**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 **FORM
        10-Q**
 
 (Mark
        One)
  x
              Quarterly
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934
  For
        the
        quarterly period ended December 31, 2005
  o
              Transition
                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                  Act
  For
        the
        transition period from _____________ to _______________
 
 Commission
        File Number 0-24217
 
 **YP
        CORP.**
 (Exact
        Name of Registrant as Specified in Its Charter)
  **Nevada**
              **85-0206668**(State
                  or Other Jurisdiction of Incorporation or Organization)
              (IRS
                  Employer Identification No.)**4840
                  East Jasmine St. Suite 105**
              **85205****Mesa,
                  Arizona**
              (Zip
                  Code)(Address
                  of Principal Executive Offices)
 
 **(480)
        654-9646**
 (Registrant’s
        Telephone Number, Including Area Code)
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x No o
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes o No x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No x
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
  The
        number of shares of the issuer’s common equity outstanding as of February 1,
        2006 was 48,106,594 shares of common stock, par value $.001.
  
  **INDEX
        TO FORM 10-Q FILING**
 **FOR
        THE QUARTER ENDED DECEMBER 31, 2005**
 
 **TABLE
        OF CONTENTS**
 
 **PART
        I.**
 **FINANCIAL
        INFORMATION**
 **Page****Item
                    1.**
                **Financial
                    Statements****Consolidated
                    Balance Sheets****as of December 31, 2005 and September 30,
                    2005**
                **3****Unaudited
                    Consolidated Statements of Operations****for the Three - Month Periods Ended December 31, 2005 and****December
                    31, 2004**
                **4****Unaudited
                    Consolidated Statement of Cash Flows****for the Three-Month Periods Ended December 31, 2005 and****December
                    31, 2004**
                **5****Notes
                    to the Unaudited Consolidated Financial
                    Statements**
                **6****Item
                    2.**
                **Management’s
                    Discussion and Analysis of Financial Condition
                    and Results of Operations**
                **12****Item
                    3.**
                **Quantitative
                    and Qualitative Disclosures About Market
                    Risk**
                **21****Item
                    4.**
                **Controls
                    and
                    Procedures**
                **21****PART
                    II****OTHER
                    INFORMATION****Item
                    1.**
                **Legal
                    Proceedings**
                **22****Item
                    1A.**
                **Risk
                    Factors**
                **22****Item
                    2.**
                **Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds**
                **22****Item
                    3.**
                **Defaults
                    Upon Senior
                    Securities**
                **22****Item
                    4.**
                **Submission
                    of Matters to a Vote of Security
                    Holders**
                **22****Item
                    5.**
                **Other
                    Information**
                **22****Item
                    6.**
                **Exhibits**
                **22****Signatures**
                **23**
  *Table
            of Contents*
 
 **PART
        I - FINANCIAL INFORMATION**
 
 ITEM
        1.  FINANCIAL
        STATEMENTS
 
 **YP
                  CORP. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEET****December
                  31,**
              
              **September
                  30,****2005**
              
              **2005****(unaudited)****Assets**Cash
                  and equivalents
              
              $
              9,038,570
              
              $
              8,119,298Restricted
                  cash
              
              
              500,000
              
              
              500,000Accounts
                  receivable, net
              
              
              5,653,323
              
              
              5,338,533Prepaid
                  expenses and other current assets
              
              
              627,650
              
              
              602,103Deferred
                  tax asset
              
              
              396,336
              
              
              381,887Total
                  current assets
              
              
              16,215,879
              
              
              14,941,821Accounts
                  receivable, long term portion, net
              
              
              616,358
              
              
              873,299Customer
                  acquisition costs, net
              
              
              3,554,345
              
              
              2,337,650Property
                  and equipment, net
              
              
              311,656
              
              
              396,862Deposits
                  and other assets
              
              
              101,002
              
              
              62,029Intangible
                  assets, net
              
              
              5,836,602
              
              
              6,108,823Deferred
                  tax asset, long term
              
              
              91,820
              
              
              376,708Total
                  assets
              
              $
              26,727,662
              
              $
              25,097,192**Liabilities
                  and Stockholders' Equity**Accounts
                  payable
              
