overview*





We
      confronted a number of significant challenges during fiscal 2004 and continue
      to
      face recent issues related to our billing methods, which is described in greater
      detail below under Recent Developments. However, we believe that the progress
      we
      have made in addressing these challenges and adopting enhanced corporate
      governance practices will help us to preserve the financial and operational
      integrity that we and our stockholders have experienced in the past. This
      progress is marked by the following examples:





·
            In
                keeping with our goal to end all related party transactions, we terminated
                the executive consulting agreements pursuant to which the offices
                of Chief
                Executive Officer, Chief Financial Officer and other executive positions
                were provided through consulting companies.





1
 *Table
            of Contents*





·
            We
                revamped our management team and filled the positions of Chief Executive
                Officer and Chief Financial Officer, as described in greater detail
                below.





·
            We
                recomposed our Board of Directors to include more independent directors,
                as described in greater detail
                below.





·
            We
                formed an audit committee, adopted its charter and appointed its
                chairman.





·
            We
                identified and designated the Board of Directors’ qualified financial
                expert.





·
            We
                adopted a comprehensive code of
                ethics.





·
            We
                revisited and updated our insider trading
                policies.





·
            We
                terminated our previous loan obligations to our two largest stockholders,
                Morris & Miller, Ltd. and Mathew and Markson, Ltd. Moreover, we
                negotiated the acceleration of three repayments, totaling an aggregate
                of
                $1,600,000, from these stockholders on their existing debt to us,
                which is
                well ahead of their April 2007 maturity
                dates.





·
            We
                obtained and publicly disclosed the beneficial ownership of Morris
&
                Miller, Ltd. and Mathew and Markson, Ltd. as provided to us in sworn
                affidavits by their managing director, Ilse
                Cooper.





·
            We
                recently paid our third consecutive quarterly cash dividend to our
                stockholders.





·
            We
                established a new $1 million credit
                facility.





·
            We
                adopted a Stockholder Rights Plan to protect the Company and our
                stockholders from unsolicited offers and to provide our board of
                directors
                with the leverage and ample opportunity to negotiate the greatest
                value
                for the stockholders if another person wishes to acquire the
                Company.





*Management
      and Board Changes*





On
      May
      28, 2004, our Chief Executive Officer, Angelo Tullo, resigned as an officer
      and
      director of our company. Our board of directors appointed Peter J. Bergmann
      to
      succeed Mr. Tullo as Chairman, President and Chief Executive Officer. Mr.
      Bergmann had previously been an independent director of our company since May
      2002. Mr. Tullo’s resignation was prompted by the fact that on May 27, 2004,
      federal indictments were handed down alleging that the former management of
      American Business Funding Corp., including Mr. Tullo, had engaged in fraud
      and
      conspiracy in connection with the factoring of receivables. American Business
      Funding Corp. is not and has never been affiliated with or related to our
      company.





Our
      board
      of directors believed that even though the indictments against Mr. Tullo were
      not related to our company or its business, so long as Mr. Tullo remained an
      officer and director of our company the indictments against him would adversely
      impact our business reputation and perception in the public markets and detract
      from our ability to expand our business. Accordingly, Mr. Tullo and the board
      of
      directors determined that it was in the best interests of our stockholders
      for
      Mr. Tullo to resign as an officer and director of our company. As described
      below under *Termination
      Agreements* ,
      we also
      later terminated the executive consulting agreement with Mr. Tullo’s company,
      Sunbelt Financial Concepts, Inc., or Sunbelt.





2
 *Table
            of Contents*





Upon
      Mr.
      Tullo’s resignation as Chairman and CEO, the board of directors determined that
      Mr. Bergmann was the most qualified candidate to replace him because of Mr.
      Bergmann’s familiarity with our business, his business expertise, and his public
      company experience. We believe that Mr. Bergmann’s background in the management
      of advertising and marketing companies will be helpful to our company, given
      our
      advertising focus.





Since
      January 1999, Mr. Bergmann has served as the President of Perfect Timing Media,
      Inc., a television development and production company that he founded. Mr.
      Bergmann received his PhD from New York University and has served as head of
      a
      number of companies and divisions, including:





·
            principal
                of Century Media Inc, a Santa Monica, California, based direct-response
                advertising agency and media buying
                company;





·
            head
                of the television division of Major Arts, Inc.;





·
            president
                of Coast Productions, where he engineered the merger of Coast Productions,
                Inc., with Odyssey Entertainment, Inc., which subsequently became
                Odyssey
                Filmmakers, Inc.;





·
            president
                of The Film Company, Inc.; and





·
            various
                capacities with the American Broadcasting Company (ABC), including
                Executive Vice President and Special Assistant to the Chairman of
                the
                Board.





On
      June
      9, 2004, Gregory Crane, Vice President of Marketing, resigned as an officer
      and
      director in an effort to assist our company in recomposing management and the
      Board of Directors. As described below under *Termination
      Agreements* ,
      we also
      later terminated the executive consulting agreement with Mr. Crane’s company,
      Advertising Management & Consulting Services, Inc., or AMCS.





In
      November 2004, DeVal Johnson also resigned as an officer. As described below
      under *Termination
      Agreements* ,
      we also
      later terminated the Executive Consulting Agreement with Mr. Johnson’s company,
      Advanced Internet Marketing, Inc., or AIM. Mr. Johnson will continue to serve
      as
      a director.





We
      also
      concluded our relationship with MAR & Associates, Inc., or MAR, during
      fiscal 2004. MAR was the entity that provided us with services associated with
      the position of Chief Financial Officer through MAR’s President, David Iannini.
      As described below under *Termination
      Agreements* ,
      we also
      terminated the executive consulting agreement with MAR.





On
      August
      3, 2004, we hired W. Chris Broquist as our new Chief Financial Officer. Mr.
      Broquist brings 23 years of business experience to our company, including 14
      years in business banking. Most recently, he served as Vice President and Chief
      Financial Officer of Gold Graphics Manufacturing Co., a medium-sized Los
      Angeles-based manufacturer. Prior to Gold Graphics, Mr. Broquist held the senior
      financial position at Century Media Group, where he was a key member of the
      team
      that successfully negotiated its acquisition by a public entity. Mr. Broquist
      also was with The Summit Group for four years, where he led the Businesses
      Services Group, which was responsible for providing business and financial
      planning services as well as developing access to capital for small and medium
      sized businesses.





As
      part
      of our continuing effort to recompose our board of directors, John T. Kurtzweil
      and Paul Gottlieb became independent members of the board of directors during
      fiscal 2004. Messrs. Kurtzweil and Gottlieb also were appointed to our Audit
      and
      Compensation Committees. Mr. Kurtzweil has agreed to serve as the Chairman
      of
      the Audit Committee and as qualified financial expert.





3
 *Table
            of Contents*





Mr.
      Kurtzweil brings more than 25 years of high-level corporate management
      background to our board of directors. Mr. Kurtzweil currently serves as the
      Senior Vice President and Chief Financial Officer of Cirrus Logic, Inc., a
      publicly-held corporation that is a premier supplier of high-performance analog,
      mixed-signal, and digital processing solutions for consumer entertainment
      electronics, automotive entertainment, and industrial product applications.
      He
      possesses a strong financial background, including public company experience
      with industry leaders such as ON Semiconductor and Honeywell, Inc. Mr. Kurtzweil
      maintains active CPA and CMA licenses.





Mr.
      Gottlieb is an attorney with Snow Becker Krauss, PC in New York City. His
      practice involves estate planning, tax, corporate and securities matters. Mr.
      Gottlieb received his undergraduate degree from Queens College of City
      University of New York, after which he served as a journalist in the United
      States Army. Upon completion of his military service, Mr. Gottlieb attended
      New
      York Law School, where he received his law degree. Mr. Gottlieb worked as a
      senior attorney with the Internal Revenue Service before entering private
      practice.





*Termination
      Agreements*





Following
      the personal resignations of Messrs. Tullo, Crane and Johnson, we entered into
      Termination Agreements with these individuals’ respective entities concerning
      the termination of their Executive Consulting Agreements. The Termination
      Agreements with Messrs. Tullo and Crane provide for payments over two years
      and,
      in the case of Mr. Johnson, over 18 months. Had the Executive Consulting
      Agreements not been terminated, we would have been obligated to pay Sunbelt,
      AMCS and AIM, over the remaining life of the agreements, approximately $2.6
      million, $1.9 million, and $1 million, respectively. However, under the
      Termination Agreements, these payouts were reduced to $960,000, $697,010, and
      $367,570, respectively, or approximately 36% of the full payouts. The Executive
      Consulting Agreements had allowed us to terminate those agreements and pay
      a
      one-time lump sum payment of 30% of the total payouts. However, we were able
      to
      negotiate extended payment periods and receive certain favorable consulting
      and
      non-compete covenants from these former officers, as described below in greater
      detail.





Specifically,
      the amounts owed under the Termination Agreement with Sunbelt are payable as
      follows:


a. $150,000
        upon signing of the Termination Agreement;
 
 b. $17,500
        payable at the beginning of each month for 24 months commencing August 1,
        2004;
 
 c. $120,000
        on October 1, 2004;
 
 d. $150,000
        on the one-year anniversary of the signing of the agreement; and
 
 e. $120,000
        no later than October 1, 2005. This payment must be made upon Sunbelt’s written
        request at any time between the July 1, 2005 and the October 1, 2005 payment.
        We
        will be obligated to make such early payment so long as we retain 30 days’
operating capital after making the payment, which is defined as a current
        ratio
        of 1-to-1.


The
      amounts owed under the Termination Agreement with AMCS are payable as
      follows:


a. $130,000
        upon signing of the Termination Agreement;
 
 b. $10,709
        payable at the beginning of each month for 24 months commencing August 1,
        2004;
 
 c. $110,000
        on October 1, 2004;
 
 d. $110,000
        on the one-year anniversary of the signing of the agreement; and


4
 *Table
            of Contents*




e. $90,000
        no later than October 1, 2005. This payment must be made upon AMCS’ written
        request at any time between the July 1, 2005 and the October 1, 2005 payment.
        We
        will be obligated to make such early payment so long as we retain 30 days’
operating capital after making said payment, which is defined as a current
        ratio
        of 1-to-1.





The
      amounts owed under the Termination Agreement with AIM are payable as
      follows:


a. $50,000
        upon signing of the Termination Agreement;
 
 b. $14,865
        payable at the beginning of each month for 18 months commencing December
        1,
        2004; and
 
 c. $50,000
        on January 1, 2005.


Upon
      a
      change of control or the sale of all or substantially all of the assets of
      our
      Company, all the foregoing payments to Sunbelt, AMCS, and AIM will be
      immediately due and payable.





Additionally,
      pursuant to the Termination Agreements, each of Sunbelt, AMCS, and AIM, and
      their respective officers, directors, and affiliates have agreed not to compete
      with or solicit our customers or employees for a period of six years. Finally,
      the Termination Agreements require Messrs. Tullo, Crane, Johnson and other
      officers and employees of their respective entities to make themselves available
      to our company and our officers, directors, and employees for consultation
      as
      needed.





In
      connection with the conclusion of our relationship with MAR, we entered into
      a
      Separation and Settlement Agreement with MAR, whereby the Executive Consulting
      Agreement between our company and MAR was terminated. Under the arrangement,
      we
      will pay MAR $120,000 in equal monthly payments over the six months commencing
      August 1, 2004. This amount is well below the approximately $750,000 that would
      have been payable under the Executive Consulting Agreement with MAR over the
      remaining life of that agreement.





**Recent
      Developments**





*Developments
      with LEC Billing and Resulting Impacts on the Business.*





Historically,
      we have been highly dependent on our ability to bill our IAP advertisers
      directly through their monthly telephone bill. We refer to this method as LEC
      billing. Our ability to use this billing method has been severely curtailed
      as a
      result of new internal policies adopted by many of the LECs and changes in
      the
      telephony industry generally. This has forced us to explore alternative billing
      methods.





*New
      Internal LEC Policies* .





During
      the fourth quarter of fiscal 2004, several of the LECs changed their internal
      policies regarding the use of activation checks as an acceptable letter of
      authorization that allows us to bill our products and services directly on
      our
      advertisers’ local telephone bill. These LECs are requiring additional
      confirmation procedures to allow new customers to be billed. Further, these
      LECs
      are requiring us to reconfirm our existing customer base before allowing such
      customers to be billed.





The
      LECs
      modified policies have impacted us by decreasing the effectiveness of the
      activation check. We are no longer able to use this check as the letter of
      authorization for LEC billing in certain regions. Instead, we must obtain
      written or verbal authorization, thereby reducing the effectiveness of the
      LECs
      as an efficient and cost-effective means of billing our customers.





5
 *Table
            of Contents*





*Developments
      with CLECs* .





An
      additional contributing factor to the trend away from LEC billing is the
      increasing presence of Competitive Local Exchange Carriers, or CLECs, in local
      markets. Recently, the CLECs have been participating in providing local
      telephone services to IAP advertisers at an increasing rate. We are not
      permitted to bill our IAP advertisers through CLECs at the present time. If
      an
      advertiser changes their telephone carrier from a LEC to a CLEC, we must change
      our billing method from billing through the LEC to an alternative billing
      method.





*Increasing
      Dependence on ACH Billing* .





Prior
      to
      fiscal 2004, virtually all of the Company’s revenues were billed via LECs. Our
      ACH billings were immaterial. During 2004, to address the billing problems
      posed
      by the CLECs, we began to convert our customers to ACH billing, as we believe
      this is an efficient and cost effective means of billing. With the decline
      in
      LEC billings and to address the LECs internal policy changes described above,
      we
      accelerated the conversion of a substantial amount of our customers to ACH
      billing by year-end. By September 2004, ACH billing accounted for 57% of total
      net billings and LEC billings dropped to approximately 43% of net billings.





The
      majority of our advertisers that switched billing channels during the fourth
      quarter of fiscal 2004 went from LEC billing to ACH billing. We believe ACH
      billing is less expensive, has a faster collection time than LEC billing and
      presents minimal dilution. Therefore, we believe it is a desirable means of
      billing. However, it is time-consuming and labor-intensive to convert customers
      from one billing channel to another and can result in missed billings or
      customer cancellations.





Because
      the announcement of the change in LEC billing practices came suddenly and
      unexpectedly in the fourth quarter of 2004, we were not able to transition
      all
      impacted customers to ACH billing in a timely fashion. Accordingly, we have
      not
      been able to bill all of our customers for services performed during the fourth
      quarter of 2004 and, with respect to certain customers, it is unlikely that
      this
      revenue will ever be effectively billed and collected. We estimate that this
      change has caused a decrease in revenue in the fourth quarter of 2004 of
      approximately $6 to $7 million as compared to our prior two quarters. We
      currently are in the process of determining an effective means of billing these
      customers for future service. We expect that this trend away from billing
      through LECs will continue in the future.


*Revenue
      and Billing Concentration*





We
      process our billings through two primary billing aggregators; PaymentOne, Inc.
      and Billing Concepts, Inc. PaymentOne provides the majority of our billings,
      collections, and related services. Total amounts due from PaymentOne (for both
      LEC and ACH billing) at September 30, 2004 were $8,565,408, net of an allowance
      for doubtful accounts of $2,230,279. The net receivable from PaymentOne for
      billing at September 30, 2004 represented approximately 80% of our total net
      accounts receivable.





*Termination
      of M&M Credit Facility*





As
      of
      April 9, 2004, we terminated certain loan obligations that we owed to Morris
      & Miller, Ltd. and Mathew and Markson, Ltd., our two largest stockholders.
      Under this termination agreement, we made final advances to these stockholders
      totaling an aggregate of $1,050,000 at an annual interest rate of 8%. The
      stockholders agreed to forego the final advance of $250,000. The aggregate
      of
      all advances made by our company to these stockholders is to be repaid by April
      2007, along with accrued interest. To date, we have received $1,600,000 in
      negotiated accelerated repayments.





6
 *Table
            of Contents*





*Cash
      Dividends*





In
      connection with our termination of the loan obligations to Morris & Miller
      and Mathew and Markson, we began paying a $0.01 per share dividend each quarter,
      subject to compliance with applicable laws. We have paid three consecutive
      quarterly dividends to date.





*Disclosure
      of M&M Beneficial Ownership*





On
      May
      27, 2004, we issued a press release disclosing the beneficial ownership of
      Morris & Miller and Mathew and Markson, as provided to us in sworn
      affidavits by Ms. Ilse Cooper, the Managing Director of these entities.
      Specifically, it was disclosed that Ms. Cooper herself, as well as her sister,
      are the beneficial owners of these entities. It was further disclosed that
      any
      assets of Morris & Miller and Mathew and Markson remaining after their
      deaths will be bequeathed to the Swiss Institute for Experimental Cancer
      Research, a large not-profit-organization partially funded by the Swiss
      government.





*New
      Credit Facility*





On
      April
      13, 2004, we entered into a one year, renewable revolving credit facility
      agreement with Merrill Lynch Business Financial Services, Inc. for a maximum
      principal amount of $1,000,000. We may request advances under the credit
      facility up to the full amount of the line. Interest on outstanding advances
      is
      payable monthly in arrears at the per annum rate of the one-month LIBOR as
      published in The Wall Street Journal, plus 3.0%. Outstanding advances are
      secured by all of our existing and -acquired tangible and intangible assets
      located in the United States.





We
      paid
      Merrill Lynch a $10,000 fee in connection with the initiation of the credit
      facility. A $10,000 line maintenance fee is payable to Merrill Lynch upon each
      annual renewal. As of September 30, 2004, we had no outstanding obligations.
      At
      this time, we do not have any current plans or need to draw down any funds
      under
      the credit facility.





The
      credit facility requires us to maintain a “Leverage Ratio” (total liabilities to
      tangible net worth) that does not exceed 1.5-to-1 and a “Fixed Charge Ratio”
(earnings before interest, taxes, depreciation, amortization and other non-cash
      charges minus any internally financed capital expenditures divided by the sum
      of
      debt service, rent under capital leases, income taxes and dividends) that is
      not
      less that 1.5-to-1 as determined quarterly on a 12-month trailing basis. The
      credit facility includes additional covenants governing permitted indebtedness,
      liens, and protection of collateral.





*Stockholder
      Rights Plan*





In
      May
      2004, our board of directors declared a dividend distribution of one right
      on
      each outstanding share of our common stock. Each right will entitle stockholders
      to buy one one-thousandth of a share of our newly created Series A Junior
      Participating Preferred Stock at an initial exercise price of $36.50 per one
      one-thousandth share.





The
      rights will enable our board of directors to control the terms and timing of
      its
      response if a third party makes an unsolicited bid to acquire control of the
      Company. The rights are designed to protect the interests of our stockholders,
      to ensure that all stockholders of the Company receive fair and equal treatment
      in the event of any proposed takeover of the Company, and to guard against
      partial tender offers, open market accumulations and other tactics designed
      to
      gain control of the Company without paying all stockholders a fair price. The
      rights accomplish these goals by creating the potential for an unacceptable
      level of dilution if an acquirer takes certain actions without the board of
      directors’ approval. The bidder will therefore be more likely to negotiate with
      the board of directors, which has the ability to redeem the rights or exempt
      the
      bidder from the rights’ dilutive effect if the bidder’s proposal is acceptable
      to the board. The rights were not distributed in response to any specific effort
      to acquire the Company.





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In
      general, the rights become exercisable if a person or group becomes an
“Acquiring Person,” or commences or announces a tender or exchange offer to
      acquire 15% or more of the outstanding Common Stock, at which time each right
      will entitle its holder to purchase, at the right’s exercise price, a number of
      shares of common stock having a market value at that time of twice the right’s
      exercise price. Rights held by an Acquiring Person will become void. In general,
      a person will become an Acquiring Person by acquiring 15% or more of the
      Company’s outstanding Common Stock. Certain other shareholders that already own
      in excess of 15% will be come an Acquiring Person if they exceed higher
      thresholds.





*Strategic
      Alternatives*





We
      believe that the fragmented online Yellow Pages market will experience some
      consolidation in the future. Accordingly, we have engaged Jefferies &
Company, Inc. as our financial advisor to assist us in exploring strategic
      alternatives to enhance shareholder value, including a possible sale or merger
      of our company. There can be no assurance that any transaction will result
      from
      this engagement.





**Critical
      Accounting Estimates and Assumptions**





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





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





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





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





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





8
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·
            Non-paying
                customers.
                There are customers who may not pay the fee for our services even
                though
                we believe they are valid subscribers. Included in cost of services
                is an
                accrual for estimated non-paying customers that is recorded at the
                time of
                billing.





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





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





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





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





*Allowance
      for Doubtful Accounts.* ****** We
      receive cash through the processes discussed above. Under our contractual
      arrangements with our third party aggregators and service providers, the LECs
      and aggregators/service providers deduct from our gross billings amounts for
      returns, nonpaying customers, dilution and fees to arrive at net proceeds
      remitted to us. We estimate an allowance for doubtful accounts on the basis
      of
      information provided by the billing aggregators and service providers. This
      information is an indicator of timely payments made by our subscribers. At
      September 30, 2004, the allowance for doubtful accounts was approximately 26%
      of
      gross accounts receivable.