              $
              889,362
              
              $
              655,526Accrued
                  liabilities
              
              
              1,403,219
              
              
              803,268Income
                  taxes payable
              
              
              114,059
              
              
              108,855Total
                  current liabilities
              
              
              2,406,640
              
              
              1,567,649Total
                  liabilities
              
              
              2,406,640
              
              
              1,567,649Commitments
                  and contingencies
              
              
              -
              
              
              -Series
                  E convertible preferred stock, $.001 par value, 200,000 shares
                  authorized,
                  127,840 issued and outstanding, liquidation preference
                  $38,202
              
              
              10,866
              
              
              10,866Common
                  stock, $.001 par value, 100,000,000 shares authorized, 48,164,594
                  and
                  48,837,694 issued and outstanding
              
              
              48,165
              
              
              48,838Treasury
                  stock
              
              
              (2,261,766
              )
              
              (2,171,740
              )Paid
                  in capital
              
              
              11,075,081
              
              
              11,044,400Deferred
                  stock compensation
              
              
              (2,831,069
              )
              
              (3,247,535
              )Retained
                  earnings
              
              
              18,279,745
              
              
              17,844,714Total
                  stockholders' equity
              
              
              24,321,022
              
              
              23,529,543Total
                  liabilities and stockholders' equity
              
              $
              26,727,662
              
              $
              25,097,192See
                  accompanying notes to consolidated financial
                  statements.
 
  3
 *Table
            of Contents*
  **YPCORP.
                  AND
                  SUBSIDIARIES****UNAUDITED
                  CONSOLIDATED STATEMENT OF OPERATIONS****Three
                  Months ended December 31,****2005**
              
              **2004**Net
                  revenues
              
              $
              7,626,776
              
              $
              6,190,155Cost
                  of services
              
              
              1,116,346
              
              
              1,134,584Gross
                  profit
              
              
              6,510,430
              
              
              5,055,571Operating
                  expenses:General
                  and administrative expenses
              
              
              3,758,849
              
              
              3,320,296Sales
                  and marketing expenses
              
              
              1,533,791
              
              
              1,610,493Depreciation
                  and amortization
              
              
              397,004
              
              
              360,242Total
                  operating expenses
              
              
              5,689,644
              
              
              5,291,031Operating
                  income (loss)
              
              
              820,786
              
              
              (235,460
              )Other
                  income (expense):Interest
                  expense and other financing costs
              
              
              -
              
              
              (4,163
              )Interest
                  income
              
              
              39,636
              
              
              85,112Other
                  income (expense)
              
              
              (188,545
              )
              
              86,365Total
                  other income (expense)
              
              
              (148,909
              )
              
              167,314Income
                  (loss) before income taxes and cumulative effect of accounting
                  change
              
              
              671,877
              
              
              (68,146
              )Income
                  tax benefit (provision)
              
              
              (236,846
              )
              
              17,370Income
                  (loss) before cumulative effect of accounting change
              
              
              435,031
              
              
              (50,776
              )Cumulative
                  effect of accounting change (net of income taxes of $53,764 in
                  2004)
              
              
              -
              
              
              99,848Net
                  income
              
              $
              435,031
              
              $
              49,072Net
                  income (loss) per common share:Basic:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              0.01
              
              $
              (0.00
              )Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              -Net
                  income applicable to common stock
              
              $
              0.01
              
              $
              0.00Diluted:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              0.01
              
              $
              (0.00
              )Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              0.00Net
                  income applicable to common stock
              
              $
              0.01
              
              $
              0.00Weighted
                  average common shares outstanding:Basic
              
              
              44,885,425
              
              
              46,572,106Diluted
              
              
              45,143,006
              
              
              46,572,106See
                  accompanying notes to consolidated financial
                  statements.
  4
 *Table
            of Contents*
 
 **YPCORP.
                  AND SUBSIDIARIES****UNAUDITED
                  CONSOLIDATED STATEMENT OF CASH FLOWS****Three
                  Months Ended December 31,****2005**
              