*Carrying
      Value of Intellectual Property.* The
      carrying value of our intellectual property at September 30, 2004, relates
      primarily to the purchase of the Yellow-Page.Net Universal Resource Locator,
      or
      URL, from Telco. The URL is recorded at its $5,000,000 purchase price, less
      accumulated amortization of $2,137,205. We have estimated the useful life of
      this asset to be 20 years.





We
      evaluate the recoverability of the carrying amount of this intangible asset
      whenever events or changes in circumstances indicate that the carrying amount
      of
      this asset may not be fully recoverable. In 2004, there have been no events
      that
      indicate that this asset may be impaired and, accordingly, no such impairment
      tests are warranted. In the event of such changes, impairment would be assessed
      if the undiscounted expected cash flows derived for the asset are less than
      its
      carrying amount. The dynamic economic environment in which we operate and the
      resulting assumptions used to estimate future cash flows would impact the
      outcome of such impairment tests.





9
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*Capitalization
      of Direct Response Advertising Costs and Amortization of those Costs.* We
      purchase mailing lists and send advertising materials to prospective subscribers
      from those mailing lists. Customers subscribe to the services by affirmatively
      responding to those advertising materials, which serve as the contract for
      the
      subscription. We capitalize and amortize the costs of direct-response
      advertising on a straight-line basis over 18 months, which is 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 the 18 month amortization period. However, due to attrition in the first
      months of a new subscription, the amortization period has been determined to
      be
      18 months. As of September 30, 2004, the carrying value of our direct response
      advertising costs was $4,482,173, which includes the gross cost of approximately
      $9,578,842, less amortization of $5,096,669.





*Income
      Taxes.* Management
      evaluates the probability of the utilization of the deferred income tax assets.
      We have estimated deferred income tax assets of $1,048,000 at September 30,
      2004, which relates to various timing differences between book and tax expense
      recognition. We are required to make judgments and estimates related to the
      timing and utilization of deferred income tax assets, applicable tax rates,
      and
      feasible tax planning strategies.





**Results
      of Operations**





Net
      revenue increased 85.8%, or $26,400,661, to $57,168,105 for fiscal 2004 from
      $30,767,444 for fiscal 2003. This increase in net revenue is primarily the
      result of an increase in the average number of our IAP advertisers and an
      increase in our monthly pricing. These two factors are discussed further
      below.





Our
      net
      revenue decreased in the fourth quarter ended September 30, 2004 to $10,069,924
      compared to $16,890,361 for the previous quarter ended June 30, 2004 and
      compared to $16,367,893 for the three-month period ended March 31, 2004. This
      decline in revenue resulted in a net loss of $311,721 for the quarter. The
      decrease in revenues for the fourth quarter was due, largely, to declines in
      our
      paying subscriber base, which is described in more detail below.





We
      differentiate between “paying” advertisers and “activated” advertisers. Paying
      advertisers, as the name implies, are those advertisers that are actually
      currently paying for the IAP product. The term activated advertiser is broader
      and more inclusive. Activated includes 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 invoiced
      (via direct bill method) but have not yet remitted to us their
      fees.





We
      believe that our methodology of classifying advertisers as activated and paying
      is more accurate and can be more consistently applied to each period. We also
      believe that tracking and disclosing the numbers of our activated advertisers,
      in addition to our paying advertisers, provides greater clarity into our
      business by providing an indication of how many activated advertisers may
      eventually become paying advertisers.





Our
      activated IAP advertiser count increased to 327,512 at September 30, 2004
      compared to 255,376 at September 30, 2003, an increase of approximately 28%.
      The
      increase in activated advertisers equates to average monthly growth of
      approximately 6,000 activated advertisers for the year ended September 30,
      2004.
      This remains within our targeted net growth of 5,000 to 10,000 new activated
      advertisers per month.





Our
      average paying IAP advertiser count increased during fiscal 2004 as compared
      to
      fiscal 2003, accounting for a substantial portion of our revenue growth.
      However, we began to experience declines in our paying subscriber base in the
      second half of 2004. By year-end, our paying IAP advertiser count decreased
      by
      11.7% to approximately 196,000 at September 30, 2004 compared to approximately
      222,000 at September 30, 2003. Our paying subscriber base declined in the second
      half of 2004 due in large part to advertisers changing from LECs to CLECs for
      their local telephone service and changes in billing practices by LECs, both
      of
      which are described in greater detail above under Recent
      Developments.





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            of Contents*





Within
      the last two years, the prices for our IAP product have fluctuated between
      $17.95 and $29.95 per month. Currently, the majority of our customers are
      charged $29.95 per month, though recently we dropped our price to $27.50 per
      month.





Looking
      forward, we continue to take active measures to reconfirm our existing
      subscriber base and to convert customers from LEC billing to ACH billing.
      However, because these are time-consuming projects and result in an increase
      in
      customer cancellations, we expect that near-term revenues may continue to
      decline.





Cost
      of
      services increased 192.2%, or $16,284,134, to $24,757,880 for fiscal 2004 from
      $8,473,768 for fiscal 2003. As a percentage of net revenue, our cost of services
      increased to 43.3% in fiscal 2004 from 27.5% in fiscal 2003. The increase in
      our
      cost of services is directly attributable to an increase in our dilution expense
      as a percentage of revenues. The following table sets forth our quarterly
      dilution expense for fiscal year 2004 as compared to fiscal year
      2003:




**2004**
              
              **%
                  of Net Revenues**
              
              **2003**
              
              **%
                  of Net Revenues**First
                  Quarter
              
              
              3,493,394
              
              
              25.2
              %
              
              1,336,091
              
              
              23.3
              %Second
                  Quarter
              
              
              5,329,811
              
              
              32.6
              %
              
              1,243,151
              
              
              18.2
              %Third
                  Quarter
              
              
              6,260,633
              
              
              37.1
              %
              
              1,120,826
              
              
              14.0
              %Fourth
                  Quarter
              
              
              3,384,676
              
              
              33.6
              %
              
              1,403,641
              
              
              13.8
              %





The
      increase in dilution is primarily the result of the increasing trend towards
      advertisers switching from LECs to other telephone carriers for their local
      telephone service and the change in LEC billing practices with respect to
      customers whose activation check served as the letter of authorization. Each
      of
      these factors is described above in *Item
      6: Management’s Discussion and Analysis - Executive Overview* .





Our
      dilution peaked during the third quarter of 2004, both as a dollar amount and
      as
      a percentage of revenue and started to decline in the fourth quarter of 2004
      as
      we converted many of our customers to ACH billing. We expect that this dilution
      may continue to decrease as we continue to convert more customers to ACH
      billing.





We
      are
      taking active measures to reduce our dilution. We have purchased new software
      that more quickly identifies the telephone numbers that are active with the
      LECs
      so that we are able to more efficiently bill our clients by omitting accounts
      that have switched to a CLEC. We have begun to acquire direct debit information
      from at least 40% of new accounts as we acquire them. We are contacting all
      of
      our direct invoice customers to obtain more direct billing information in an
      effort to switch them to ACH billing. While we expect this dilution and the
      costs to implement our new billing method to be reduced to more normal levels
      over the next few quarters as this process runs its course through the billing
      system, it has significantly increased our costs in the near term.





Gross
      profits increased 45.4%, or $10,116,527, to $32,410,225 for fiscal 2004 from
      $22,293,698 for fiscal 2003. The increase in our gross profits was due to
      increased revenues resulting from the previously mentioned increased average
      IAP
      advertiser counts and price increases, offset by increased dilution discussed
      above. Gross margins decreased to 56.7% of net revenues in fiscal 2004 compared
      to 72.5% of net revenues in fiscal 2003 due to increased dilution as a
      percentage of revenues in fiscal 2004. As previously discussed, we expect that
      this dilution will decrease in the first half of 2005.





11
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Our
      general and administrative expense increased 46.5%, or $4,028,646, to
      $12,686,336 for fiscal 2004 from $8,657,690 for fiscal 2003. General and
      administrative expenses increased due to an increase in personnel and other
      expenses relating to our growth in IAP advertisers, our Quality Assurance and
      outbound marketing initiatives, as well as an increase in certain officers’
compensation relating to employment contracts with such officers and termination
      agreements with former officers.





As
      a
      percentage of net revenue, general and administrative expenses were
      approximately 22.2% and 28.1% for fiscal 2004 and 2003, respectively. The
      reduction in general and administrative expenses as a percentage of net revenue
      is the result of increasing revenue and the leveraging of our fixed cost
      infrastructure over a larger IAP advertiser base.




Sales
      and
      marketing expenses increased 57.4%, or $2,219,971, to $6,088,614 for fiscal
      2004
      from $3,868,643 for fiscal 2003. The main reasons for the increase in sales
      and
      marketing expenses is due to the increased effort in our marketing solicitation
      program, the implementation of new market strategies, and modifications to
      our
      direct mail marketing pieces. We expect these sales and marketing costs to
      continue to increase as our marketing efforts increase and as we continue to
      roll out our branding campaign. We capitalize certain direct marketing expenses
      and amortize those costs over an 18-month period based on the estimated IAP
      advertiser attrition rates. As a percentage of net revenues, sales and marketing
      expenses were approximately 10.7% and 12.6% for fiscal 2004 and fiscal 2003,
      respectively.





Depreciation
      and amortization, consisting of depreciation of property and equipment and
      amortization of intangible assets, increased 40.9%, or $269,918, to $930,393
      for
      fiscal 2004 from $660,475 for fiscal 2003. This increase is attributable to
      increased depreciation due to additional purchases of equipment related to
      our
      upgrade in infrastructure in the information technology department and hardware
      purchased relating to our Quality Assurance and Outbound Marketing initiatives
      and increased amortization of intangible assets associated with website
      development costs that were capitalized during 2004.. Amortization relating
      to
      the capitalization of our direct mail marketing costs is included in marketing
      expenses, as discussed previously.





Operating
      income increased 39.5%, or $3,597,992, to $12,704,882 for fiscal 2004 from
      $9,106,890 for fiscal 2003. Operating margins decreased to 22.2% of net revenue
      in fiscal 2004 from 29.6% in fiscal 2003. The increase in operating income
      is
      the result of the increased revenue discussed above. Operating margins decreased
      due to the significant increase in our cost of services resulting from increased
      dilution expense, partially offset by increased revenues and the leveraging
      of
      certain fixed expenses over a larger IAP advertiser base.





Interest
      income increased $218,150 to $327,145 for fiscal 2004 from $108,995 for fiscal
      2003. The increase in interest income primarily results from our increased
      average cash position that resulted from our increased profitability, as well
      as
      increased interest income that resulted from the increase in advances to
      affiliates.





Other
      income increased $497,173 to $788,175 for fiscal 2004 from $291,002 for fiscal
      year 2003 due to a nonrecurring reversal of previously accrued compensation
      costs for former executives for which payment is no longer expected.





Net
      income before taxes increased 45.5% or $4,313,920 to $13,801,079 for fiscal
      2004
      from $9,487,159 for fiscal year 2003. The increase in pre-tax income is a result
      of those factors that resulted in the increase in operating income in addition
      to the increased interest income and other income discussed above. Pre-tax
      margins decreased to 24.1% of net revenue in fiscal 2004 compared to
      approximately 30.8% of net revenue in fiscal 2003 primarily due to decreases
      in
      operating margins.





12
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            of Contents*





The
      income tax provision was $4,840,096 for fiscal 2004 compared to $1,871,293
      in
      the fiscal 2003. The increase in the income tax provision is the result of
      our
      increased profitability in 2004 compared to 2003, as well as the fact that
      we
      were able to recognize a net operating loss carry-forward in fiscal 2003 that
      was previously thought to be unavailable to us. As of September 30, 2004, we
      had
      fully utilized all of our net operating loss carry-forwards.




Net
      income increased 17.7% to $8,960,983, or $0.19 per diluted share for the fiscal
      year ended September 30, 2004, up from $7,615,866 or $0.17 per diluted share
      for
      fiscal year 2003. Net income as a percentage of net revenues for the fiscal
      year
      ended September 30, 2004 was 15.7%, compared to 24.8% for fiscal
      2003.





**Liquidity
      and Capital Resources**





Net
      cash
      provided by operating activities increased $55,965, or 1%, to $4,818,203 for
      the
      fiscal year ended September 30, 2004 compared to $4,762,238 for fiscal 2003.
      The
      increase in cash generated from operations is due to a 13% increase in net
      income, offset by changes in working capital.





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





Our
      most
      significant cash outflows include payments for marketing expenses and general
      operating expenses. Cash outflows for direct response advertising, our primary
      marketing strategy, typically occur in advance of expense recognition as these
      costs are capitalized and amortized over 18 months, the average estimated
      retention period for new customers. General operating cash outflows consist
      of
      payroll costs, income taxes, and general and administrative expenses that
      typically occur within close proximity of expense recognition.





Net
      cash
      used for investing activities totaled $2,192,500 for the fiscal year ended
      September 30, 2004. The primary component of cash used for investing activities
      was net advances to affiliates of $1,450,000. We ceased making advances to
      affiliates as of April 9, 2004 and these affiliates have begun repayment of
      those advances. In the fiscal year ended September 30, 2003, cash used for
      investing activities was $2,798,500, of which the primary component was advances
      to affiliates of $1,800,000.





Net
      cash
      used for financing activities for the fiscal year ended September 30, 2004
      was
      $1,428,022, consisting primarily of dividends paid, compared to net cash used
      for financing activities of $351,998 for fiscal 2003. The net cash used in
      financing activities in fiscal 2003 relates to proceeds and repayments on our
      two credit facilities and the repayment of $160,000 on a note payable.





13
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We
      had
      working capital of $12,484,833 as of September 30, 2004, compared to $6,615,537
      as of September 30, 2003. The increase is due primarily to increases in cash
      and
      accounts receivable and reductions in accrued liabilities and income taxes
      payable.





In
      the
      past, we borrowed under two credit facilities. These credit facilities were
      maintained primarily for safety and security back-up purposes as our cash flow
      generally is more than sufficient to maintain and grow our business. We have
      terminated our previous credit facilities with the Bank of the Southwest and
      AcTrade Financial Technologies, Ltd. In April 2004, we established a $1,000,000
      credit facility with Merrill Lynch Business Financial Services, Inc. This
      facility is for one year and is renewable. The applicable interest rate on
      borrowings, if any, will be a variable rate of the one-month LIBOR rate (as
      published in the *Wall
      Street Journal* ),
      plus
      3%. The facility requires an annual line fee of $10,000, payable whether or
      not
      we have drawn any funds on the line. We utilized our new credit facility with
      Merrill Lynch and repaid the balance during the quarter ended June 30, 2004
      in
      order to test its functioning and reporting requirements. There was no balance
      outstanding on September 30, 2004.





We
      owe
      $115,868 to Mathew & Markson Ltd. on a note related to the original
      acquisition of the “Yellow Page.net” URL. This note is technically past due. We
      have not repaid the balance, however, as we have amounts owed to us from Mathew
      & Markson in excess of the amount due. As we have no legal right of offset,
      we have not netted this amount due with the amounts owed to us in our
      consolidated balance sheet filed as part of this Annual Report. We currently
      are
      negotiating the settlement of this balance.





Effective
      as of April 9, 2004, we terminated certain loan agreements whereby we were
      obligated to loan or advance money to Morris & Miller and Mathew and
      Markson, our two largest stockholders. These outstanding loans are secured
      by
      shares of our common stock held by these stockholders. Under the termination
      agreement, we made final advances to these stockholders totaling approximately
      $1,050,000 at 8% interest. We did not make an additional final advance of
      $250,000 as the stockholders decided to forego this payment. The aggregate
      of
      all advances made by the Company to these stockholders is to be repaid to the
      Company at the end of three years, along with accrued interest. As of September
      30, 2004, however, these stockholders had made advance repayments totaling
      $1,600,000.





In
      connection with our termination of the loan obligations, we began paying a
      $0.01
      per share dividend each quarter, subject to compliance with applicable laws.
      As
      of September 30, 2004, we had paid three consecutive quarterly dividends to
      all
      common stockholders, including those who hold unvested restricted
      stock.





**Risk
      Factors**





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








**Risks
      Related to Our Business**





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





14
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            of Contents*





Our
      business model historically has depended heavily upon our ability to bill
      advertisers on their telephone bills through their respective Local Exchange
      Carriers, or LECs. We have recently faced challenges and impediments to our
      ability to bill certain advertisers in this manner. This has forced us to
      convert these advertisers to alternative methods of billing, which has resulted
      in dilution and decreased revenues. We continue, however, to rely on our ability
      to use the LEC billing method for our other advertisers.





The
      existence of the LECs is the result of Federal legislation. In the same manner,
      Congress could pass future legislation that obviates the existence of or the
      need for the LECs. Additionally, regulatory agencies could limit or prevent
      our
      ability to use the LECs to bill our advertisers. The introduction of and
      advancement of new technologies, such as WiFi technology or other
      wireless-related technologies, could render unnecessary the existence of fixed
      telecommunication lines, which also could obviate the need for and access to
      the
      LECs. Finally, if the recent trend of certain LECs to change their policies
      concerning an ability to use an incentive check as a letter of authorization
      and
      to adopt more onerous reconfirmation requirements becomes more widespread,
      our
      ability to use the LECs to bill our advertisers could be jeopardized altogether.
      Our inability to use the LECs to bill our advertisers through their monthly
      telephone bills would result in increased dilution and decreased revenues and
      would have a material adverse impact on our financial condition and results
      of
      operations.





**We
      may experience increased dilution and our revenue may decline over time due
      to
      the involvement of the CLECs.**  ****





We
      have
      experienced a decrease in revenue from the LECs from the effects of the
      Competitive Local Exchange Carriers, or CLECs, that are providing local
      telephone services to IAP advertisers. With the competition in the telephony
      industry, many business customers are finding alternative telephony suppliers,
      such as CLECs, that offer less expensive alternatives to the LECs. When the
      LECs
      effectuate a price increase this causes a rush of LEC customers looking for
      an
      alternative telephone company, which may be a CLEC. When our advertising
      customers switch service providers from the LECs to a CLEC, we are precluded
      from billing these customers on their monthly telephone bill and must instead
      convert them to alternative billing methods such as ACH billing or direct
      invoicing. This conversion process can be disruptive to our operations and
      result in lost revenue. 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. We may experience future increases in dilution
      of
      our customer base that we are able to bill on their monthly telephone bills,
      which, in turn, may result in decreases in our revenue.





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





Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
      Report on Form 10-K for the fiscal year ending September 30, 2005, we will
      be
      required to furnish a report by our management on our internal control over
      financial reporting. The internal control report must contain (i) a statement
      of
      management’s responsibility for establishing and maintaining adequate internal
      control over financial reporting, (ii) a statement identifying the framework
      used by management to conduct the required evaluation of the effectiveness
      of
      our internal control over financial reporting, (iii) management’s assessment of
      the effectiveness of our internal control over financial reporting as of the
      end
      of our most recent fiscal year, including a statement as to whether or not
      internal control over financial reporting is effective, and (iv) a statement
      that the Company’s independent auditors have issued an attestation report on
      management’s assessment of internal control over financial reporting.





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In
      order
      to achieve compliance with Section 404 of the Act within the prescribed period,
      beginning in our next fiscal year, we will need to engage in a process to
      document and evaluate our internal control over financial reporting, which
      will
      be both costly and challenging. In this regard, management will need to dedicate
      internal resources, engage outside consultants and adopt a detailed work plan
      to
      (i) assess and document the adequacy of internal control over financial
      reporting, (ii) take steps to improve control processes where appropriate,
      (iii)
      validate through testing that controls are functioning as documented and (iv)
      implement a continuous reporting and improvement process for internal control
      over financial reporting. We can provide no assurance as to our, or our
      independent auditors’, conclusions at September 30, 2005 with respect to the
      effectiveness of our internal control over financial reporting under Section
      404
      of the Act. There is a risk that neither we nor our independent auditors will
      be
      able to conclude at September 30, 2005 that our internal controls over financial
      reporting are effective as required by Section 404 of the Act.





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





**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.





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





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





Our
      net
      revenues 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 in order to meet market
                demand;





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





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·
            new
                product offerings or other actions by our
                competitors;





·
            month-to-month
                variations in the billing and receipt of amounts from LECs, 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





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





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





We
      also
      depend upon our billing aggregators to efficiently bill and collect monies
      from
      the LECs relating to the LECs’ billing and collection of our monthly charges
      from advertisers, as well as collecting from those advertisers on ACH billing.
      We currently have agreements with two billing aggregators and two ACH service
      providers. Any disruption in our billing aggregators’ ability to perform these
      functions could adversely affect our financial condition and 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.**





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 with 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 its 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.