              **2004**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              435,031
              
              $
              49,072Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              397,004
              
              
              360,242Amortization
                  of deferred stock compensation
              
              
              446,474
              
              
              201,164Issuance
                  of common stock as compensation for services
              
              
              -
              
              
              119,500Cumulative
                  effect of accounting change
              
              
              -
              
              
              (99,848
              )Deferred
                  income taxes
              
              
              270,439
              
              
              (165,301
              )Provision
                  for uncollectible accounts
              
              
              339,446
              
              
              (156,301
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (397,295
              )
              
              2,231,013Customer
                  acquisition costs
              
              
              (1,216,695
              )
              
              976,200Prepaid
                  and other current assets
              
              
              (25,547
              )
              
              (282,410
              )Intellectual
                  property
              
              
              (39,577
              )
              
              -Deposits
                  and other assets
              
              
              (38,973
              )
              
              (46,799
              )Accounts
                  payable
              
              
              233,836
              
              
              (515,879
              )Accrued
                  liabilities
              
              
              599,951
              
              
              (151,150
              )Income
                  taxes payable
              
              
              5,204
              
              
              147,931Advances
                  to affiliates (accrued interest)
              
              
              -
              
              
              (79,066
              )Net
                  cash provided by operating activities
              
              
              1,009,298
              
              
              2,588,368CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of equipment
              
              
              -
              
              
              (8,732
              )Net
                  cash used for investing activities
              
              
              -
              
              
              (8,732
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Series
                  E preferred stock dividends
              
              
              -
              
              
              (481
              )Repurchases
                  of common stock
              
              
              (90,026
              )
              
              -Net
                  cash used for financing activities
              
              
              (90,026
              )
              
              (481
              )INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              919,272
              
              
              2,579,155CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              8,119,298
              
              
              3,576,529CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              9,038,570
              
              $
              6,155,684See
                  accompanying notes to consolidated financial
                  statements
 
  5
 *Table
            of Contents*
  **YPCORP.
        AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**
 
 1.
              ORGANIZATION
                  AND BASIS OF PRESENTATION
 
 The
        accompanying consolidated financial statements include the accounts of YP
        Corp.,
        a Nevada Corporation, and its wholly owned subsidiaries (collectively the
        “Company”). The Company is an Internet-based provider of yellow page directories
        and advertising space on or through www.YP.com, www.YP.net
        and www.Yellow-Page.net. No material or information contained on these websites
        is a part of the notes or the quarterly report to which notes are attached.
        All
        material intercompany accounts and transactions have been
        eliminated.
  The
        accompanying unaudited financial statements as of December 31, 2005 and for
        the
        three months ended December 31, 2005 and 2004,  respectively,
        have been prepared in accordance with generally accepted accounting principles
        for interim financial information. Accordingly, they do not include all of
        the
        information and footnotes required by generally accepted accounting principles
        for audited financial statements. In the opinion of the Company’s management,
        the interim information includes all adjustments, consisting only of normal
        recurring adjustments, necessary for a fair presentation of the results for
        the
        interim periods. The footnote disclosures related to the interim financial
        information included herein are also unaudited. Such financial information
        should be read in conjunction with the consolidated financial statements
        and
        related notes thereto as of September 30, 2005 and for the year then ended
        included in the Company’s annual report on Form 10-K for the year ended
        September 30, 2005.
  All
        amounts, except share and per share amounts, are rounded to the nearest thousand
        dollars.
  The
        preparation of financial statements in accordance with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amount of assets and liabilities at the date of the
        financial statements and the reported amount of revenues and expenses during
        the
        reporting period. Significant estimates and assumptions have been used by
        management in conjunction with establishing
        allowances for customer refunds, non-paying customers, dilution and fees,
        analyzing the recoverability of the carrying amount of intangible assets,
        estimating amortization periods for direct response advertising costs,
        estimating forfeitures of restricted stock and evaluating the recoverability
        of
        deferred tax assets. Actual results could differ from these estimates. Certain
        prior period amounts have been revised to conform to the current period
        presentation. These changes had no impact on previously reported net income
        or
        stockholders’ equity.
  2.
              ACCOUNTING
                  CHANGES
 
 Effective
        October 1, 2004, the Company changed its method of accounting for forfeitures
        of
        restricted stock granted to employees, executives and consultants. Prior
        to this
        date, the Company recognized forfeitures as they occurred. Upon occurrence,
        the
        Company reversed the previously recognized expense associated with such grant.
        Effective October 1, 2004, the Company changed to an expense recognition
        method
        that is based on an estimate of the number of shares for which the service
        is
        expected to be rendered. The Company believes that this is a preferable method
        as it provides less volatility in expense recognition.
 