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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 as of September 30, 2004, together with cash
      flows from operations, will be sufficient to meet our anticipated liquidity
      needs for working capital and capital expenditures over the next 12 months.
      In
      the future, however, we may seek additional capital through the issuance of
      debt
      or equity depending upon our results of operations, market conditions or
      unforeseen needs or opportunities. Our future liquidity and capital requirements
      will depend on numerous factors, including the following:





·
            the
                pace of expansion of our
                operations;


·
            our
                need to respond to competitive pressures;
                and


·
            future
                acquisitions of complementary products, technologies or
                businesses.





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





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





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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 added a number of key managerial,
      technical, and operations personnel and we may add additional key personnel
      in
      the future. 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 our 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.





**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. 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. Our increasing dependence on ACH billing has
      exposed us to greater scrutiny by the National Automated Clearing House
      Association, or NACHA. 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
      may face risks as we expand our business into international
      markets.**





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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;





·
            difficulties
                in staffing and managing foreign
                operations;





·
            changing
                economic conditions;





·
            exposure
                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.





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





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





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





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





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





**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
      websites. We may not be able to project accurately the rate or timing of
      increases, if any, in the use of our services or expand and upgrade our systems
      and infrastructure to accommodate these increases in a timely manner. If we
      do
      not expand and upgrade our infrastructure in a timely manner, we could
      experience temporary capacity constraints that may cause unanticipated system
      disruptions, slower response times, and lower levels of IAP advertiser service.
      Our inability to upgrade and expand our infrastructure and IAP advertiser
      support capabilities as required could impair the reputation of our brand and
      our services, reduce the volume of users able to access our website, and
      diminish the attractiveness of our service offerings to our advertisers.





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





**Risks
      Related to the Internet**





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





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





·
            rapid
                technological change;





·
            changes
                in advertiser and user requirements and
                preferences;





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





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





In
      order
      to compete successfully in the future, we must





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





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





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





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





Because
      Internet Yellow Pages is a 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
      may be required to keep pace with rapid technological change in the Internet
      industry.**





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





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





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





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





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





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





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





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





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





24
 *Table
            of Contents*





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.





**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 and fallen 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.





25
 *Table
            of Contents*





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





**Certain
      provisions of Nevada law and in our charter, as well as our Shareholder Rights
      Plan, 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.





We
      also
      recently adopted a Shareholder Rights Plan, commonly referred to as a poison
      pill. This Plan serves as a strong deterrent to any unsolicited or hostile
      takeover attempts and, effectively, requires an interested acquirer to negotiate
      with our board of directors.





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





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





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





26
 *Table
            of Contents*





ITEM
      7. FINANCIAL STATEMENTS




**YP
      CORP.**





**TABLE
                OF CONTENTS**
            **Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            28CONSOLIDATED
                FINANCIAL STATEMENTS:Consolidated
                Balance Sheet at September 30, 2004
            29Consolidated
                Statements of Operations for the years ended September 30, 2004 and
                September 30, 2003
            30Consolidated
                Statements of Stockholders’ Equity for the years ended September 30, 2004
                and September 30, 2003
            31Consolidated
                Statements of Cash Flows for the years ended September 30, 2004 and
                September 30, 2003
            32NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            33





27
 *Table
            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, 2004 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, 2004, and the consolidated results of its
        operations and cash flows for each of the two years in the period ended
        September 30, 2004, 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, 2004 and 2003.
 
 
 /s/  
        Epstein, Weber & Conover, PLC
 Scottsdale,
        Arizona
 December
        9, 2004
 (except
        for the restatement of financial statements
 described
        in Note 1, for which the date is November 18, 2005)


28
 *Table
            of Contents*




**YP
        CORP. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET**
 SEPTEMBER
        30, 2004


**Assets**Cash
                    and equivalents
                
                $
                3,576,529Accounts
                    receivable, net of allowance for doubtful accounts of
                    $3,400,575
                
                
                8,362,283Prepaid
                    expenses and other current assets
                
                
                822,919Income
                    tax refund receivable
                
                
                1,239,436Deferred
                    tax asset
                
                
                352,379Total
                    current assets
                
                
                14,353,546Accounts
                    receivable, long term portion, net of allowance for doubtful
                    accounts of
                    $269,662
                
                
                2,075,334Customer
                    acquisition costs, net of accumulated amortization of
                    $5,096,669
                
                
                4,482,173Property
                    and equipment, net
                
                
                725,936Deposits
                    and other assets
                
                
                239,060Intangible
                    assets, net of accumulated amortization of $2,446,403
                
                
                3,326,274Advances
                    to affiliates
                
                
                3,894,862Total
                    assets
                
                $
                29,097,185**Liabilities
                    and Stockholders' Equity**Accounts
                    payable
                
                $
                1,210,364Accrued
                    liabilities
                
                
                542,481Notes
                    payable- current portion
                
                
                115,868Total
                    current liabilities
                
                
                1,868,713Deferred
                    income taxes
                
                
                848,498Total
                    liabilities
                
                
                2,717,211Commitments
                    and contingencies
                
                
                -Series
                    E convertible preferred stock, $.001 par value, 200,000 shares
                    authorized,
                    128,340 issued and outstanding, liquidation preference
                    $38,502
                
                
                10,909Common
                    stock, $.001 par value, 100,000,000 shares authorized, 50,071,302
                    issued
                    and outstanding
                
                
                50,858Paid
                    in capital
                
                
                12,151,947Deferred
                    stock compensation
                
                
                (5,742,814
                )Retained
                    earnings
                
                
                19,909,074Total
                    stockholders' equity
                
                
                26,379,974Total
                    liabilities and stockholders' equity
                
                $
                29,097,185
  See
          accompanying notes to consolidated financial
          statements.





29
 *Table
            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF OPERATIONS**




**Year
                  ended September 30,****2004**
              
              **2003**Net
                  revenues
              
              $
              57,168,105
              
              $
              30,767,444Cost
                  of services
              
              
              24,757,880
              
              
              8,473,746Gross
                  profit
              
              
              32,410,225
              
              
              22,293,698Operating
                  expenses:General
                  and administrative expenses
              
              
              12,686,336
              
              
              8,657,690Sales
                  and marketing expenses
              
              
              6,088,614
              
              
              3,868,643Depreciation
                  and amortization
              
              
              930,393
              
              
              660,475Total
                  operating expenses
              
              
              19,705,343
              
              
              13,186,808Operating
                  income
              
              
              12,704,882
              
              
              9,106,890Other
                  income (expense):Interest
                  expense and other financing costs
              
              
              (19,123
              )
              
              (19,728
              )Interest
                  income
              
              
              327,145
              
              
              108,995Other
                  income
              
              
              788,175
              
              
              291,002Total
                  other income (expense)
              
              
              1,096,197
              
              
              380,269Income
                  before income taxes
              
              
              13,801,079
              
              
              9,487,159Income
                  tax provision
              
              
              (4,840,096
              )
              
              (1,871,293
              )Net
                  income
              
              $
              8,960,983
              
              $
              7,615,866Net
                  income per share:Basic
              
              $
              0.19
              
              $
              0.17Diluted
              
              $
              0.19
              
              $
              0.17Weighted
                  average common shares outstanding:Basic
              
              
              47,375,927
              
              
              45,326,721Diluted
              
              
              48,075,699
              
              
              45,591,590
  See
        accompanying notes to consolidated financial statements.





30
 *Table
            of Contents*




**YP
        CORP. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF STOCKHOLDERS' EQUITY**


**Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Treasury**
              
              **Paid-In**
              
              **Deferred**
              
              **Retained****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Stock**
              
              **Capital**
              
              **Compensation**
              
              **Earnings**
              
              **Total**Balance,
                  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
              
              $
              17,740,843Balance,
                  October 1, 2003
              
              
              49,348,287
              
              $
              49,349
              
              
              131,840
              
              $
              11,206
              
              $
              (216,422
              )
              $
              9,359,865
              
              $
              (3,840,843
              )
              $
              12,377,688
              
              $
              17,740,843Common
                  stock issued for services
              
              
              1,010,000
              
              
              1,010
              
              
              
              
              
              
              
              
              
              
              
              1,540,430
              
              
              (1,541,440
              )
              
              
              
              
              -Series
                  E preferred stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,957
              )
              
              (1,957
              )Common
                  stock issued in restricted stock plan
              
              
              515,000
              
              
              515
              
              
              
              
              
              
              
              
              
              
              
              1,520,636
              
              
              (1,521,151
              )
              
              
              
              
              -Amortization
                  of deferred stock compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,160,620
              
              
              
              
              
              1,160,620Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,960,983
              
              
              8,960,983Preferred
                  shares converted to common
              
              
              3,500
              
              
              3
              
              
              (3,500
              )
              
              (297
              )
              
              
              
              
              1,869
              
              
              
              
              
              
              
              
              1,575Common
                  stock dividends
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,427,640
              )
              
              (1,427,640
              )Treasury
                  stock retired
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              216,422
              
              
              (216,422
              )
              
              
              
              
              
              
              
              -Canceled
                  stock
              
              
              (18,000
              )
              
              (18
              )
              
              
              
              
              
              
              
              
              
              
              (54,432
              )
              
              
              
              
              
              
              
              (54,450
              )Balance,
                  September 30, 2004
              
              
              50,858,787
              
              $
              50,859
              
              
              128,340
              
              $
              10,909
              
              $
              -
              
              $
              12,151,947
              
              $
              (5,742,814
              )
              $
              19,909,074
              
              $
              26,379,974


See
      accompanying notes to consolidated financial statements.




31
 *Table
          of Contents*




**YP
        CORP. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**


**Year
                    ended September 30,****2004**
                
                **2003**CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income
                
                $
                8,960,983
                
                $
                7,615,866Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                930,392
                
                
                660,475Amortization
                    of deferred stock compensation
                
                
                1,160,620
                
                
                154,482Issuance
                    of common stock as compensation for services
                
                
                -
                
                
                719,684Gain
                    on settlement of debt
                
                
                -
                
                
                (45,362
                )Non-cash
                    income recognized on return of common stock related to legal
                    settlements
                
                
                (54,450
                )
                
                -Deferred
                    income taxes
                
                
                2,136,708
                
                
                (1,631,774
                )Loss
                    on disposal of equipment
                
                
                3,992
                
                
                6,932Provision
                    for uncollectible accounts
                
                
                285,070
                
                
                1,688,058Changes
                    in assets and liabilities:Accounts
                    receivable
                
                
                (2,270,558
                )
                
                (6,064,894
                )Customer
                    acquisition costs
                
                
                (1,238,932
                )
                
                (1,825,014
                )Prepaid
                    and other current assets
                
                
                (668,643
                )
                
                (183,196
                )Deposits
                    and other assets
                
                
                (90,750
                )
                
                2,415Accounts
                    payable
                
                
                781,941
                
                
                233,027Accrued
                    liabilities
                
                
                (870,764
                )
                
                1,320,735Income
                    taxes payable
                
                
                (3,928,748
                )
                
                2,203,069Advances
                    to affiliates
                
                
                (318,658
                )
                
                (92,265
                )Net
                    cash provided by operating activities
                
                
                4,818,203
                
                
                4,762,238CASH
                    FLOWS FROM INVESTING ACTIVITIES:Advances
                    made to affiliates and related parties
                
                
                (3,050,000
                )
                
                (1,800,000
                )Repayments
                    of advances made to affiliates and related parties
                
                
                1,600,000
                
                
                -Expenditures
                    for intangible assets
                
                
                (391,442
                )
                
                (261,545
                )Proceeds
                    from sale of equipment
                
                
                34,320
                
                
                -Purchases
                    of equipment
                
                
                (385,378
                )
                
                (736,955
                )Net
                    cash used for investing activities
                
                
                (2,192,500
                )
                
                (2,798,500
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Series
                    E preferred stock dividends
                
                
                (1,957
                )
                
                -Common
                    stock dividends
                
                
                (1,427,640
                )
                
                -Proceeds
                    from conversion of preferred stock
                
                
                1,575
                
                
                -Proceeds
                    from debt
                
                
                -
                
                
                378,169Principal
                    repayments on notes payable
                
                
                -
                
                
                (685,167
                )Purchase
                    of treasury stock
                
                
                -
                
                
                (45,000
                )Net
                    cash used for financing activities
                
                
                (1,428,022
                )
                
                (351,998
                )INCREASE
                    IN CASH AND CASH EQUIVALENTS
                
                
                1,197,681
                
                
                1,611,740CASH
                    AND CASH EQUIVALENTS, beginning of year
                
                
                2,378,848
                
                
                767,108CASH
                    AND CASH EQUIVALENTS, end of year
                
                $
                3,576,529
                
                $
                2,378,848





See
      accompanying notes to consolidated financial statements





32
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








1.
            ORGANIZATION
                AND BASIS OF PRESENTATION





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





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





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





The
      accompanying financial statements represent the consolidated financial position
      and results of operations of the Company and include the accounts and results
      of
      operations of the Company, Telco and Telco of Canada, Inc, the Company’s wholly
      owned subsidiaries, for the years ended September 30, 2004 and September 30,
      2003. All amounts, except share and per share amounts, are rounded to the
      nearest thousand dollars.




Restatement
      of Financial Statements




Subsequent
        to the issuance of the Company’s financial statements as of September 30, 2004,
        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 corrected
        in
        previous years’ restated financial statements resulting only in the carryforward
        effect of a net decrease of $267,816 on stockholders’ equity at September 30,
        2005.


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,
      2004, cash deposits exceeded those insured limits by $3,443,000.





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





33
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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 serves as the contract for
      the
      subscription. The Company capitalizes and amortizes the costs of direct-response
      advertising on a straight-line basis over 18 months, the estimated average
      period of retention for new customers. The Company capitalized costs of
      $6,336,000 and $4,739,000 during the years ended September 30, 2004 and 2003
      respectively. The Company amortized $5,097,000 and $2,914,000, respectively,
      of
      these capitalized costs during the years ended September 30, 2004 and 2003.
      The
      Company also analyzes these capitalized costs for impairment in accordance
      with
      Statement of Financial Accounting Standards (“SFAS”) No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets,* as
      further discussed herein.





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 $992,000 and $955,000 for the years ended September
      30, 2004 and 2003 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 $352,000 and $273,000 for
      the years ended September 30, 2004 and 2003 respectively.





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





·
            direct
                ACH withdrawals; and


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





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





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





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





Net
      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* .





34
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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 :
      SFAS
      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.”





There
      were no options granted in the years ended September 30, 2004 and 2003 nor
      was
      there any additional vesting of options previously granted. Because no options
      were granted during the years ended September 30, 2004 and 2003, there is no
      presentation of pro forma information regarding net income.





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





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





Impairment
      of Long-lived Assets :
      The
      Company assesses long-lived assets for impairment in accordance with the
      provisions of SFAS 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets.* SFAS
      144
      requires that the Company assess the value of a long-lived asset whenever there
      is an indication that its carrying amount may not be recoverable. The carrying
      amount of a long lived asset is not recoverable if it exceeds the sum of the
      undiscounted cash flows expected to result from the use and eventual disposition
      of the asset. The amount of impairment loss, if any, is measured as the
      difference between the net book value of the asset and its estimated fair value.
      For purposes of these tests, long-lived assets must be grouped with other assets
      and liabilities for which identifiable cash flows are largely independent of
      the
      cash flows of other assets and liabilities. No long-lived assets were impaired
      during the years ended September 30, 2004 and 2003.





Recently
      Issued Accounting Pronouncements:





35
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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 adoption of SFAS No. 149 did 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 was effective for financial instruments entered into or modified after
      May
      31, 2003, and otherwise was 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 and
      therefore, the adoption of SFAS 150 did 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.





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 adoption of FIN 46 did not have a significant impact on the
      Company’s financial statements.





36
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            of Contents*





**YP
      CORP. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




3.
            ACCOUNTS
                RECEIVABLE





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





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





The
      Company processes its billings through two primary billing aggregators:
      PaymentOne, Inc. and Billing Concepts, Inc. (acquirer of ACI Communications,
      Inc.). PaymentOne provides the majority of the Company’s billings, collections,
      and related services. The receivable due from PaymentOne at September 30, 2004
      was $8,565,000, net of an allowance for doubtful accounts of $2,230,000. The
      net
      receivable from PaymentOne for billing at September 30, 2004 represented
      approximately 80% of the Company’s total net accounts receivable.





Subscription
      receivables that are directly billed by the Company are valued and reported
      at
      the estimated future collection amount. Determining the expected collections
      requires an estimation of both uncollectible accounts and refunds. The net
      direct-billed subscriptions receivable at September 30, 2004 was $60,000.





37
 *Table
            of Contents*


**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




Accounts
      receivable at September 30, 2004 is summarized as follows:




Current
              
              Long-Term
              
              TotalGross
                  accounts receivable
              
              $
              11,763,000
              
              $
              2,345,000
              
              $
              14,108,000Allowance
                  for doubtful accounts
              
              
              (3,401,000
              )
              
              (270,000
              )
              
              (3,671,000
              )Net
              
              $
              8,362,000
              
              $
              2,075,000
              
              $
              10,437,000




Certain
      receivables have been classified as long-term because issues arise whereby
      the
      billing companies change holdback terms and collection experience is such that
      collection can extend beyond one year.





The
      allowance for doubtful accounts is attributable to the following categories
      at
      September 30, 2004:




Allowance
                  for dilution and fees on amounts due from billing
                  aggregators
              
              $
              2,978,000Allowance
                  for customer refunds
              
              
              638,000Other
                  allowances
              
              
              55,000$
              3,671,000


4.
            INTANGIBLE
                ASSETS





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





In
      connection with the Company’s acquisition of Telco, the Company was required to
      provide an accelerated payment of license fees for the use of the URL
      Yellow-page.net. The URL is recorded at its cost of $5,000,000 net of
      accumulated amortization. The URL is amortized on an accelerated basis over
      the
      twenty-year term of the licensing agreement. Amortization expense on the URL
      was
      $317,000 and $352,000 for the years ended September 30, 2004 and 2003,
      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. Under the terms of this agreement, there are
      certain events, including the performance of the Company’s common stock, that
      trigger the automatic transfer of ownership to the Company. If such events
      do
      not occur, the Company has the option to purchase the rights to this URL for
      consideration not to exceed $300,000. Because of the importance of this URL
      to
      the Company’s branding strategy, it intends to purchase the rights to this URL
      if ownership has not already transferred by the end of the three-year license
      agreement.





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





38
 *Table
            of Contents*


**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




Years
                  ended September
                  30,2005
              
              
              642,0002006
              
              
              319,0002007
              
              
              171,0002008
              
              
              171,0002009
              
              
              171,000Thereafter
              
              
              1,852,000Total
              
              $
              3,326,000


5.
            PROPERTY
                AND EQUIPMENT





Property
      and equipment consisted of the following at September 30, 2004:




Leasehold
                  improvements
              
              $
              439,000Furnishings
                  and fixtures
              
              
              298,000Office
                  and computer equipment
              
              
              993,000Total
              
              
              1,730,000Less
                  accumulated depreciation
              
              
              (1,004,000
              )Property
                  and equipment, net
              
              $
              726,000


6.
            NOTES
                PAYABLE AND LINE OF CREDIT





Notes
      payable at September 30, 2004 are comprised of the following:





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.
            
            $
            116,000





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 these stockholders, the Company has made payments
      to
      third parties on behalf of the stockholders and applied those payments as
      reductions to the note payable. The stockholders are not a part of management
      or
      on the Company’s board of directors. This note is currently past due and the
      Company is technically in default. The note holder, however, has not issued
      a
      demand for payment or a notice of default. The Company has elected not to pay
      the remaining balance as the holder of the note owes the Company amounts far
      in
      excess of this remaining balance. As there is no legal right of offset, these
      amounts have not been netted in the accompanying consolidated balance
      sheet.





7.
            PROVISION
                FOR INCOME TAXES





39
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            of Contents*


**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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 than 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 for the year ended September 30, 2002. As of September 30, 2004,
      all
      net operating loss carryforwards had been fully utilized.