 Additionally,
        while both methods of accounting for forfeitures are acceptable under current
        guidance, the implementation of FAS 123R
        (effective during the Company’s first
        quarter of fiscal 2006) will no longer permit companies to recognize forfeitures
        as they occur .
        See
        Note 8. As this new guidance will require the Company to change its method
        of
        accounting for restricted stock forfeitures, the Company has decided to adopt
        such change as of the beginning of its fiscal year. The Company did not adopt
        the provisions of FAS 123R prior to its effective date. Rather, the Company
        changed its accounting for forfeitures under the allowed options prescribed
        in
        FAS 123.
 
 The
        impact of this change for periods prior to October 1, 2004 was an increase
        to
        income of $100,000 (less than $0.01 per share), net of taxes of $54,000,
        and has
        been reflected as a cumulative effect of a change in accounting principle
        in the
        Company’s consolidated statement of operations for the three months ended
        December 31, 2004. Because stock grants are now recorded net of estimated
        forfeitures, the cumulative effect of this change also reduced Additional
        Paid
        in Capital and Deferred Compensation by $1,013,000 and $1,166,000, respectively,
        at October 1, 2004.
  6
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**
 
 3.
              BALANCE
                  SHEET INFORMATION
 
 Balance
        sheet information is as follows:
 
  **December
                  31, 2005**Current
              
              Long-Term
              
              TotalGross
                  accounts receivable
              
              $
              7,136,000
              
              $
              694,000
              
              $
              7,830,000Allowance
                  for doubtful accounts
              
              
              (1,483,000
              )
              
              (78,000
              )
              
              (1,561,000
              )Net
              
              $
              5,653,000
              
              $
              616,000
              
              $
              6,269,000**September
                  30, 2005**Current
              
              Long-Term
              
              TotalGross
                  accounts receivable
              
              $
              6,451,000
              
              $
              982,000
              
              $
              7,433,000Allowance
                  for doubtful accounts
              
              
              (1,112,000
              )
              
              (109,000
              )
              
              (1,221,000
              )Net
              
              $
              5,339,000
              
              $
              873,000
              
              $
              6,212,000
 
 Components
                  of allowance for doubtful accounts are as follows:**December
                  31, 2005**
              
              
              
              **September
                  30, 2005**Allowance
                  for dilution and fees on amounts due from billing
                  aggregators
              
              $
              1,103,000
              
              
              
              
              $
              923,000Allowance
                  for customer refunds
              
              
              458,000
              
              
              
              
              
              298,000Other
                  allowances
              
              
              -
              
              
              
              
              
              -$
              1,561,000
              
              
              
              
              $
              1,221,000
 
 Customer
                  acquisition costs:
              
              **December
                  31, 2005**
              
              
              
              **September
                  30, 2005**Customer
                  acquisition costs
              
              
              5,758,000
              
              
              
              
              
              3,622,000Less:
                  Accumulated amortization
              
              
              (2,203,000
              )
              
              
              
              
              (1,284,000
              )Customer
                  acquisition costs, net
              
              
              3,555,000
              
              
              
              
              $
              2,338,000
 
 Property
                  and equipment:
              
              **December
                  31, 2005**
              
              
              
              **September
                  30, 2005**Leasehold
                  improvements
              
              $
              439,000
              
              
              
              
              $
              439,000Furnishings
                  and fixtures
              
              
              295,000
              
              
              
              
              
              295,000Office
                  and computer equipment
              
              
              1,040,000
              
              
              
              
              