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





2004
            
            2003Current
                provision
            
            $
            3,682,000
            
            $
            3,337,000Deferred
                (benefit) provision
            
            
            1,158,000
            
            
            (1,466,000
            )Net
                income tax provision
            
            $
            4,840,000
            
            $
            1,871,000






40
 *Table
            of Contents*


**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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


2004
              
              
              
              2003Amount
              
              %
              
              Amount
              
              %Federal
                  statutory rates
              
              $
              4,692,000
              
              
              34
              %
              $
              3,226,000
              
              
              34
              %State
                  income taxes
              
              
              343,000
              
              
              2
              %
              
              115,000
              
              
              1
              %Change
                  in estimate of NOL due tochanges
                  in structuring and stateincome
                  tax rates used
              
              
              
              
              
              
              
              
              (1,465,000
              )
              
              -15
              %Other
              
              
              (195,000
              )
              
              -1
              %
              
              (5,000
              )
              
              0
              %Effective
                  rate
              
              $
              4,840,000
              
              
              35
              %
              $
              1,871,000
              
              
              20
              %




At
      September 30, 2004, deferred income tax assets and liabilities were comprised
      of:


Deferred
                    income tax assets:Book/tax
                    differences in accounts receivable
                
                $
                474,000Book/tax
                    differences for compensation expense associated with restricted
                    stock
                
                
                728,000Book/tax
                    differences in intangible assets
                
                
                114,000Total
                    deferred income tax asset
                
                
                1,316,000Deferred
                    income tax liabilities:Book/tax
                    differences in depreciation
                
                
                122,000Book/tax
                    differences in prepaid assets
                
                
                122,000Book/tax
                    differences in customer acquisition costs
                
                
                1,568,000Total
                    deferred income tax liability
                
                
                1,812,000Net
                    deferred income tax liability
                
                $
                (496,000
                )





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
      $344,000 and $222,000 for the years ended September 30, 2004 and 2003,
      respectively.





41
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            of Contents*


**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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


Years
                  ended September 30,2005
              
              $
              379,0002006
              
              
              326,0002007
              
              
              19,0002008
              
              
              -2009
              
              
              -Thereafter
              
              
              -Total
              
              $
              724,000


9.
            STOCKHOLDERS’
                EQUITY





Common
      Stock Issued for Services





The
      Company historically has granted shares of its common stock to officers,
      directors and consultants as payment for services rendered. The value of those
      shares was determined based on the trading value of the stock at the dates
      on
      which the agreements were made for the services. During the year ended September
      30, 2004, the Company issued 1,010,000 shares of common stock to an
      officer/director, and contractor valued at $1,541,000.





During
      the year ended September 30, 2003, the Company issued 6,300,000 shares of common
      stock to officers, directors and consultants valued at $479,000.





Common
      Shares Received and Retired Under Legal Settlements





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





Common
      Stock 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. (See Note 4)





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.





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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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.





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. During the year ended September 30, 2004, all outstanding treasury
      shares were retired.





Dividends





During
      the years ended September 30, 2004 and 2003, the Company paid dividends of
      $1,428,000 and $0, respectively, to holders of common stock, including
      restricted stock, and $2,000 and $2,000, respectively, to holders of Series
      E
      preferred stock. Dividends paid on unvested shares of common stock are charged
      to compensation expense. The amount of dividends charged to compensation expense
      in fiscal 2004 and 2003 were $86,000 and $0, respectively.





10.
            COMMITMENTS
                AND CONTINGENCIES





Loan
      Commitments to Stockholders





As
      part
      of the original acquisition of Telco, from Morris & Miller, Ltd. and Mathew
      and Markson, Ltd., our two largest stockholders, the Company provided them
      with
      the right to “put” back to the Company their shares of Company common stock
      under certain circumstances. In September 2000, the Company entered into a
      new
      arrangement with these stockholders, whereby their “put” rights were terminated
      in exchange for the establishment of revolving lines of credit. Under these
      lines of credit, the Company agreed to lend up to $10 million to each of Morris
      & Miller and Mathew and Markson, subject to certain limitations. The amounts
      loaned to Morris & Miller and Mathew and Markson carried an annual interest
      rate of 8%.





In
      December 2003, the Company entered into an agreement with Morris & Miller
      and Mathew and Markson to terminate the revolving lines of credit previously
      provided to them. Under this termination agreement, the Company was required
      to advance an additional $1,300,000 to Morris
      & Miller and Mathew and Markson through
      April 2004 at an annual interest rate of 8%, after which their ability to draw
      any additional amounts terminated. The
      Company continues to retain pledged stock as collateral for the repayment of
      all
      such loans, which, by agreement, mature December 2007.





Of
      the
      negotiated $1,300,000 final payments, Morris & Miller and Mathew and Markson
      only drew down $1,050,000 through April 9, 2004. Although the loans to Morris
      & Miller and Mathew and Markson do not mature and require repayment until
      April 2007, they made accelerated prepayments totaling $1,600,000 in the fiscal
      year ended September 30, 2004. As of September 30, 2004, Morris & Miller and
      Mathew and Markson owe the Company an aggregate of $3,895,000 and the Company
      has no further obligation to make advances to those stockholders.





As
      part
      of the December 2003 agreement, the Company also agreed to pay recurring
      quarterly dividends of not less than $.01 per share to
      all of
      our common stockholders, subject to applicable law.





Billing
      Service Agreements





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        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




The
      Company has entered into a customer billing service agreement with PaymentOne,
      Inc. (formerly eBillit, Inc.) under which PaymentOne provides billing and
      collection and related services to the Company. The agreement term is for three
      years, automatically renewable in one-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, PaymentOne bills, collects and remits
      the proceeds to Telco net of reserves for bad debts, billing adjustments,
      telephone company fees and PaymentOne fees. If either the Company’s transaction
      volume decreases by 25% from the preceding month or less than 75% of the traffic
      is billable to major telephone companies PaymentOne may, at its own discretion,
      increase the reserves and holdbacks under this agreement. The Company’s cash
      receipts on trade accounts receivable are dependent upon estimates pertaining
      to
      holdbacks and other factors as determined by PaymentOne.





The
      Company has also entered into an agreement with Billing Concepts, Inc. Billing
      Concepts 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
      LECs.





Other





Prior
      to
      the Company’s fiscal year ended September 30, 2003, the board of directors had
      committed the Company to pay for the costs of defending a civil action filed
      against its former CEO and Chairman. The action involved a business in which
      the
      CEO was formerly involved. The Company and at least one officer had received
      subpoenas in connection with this matter and the board believed that it was
      important to help resolve the matter as soon as possible to allow the CEO to
      refocus his attention on the Company’s business. The board action included the
      payment of legal and other fees for any other officers and directors that may
      have become involved in this civil action. During the year ended September
      30,
      2004, the Company paid final legal costs of approximately $58,000 on behalf
      of
      our former CEO relative to this matter. The amounts expensed in the current
      period are presented as compensation expense within general and administrative
      expenses in the accompanying consolidated statement of operations for the year
      ended September 30, 2004. The civil case against the former CEO was settled
      in
      December 2003. No additional legal costs will be advanced to the former CEO.





Prior
      to
      fiscal 2004, the Company entered into Executive Consulting Agreements with
      four
      entities, each of which was controlled by one of the Company’s four executive
      officers. These agreements called for fees to be paid for the services provided
      by these individuals as officers of the Company, as well as their respective
      staffs. These agreements were not personal service contracts of these officers.
      The agreements ran through 2007 and required annual performance bonuses that
      aggregated up to approximately $320,000, depending upon available cash and
      meeting of certain performance criteria. During the fiscal year ended September
      30, 2004, the Company terminated the Executive Consulting Agreements with the
      entities controlled by its former CEO, former Executive Vice President of
      Marketing, and former CFO. In the case of the former CEO, the Company will
      pay
      Sunbelt Financial Concepts, Inc. $960,000 over two years in lieu of the amounts
      due under the original contract, which called for approximately $2.6 million
      in
      payments over three years. In the case of the former Executive Vice President
      of
      Marketing, the Company will pay Advertising Management & Consulting
      Services, Inc. $697,000 over two years in lieu of the amounts due under the
      original contract, which called for approximately $1.9 million in payments
      over
      three years. In the case of the former CFO, the Company will pay MAR &
Associates, Inc. $120,000 over six months in lieu of the amounts due under
      the
      original contract, which called for approximately $750,000 in payments over
      three years. With respect to these agreements, approximately $1,360,000 of
      this
      amount will be allocated to non-compete agreements, as paid, based on values
      determined by an independent third party valuation firm. The non-compete
      agreements extend for six years. The balance of the payments will be expensed
      as
      incurred as two of the agreements call for ongoing services to be provided
      over
      a two year period. The fourth Executive Consulting Agreement with Advance
      Internet Marketing was terminated subsequent to September 30, 2004. (See Note
      17).





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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




On
      April
      13, 2004, the Company entered into a $1 million, one year, renewable revolving
      credit facility agreement with a lending institution. The terms of the agreement
      require interest only payments on the outstanding balance at the per annum
      rate
      of the one month LIBOR rate, plus 3%. Outstanding advances are secured by all
      existing and acquired tangible and intangible assets of the Company located
      in
      the United States. The Company utilized the new credit facility and repaid
      the
      balance during the quarter ended June 30, 2004 in order to test its functioning
      and reporting requirements. There was no balance outstanding on September 30,
      2004.





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
      stockholders. There were $2,000 of preferred stock dividends in the years ended
      September 30, 2004 and 2003, respectively. Warrants to purchase 500,000 shares
      of common stock were excluded from the calculation of net income per share
      for
      the year ended September 30, 2003 as 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
      for
      the year ended September 30, 2003 were 131,840 shares of Series E Convertible
      Preferred Stock as such shares were 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:





45
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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




**2004**
                
                **2003****Income**
                
                **Shares**
                
                **Per
                    Share**
                
                **Income**
                
                **Shares**
                
                **Per
                    Share**Net
                    income
                
                $
                8,961,000
                
                
                
                
                
                
                
                $
                7,616,000Preferred
                    stock dividends
                
                
                (2,000
                )
                
                
                
                
                
                
                
                (2,000
                )Income
                    available to common stockholders
                
                $
                8,959,000
                
                
                
                
                
                
                
                $
                7,614,000Basic
                    earnings per share:Income
                    available to common stockholders
                
                $
                8,959,000
                
                
                47,375,927
                
                $
                0.19
                
                $
                7,614,000
                
                
                45,326,721
                
                $
                0.17Effect
                    of dilutive securities:Unvested
                    restricted stock
                
                
                
                
                
                510,745
                
                
                
                
                
                
                
                
                264,869Series
                    E convertible preferred stock
                
                
                
                
                
                104,032
                
                
                
                
                
                
                
                
                -Outstanding
                    warrants
                
                
                
                
                
                84,995
                
                
                
                
                
                
                
                
                -Diluted
                    earnings per share:
                
                $
                8,959,000
                
                
                48,075,699
                
                $
                0.19
                
                $
                7,614,000
                
                
                45,591,590
                
                $
                0.17


12.
            RELATED
                PARTY TRANSACTIONS





During
      the years ended September 30, 2004 and 2003, the Company entered into the
      related party transactions with current and former board members, officers
      and
      affiliated entities as described below.





Directors
      & Officers





Board
      of
      director fees for the fiscal year ended September 30, 2004 and 2003 were
      $209,000 and $160,000, respectively. These amounts are included in the amounts
      discussed below.





The
      former CEO, CFO, Executive Vice President and Corporate Secretary were paid
      for
      their services and those of their respective staffs through separate entities
      controlled by these individuals. The following describes the compensation paid
      to these entities. Three of these contracts were terminated prior to September
      30, 2004 and the fourth contract was terminated subsequent to September 30,
      2004. (See Notes 10 and 17)





Sunbelt
      Financial Concepts, Inc.





Sunbelt
      Financial Concepts, Inc. provided the services of the Chairman and CEO and
      his
      staff to the Company, as well as the strategic and overall planning and
      operations management and administration for the Company. Sunbelt’s president
      was the Company’s CEO and Chairman until May 28, 2004.





During
      fiscal years ended 2004 and 2003, the Company paid a total of approximately
      $838,000 and $1,933,000, respectively, to Sunbelt. In addition, during the
      year
      ended September 30, 2004, the Company paid final legal costs of approximately
      $58,000 on behalf of our former CEO incurred by Sunbelt related to his personal
      legal matters. However, this contract was terminated as of July 2004 and the
      termination agreement calls for the payment of $960,000 over two years in lieu
      of the approximately $2.6 million in payments that would have been due over
      the
      remaining three years of the original contract (See Note 10).





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        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




Advertising
      Management & Consulting Services, Inc.





Advertising
      Management & Consulting Services, Inc., or AMCS, provided the Company with
      the services of Executive Vice President and Director through its officers
      and
      employees. AMCS’ president was Executive Vice President of Marketing and a
      director of the Company until June 9, 2004.





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





The
      total
      amount paid to AMCS during the fiscal years ended September 30, 2004 and 2003
      was approximately $614,000 and $957,000, respectively. However, this contract
      was terminated as of July 12, 2004 and the termination agreement calls for
      the
      payment of $697,000 over two years in lieu of the approximately $1.9 million
      in
      payments that would have been due over the remaining three years of the original
      contract (See Note 10)





Advanced
      Internet Marketing, Inc.





Advanced
      Internet Marketing, Inc., or AIM, provided the Company with the services of
      a
      subsidiary officer, Corporate Secretary and a Director through its officers
      and
      employees. The Company outsourced the design and marketing of its website on
      the
      World Wide Web to AIM.





The
      total
      amount paid to AIM during the fiscal years ended September 30, 2004 and 2003
      was
      approximately $296,000 and $755,000, respectively. The Company’s agreement with
      AIM was terminated subsequent to September 30, 2004 (See Note 10).





MAR
      & Associates





The
      compensation for services of the Company’s Chief Financial Officer was paid to
      MAR & Associates (“MAR”). MAR’s president was our CFO until June 21, 2004.
      The total amount paid to MAR during the fiscal years ended September 30, 2004
      and 2003 was approximately $262,000 and $851,000, respectively. However, this
      contract was terminated as of July 16, 2004 and the termination agreement calls
      for the payment of $120,000 over six months in lieu of the approximately
      $750,000 in payments that would have been due over the remaining term of the
      original contract. (See Note 10)





Other





The
      Company made final advances totaling $3,050,000 to its two largest stockholders,
      Morris & Miller and Mathew and Markson, during the fiscal year ended
      September 30, 2004. Interest earned on these advances was at an 8% annual rate
      and was approximately $ 321,000
      and $94,000 for the fiscal years ended September 30, 2004 and 2003,
      respectively. On December 22, 2003, the Company entered into an agreement with
      Morris & Miller and Mathew and Markson that terminated the line of credit
      agreement effective April 9, 2004. (See Note 10). During the fiscal year ended
      September 30, 2004, Morris & Miller and Mathew and Markson made accelerated
      principal reductions of $1.6 million almost three years in advance of their
      maturity.





Advances
      to affiliates are summarized as follows at September 30, 2004:





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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




Mathew
                  & Markson
              
              $
              1,632,000Morris
                  & Miller
              
              
              2,263,000$
              3,895,000
  Simple.Net,
      Inc.





The
      Company had contracted with Simple.Net, Inc., or SN, an Internet service
      provider owned by a director of the Company, to provide Internet dial-up and
      other services to its customers. During the fiscal years ended September 30,
      2004 and 2003, the Company recorded expenses related to SN of $422,000 and
      $559,000, respectively.





In
      addition, prior to the quarter ended March 31, 2004, SN paid a monthly fee
      to
      the Company for technical support and customer service provided to SN’s
      customers by the Company’s personnel. The Company charged SN for these services
      according to a per customer pricing formula.





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





Technical
      Support fees were calculated by number of customer records of SN multiplied
      by a
      base cost of $0.60.





For
      the
      fiscal year ended September 30, 2004, the Company recorded other income of
      approximately $278,000 from SN for these services.





On
      December 29, 2003, the Company entered into a separation agreement with
      Simple.Net, which became effective January 31, 2004. Under this agreement,
      as
      extended, Simple.Net ceased providing any services to the Company as of March
      2,
      2004.





13.
            CONCENTRATION
                OF CREDIT RISK





The
      Company maintains cash balances at banks in Arizona and Nevada. Accounts are
      insured by the Federal Deposit Insurance Corporation up to $100,000. At
      September 30, 2004, the Company had bank balances exceeding those insured limits
      of $3,443,000.





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, 2004 was $8,565,000, net of  an
      allowance for doubtful accounts of $2,230,000. The net receivable from that
      billing services provider at September 30, 2004, represents approximately 80%
      of
      the Company’s total net accounts receivable at September 30, 2004.





14.
            STOCK
                BASED COMPENSATION





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        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




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





As
      of
      September 30, 2004, 2,488,000 shares authorized under the 2003 Plan were granted
      and remain outstanding in the form of restricted stock. These shares of
      restricted stock were granted to the Company’s service providers, executives and
      directors. These 2,488,000 shares of restricted stock granted are subject to
      the
      following vesting schedules:





·
            1,039,000
                shares vest at the end of three years from the date of
                grant;


·
            576,500
                shares vest either at the end of ten years or upon the Company’s common
                stock attaining an average bid and ask price of $10.00 per share
                for three
                consecutive trading days;


·
            687,500
                shares vest either at the end of ten years or in increments based
                on the
                common stock attaining various average bid and ask prices between
                $5.00
                per share and $9.00 per share;


·
            185,000
                shares vest either at the end of three years or in increments based
                on the
                common stock attaining various average bid and ask prices between
                $5.00
                per share and $8.00 per share.





The
      vesting of substantially all shares of restricted stock accelerates upon a
      change of control, as defined in the 2003 Plan. Compensation expense is
      determined at the date of grant, is equal to the stock price at the date of
      grant, and is deferred and recognized on a straight-line basis over the vesting
      period. The weighted-average grant-date fair value of the shares outstanding
      is
      $2.22 per share.





During
      the year ended September 30, 2004, additional restricted stock issuances of
      1,010,000 were granted outside of the 2003 Plan to two employees, including
      the
      CEO. The weighted average grant-date fair value of these shares were
      $1,541,000.





During
      the years ended September 30, 2004 and 2003, the Company recognized compensation
      expense of $1,161,000 and $155,000, respectively, under the 2003 Plan and other
      restricted stock issuances. As of September 30, 2004, all outstanding shares
      of
      restricted stock are unvested.





At
      September 30, 2004, there were no options exercisable or outstanding. No options
      were granted in the years ended September 30, 2004 and 2003.





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





2004
            
            2003Number
                of
              Warrants
            
            Weighted
              Average
              Exercise
              Price
            
            Number
                of
              Warrants
            
            Weighted
              Average
              Exercise
              PriceWarrants
                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





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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




The
      warrants were granted in the year ended September 30, 2001 in connection with
      the settlement with the former URL holder (See Note 4.). The exercise prices
      of
      the warrants range from $1.00 to $3.00. The fair value of these options at
      the
      date of grant was negligible, estimated using the Black-Scholes option-pricing
      model. The 500,000 warrants outstanding at September 30, 2004, expire in
      September 2006.





15.
            EMPLOYEE
                BENEFIT PLAN





The
      Company maintains a 401(k) profit sharing plan for its employees and service
      providers who are eligible to participate in the plan upon reaching age 21
      and
      completion of three months of service. The Company made contributions of $7,000
      and $5,000 to the plan for the years ended September 30, 2004 and 2003,
      respectively.





16.
            OTHER
                INCOME





For
      the
      year ended September 30, 2004, other income included $288,000 for technical
      services provided to an affiliate, $54,000 from the receipt of stock in
      accordance with the settlement of a dispute, and $600,000 relating to the
      reversal of previously accrued compensation cost for former executives for
      which
      payment is no longer expected, offset by other miscellaneous amounts. For the
      year ended September 30, 2003, other income included $474,000 related to the
      rescission of consulting contracts and $618,000 for technical services provided
      to an affiliate, offset by expenses incurred in other legal
      settlements.





17.
            QUARTERLY
                FINANCIAL DATA (UNAUDITED)





Subsequent
      to filing the interim financial statements included on Form 10-QSB for the
      periods ending December 31, 2002, March 31, 2003, June 30, 2003, December 31,
      2003, March 31, 2004, and June 30, 2004, 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 (there were no impacts on fiscal 2004 periods):





50
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**YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




**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





18.
            SUBSEQUENT
                EVENTS





On
      October 8, 2004, pursuant to the terms of a Letter Agreement with Jefferies
      & Company, Inc. the Company issued a total of 925,000 shares of common stock
      to Jefferies. These shares were issued in lieu of cash fees for Jefferies’
investment banking services. These shares were not issued under the Company’s
      2003 Stock Plan. Of the total shares issued to Jefferies, 100,000 shares were
      issued without restrictions on transfer other than those imposed by Rule 144
      under the Securities Act of 1933, as amended. The remaining 825,000 shares
      were
      issued pursuant to a Restricted Stock Agreement. Accordingly, these shares
      remain subject to restrictions on transfer and sale, which lapse in accordance
      with a vesting schedule depending on the achievement of certain performance
      goals.





On
      November 4, 2004, the Company terminated its agreement with Advanced Internet
      Marketing, the entity through which our director, DeVal Johnson, provided the
      services of Executive Vice President and corporate Secretary. Under the terms
      of
      this termination agreement, the Company will pay $368,000 over an 18-month
      period of time. Approximately $302,000 of this amount will be allocated to
      non-compete agreements.








*
      *
      *





51
 *Table
            of Contents*





ITEM
      8A. CONTROLS AND PROCEDURES





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





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





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





**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 29, 2004, 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,
      2004 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, 2004.





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
 *Table
            of Contents*





PART
      III





ITEM
      13. EXHIBITS





The
      following exhibits are 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