              1,040,000Total
              
              
              1,774,000
              
              
              
              
              
              1,774,000Less:
                  Accumulated depreciation
              
              
              (1,462,000
              )
              
              
              
              
              (1,377,000
              )Property
                  and equipment, net
              
              $
              312,000
              
              
              
              
              $
              397,000
 
 Intangible
                  assets:
              
              **December
                  31, 2005**
              
              
              
              **September
                  30, 2005**Domain
                  name
              
              $
              5,510,000
              
              
              
              
              $
              5,510,000Non-compete
                  agreements
              
              
              3,465,000
              
              
              
              
              
              3,465,000Website
                  development
              
              
              820,000
              
              
              
              
              
              781,000Software
                  licenses
              
              
              53,000
              
              
              
              
              
              53,000Total
              
              
              9,848,000
              
              
              
              
              
              9,809,000Less:
                  Accumulated amortization
              
              
              (4,011,000
              )
              
              
              
              
              (3,700,000
              )Intangible
                  assets, net
              
              $
              5,837,000
              
              
              
              
              $
              6,109,000
 
 Accrued
                  liabilities:
              
              **December
                  31, 2005**
              
              
              
              **September
                  30, 2005**Litigation
                  accrual
              
              
              500,000
              
              
              
              
              
              328,000Severance
                  accrual
              
              
              338,000
              
              
              
              
              
              -Deferred
                  revenue
              
              
              333,000
              
              
              
              
              
              291,000Accrued
                  expenses - other
              
              
              232,000
              
              
              
              
              
              184,000Accrued
                  liabilities
              
              $
              1,403,000
              
              
              
              
              $
              803,000
  7
 *Table
            of Contents*
 
 4.
              COMMITMENTS
                  AND CONTINGENCIES
 
 At
        December 31, 2005, future minimum annual lease payments under operating lease
        agreements for fiscal years ended September 30 are as follows:
 
 Fiscal_2006
              
              $
              277,000Fiscal_2007
              
              
              28,000Fiscal_2008
              
              
              8,000Thereafter
              
              
              -Total
              
              $
              313,000
 
 Commitments
        to Investment Banking Firm
 
 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
        granted 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, none of which were achieved as of December 31, 2005.
 
 In
        accordance with the provisions of EITF Topic D-90, *Grantor
        Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted
        to a Nonemployee,* because
        the Company has a right to receive future services in exchange for unvested,
        forfeitable equity instruments, the 825,000 shares are treated as unissued
        for
        accounting purposes until such time that the performance goals are achieved.
  Termination
        Agreements with Related Parties
  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. During fiscal 2004, the Company terminated the Executive Consulting
        Agreements with the entities controlled by its former CEO, former Executive
        Vice
        President of Marketing, and former CFO. In fiscal 2005, the
        Company terminated the remaining Executive Consulting Agreement with the
        entity
        controlled by a former Executive Vice President. These
        termination agreements provided for cash payments totaling $2,145,000 in
        exchange for consulting services and non-compete agreements. Approximately
        $1,643,000 of
        the
        settlement payments described above has been allocated to non-compete
        agreements. The values attributed to the non-compete agreements are being
        amortized on a straight line basis over the six-year life of the non-compete
        agreements .
        The
        remaining $502,000 was allocated to the consulting service portion of the
        termination agreements, which were originally expected to be rendered over
        a
        two-year period, In the fourth quarter of fiscal 2005, however, the Company
        concluded all matters with respect to these parties, made all remaining payments
        owed under the termination agreements, and expensed the remaining unamortized
        amount of $212,000 attributed to the consulting services. All
        amounts related to these agreements were paid by September 30,
        2005.
 
 During
        the fourth quarter of fiscal 2005, the Company entered into a separation
        agreement with its Chief Operating Officer. Under the agreement, the Company
        made a cash payment of $80,000. No further amounts are owed under this
        agreement.
  8
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**
 
 On
        November 3, 2005, the Company entered into a Separation Agreement with its
        Chief
        Executive Officer. Under the terms of the agreement, the Company is required
        to
        make a cash payment of $337,500 in the second quarter of fiscal 2006. The
        agreement also provides for the continued vesting of 700,000 shares of the
        Chief
        Executive Officers’ restricted stock awards that were granted in fiscal 2004 and
        2005. The entire amount owed under the agreement has been accrued as of December
        31, 2005.
 
 Litigation
 
 The
        Company is party to certain legal proceedings incidental to the conduct of
        its
        business. Management believes that the outcome of pending legal proceedings
        will
        not, either individually or in the aggregate, have a material adverse effect
        on
        its business, financial position, results of operations, cash flows or
        liquidity.
 
 During
        the third fiscal quarter of 2005, the Company recorded an accrual of $328,000
        relating to a legal dispute with a former service provider. Based upon recent
        developments in this matter, YP Corp has increased the accrual by an additional
        $172,000 which has been reported in Other Income(Expense). The Company continues
        to pursue all legal means in defending itself in this matter
 
 5.
              NET
                  INCOME(LOSS) PER SHARE
  Net
        income (loss)
        per share is calculated using the weighted average number of shares of common
        stock outstanding during the year. Preferred stock dividends are subtracted
        from
        net income  to
        determine the amount available to common stockholders.
 
 The
        following table presents
        the computation of basic and diluted income (loss) per share:
  9
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**
 
 **Three
                  Months Ended December 31,****2005**
              
              **2004**Income
                  (loss) before cumulative effect of accounting change
              
              $
              435,000
              
              $
              (51,000
              )Less:
                  preferred stock dividends
              
              
              -
              
              
              -Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              
              435,000
              
              
              (51,000
              )Cumulative
                  effect of accounting change
              
              
              -
              
              
              100,000Net
                  income applicable to common stock
              
              $
              435,000
              
              $
              49,000Basic
                  weighted average common shares outstanding
              
              
              44,885,425
              
              
              46,572,106Add
                  incremental shares for:Unvested
                  restricted stock
              
              
              223,918
              
              
              -Series
                  E convertible preferred stock
              
              
              33,663
              
              
              -Diluted
                  weighted average common shares outstanding
              
              
              45,143,006
              
              
              46,572,106Net
                  income per share:Basic:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              0.01
              
              $
              (0.00
              )Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              -Net
                  income applicable to common stock
              
              $
              0.01
              
              $
              0.00Diluted:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              0.01
              
              $
              (0.00
              )Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              0.00Net
                  income applicable to common stock
              
              $
              0.01
              
              $
              0.00
 
 The
        following potentially dilutive securities were excluded from the calculation
        of
        net income per share because the effects are antidilutive:
 
 **Three
                  Months Ended December 31,****2005**
              
              **2004**Warrants
                  to purchase shares of common stock
              
              
              500,000
              
              
              500,000Series
                  E convertible preferred stock
              
              
              -
              
              
              128,340Shares
                  of non-vested restricted stock
              
              
              2,837,364
              
              
              2,965,4003,337,364
              
              
              3,593,740
 
 
 6.
              RELATED
                  PARTY TRANSACTIONS
  The
        Company’s related party transactions occurring during fiscal 2005 and the first
        quarter of fiscal 2006 consisted exclusively of payments under termination
        agreements with former executives as described in Note 4.
  7.
              CONCENTRATION
                  OF CREDIT RISK
  10
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**
 
 The
        Company maintains cash balances at major nationwide institutions in Arizona
        and
        Nevada. Accounts are insured by the Federal Deposit Insurance Corporation
        up to
        $100,000. At December 31, 2005, the Company had bank balances exceeding those
        insured limits by
        approximately $6,808,000.
  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 Local Exchange Carrier (“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 net receivable due from a single billing services provider
        at
        December 31, 2005 was 3,191,000, net of  an
        allowance for doubtful accounts of $715,000. The net receivable from that
        billing services provider at December 31 2005, represents approximately 51%
        of
        the Company’s total net accounts receivable at December 31, 2005.
  8.
              RECENT
                  ACCOUNTING PRONOUNCEMENTS
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123R, “Share-Based Payment” (“SFAS 123R”). Under this new standard, companies
        will no longer be able to account for share-based compensation transactions
        using the intrinsic method in accordance with APB 25. Instead, companies
        will be
        required to account for such transactions using a fair-value method and to
        recognize the expense over the service period. This new standard also changes
        the way in which companies account for forfeitures of share-based compensation
        instruments. SFAS 123R will be effective for fiscal years beginning after
        June
        15, 2005 and allows for several alternative transition methods. In light
        of this
        upcoming change, the Company decided
        to change its method of accounting for forfeitures of restricted
        stock , under
        current GAAP rules effective October 1, 2004. See Note
        2. The Company has adopted the provisions of SFAS 123R in the first
        quarter of
        fiscal 2006
        on a
        prospective basis. This adoption did not have a material effect on its financial
        condition or results of operations.
 
 9.
              SUBSEQUENT
                  EVENTS
 
 On
        January 19, 2006, the Company entered into a Separation Agreement & General
        Release with Chris Broquist, its Chief Financial Officer, pursuant to which
        Mr.
        Broquist and the Company have agreed to terminate their employment relationship
        effective February 28, 2006. Pursuant to the terms of the Separation Agreement
        & General Release, among other items, Mr. Broquist will receive a severance
        package consisting of six months of compensation and health benefits and
        the
        continued vesting of his restricted stock and Mr. Broquist has agreed not
        to
        compete with the Company or solicit any of the employees of the Company for
        a
        period of two years.
 
 At
        a
        meeting of the Board of Directors of the Company, held on January 8, 2006,
        John
        T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each
        resigned from the Board of Directors of the Company and the respective
        committees of the Board of Directors on which they were serving. Subsequent
        to
        the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse
        were
        elected to the Board of Directors of the Company. In addition, Daniel L.
        Coury,
        Sr., a current member of the Board of Directors, was elected Chairman of
        the
        Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit
        Committee of the Board of Directors.
 
 *   *   *
  11
 *Table
            of Contents*
  ITEM
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
 
 For
        a
        description of our significant accounting policies and an understanding of
        the
        significant factors that influenced our performance during the three months
        ended December 31, 2005, this “Item 2. Management’s Discussion and Analysis of
        Financial Condition and Results of Operations” (hereafter referred to as
“MD&A”) should be read in conjunction with the Consolidated Financial
        Statements, including the related notes, appearing in Item 1 of this Quarterly
        Report ,
        as well
        as the Company’s Annual Report on Form 10-K for the year ended September 30,
        2005.
  **Forward-Looking
        Statements**
  This
        portion of this Annual Report on Form 10-Q, includes statements that constitute
        “forward-looking statements.” These forward-looking statements are often
        characterized by the terms “may,” “believes,” “projects,” “expects,” or
“anticipates,” and do not reflect historical facts. Specific forward-looking
        statements contained in this portion of the Annual Report include, but are
        not
        limited to our (i) our expectation to continue to expand our telemarketing
        campaigns in the future; (ii) our expectation that any future changes in
        billing
        practices with our remaining LECs will not have a material adverse impact
        on our
        net revenues; (iii) our belief that cost of services will continue to be
        directly correlated to our usage of LEC billing channel; (iv) our belief
        that
        sales and marketing expenses will increase if we continue to our strategy
        of
        significant mailing and telemarketing activities; and (v) the belief that
        our
        existing cash on hand will provide us with sufficient liquidity to meet our
        operating needs for the next twelve months.
 
 Forward-looking
        statements involve risks, uncertainties and other factors, which may cause
        our
        actual results, performance or achievements to be materially different from
        those expressed or implied by such forward-looking statements. Factors and
        risks
        that could affect our results and achievements and cause them to materially
        differ from those contained in the forward-looking statements include those
        identified in 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.
  **Executive
        Overview**
 
 This
        section presents a discussion of recent developments and summary information
        regarding our industry and operating trends only. For further information
        regarding the events summarized herein, you should read this MD&A in its
        entirety.
  *Business
        and Company Overview*
 
 We
        use a
        business model similar to print Yellow Pages publishers. We publish basic
        directory listings on the Internet free of charge. Our basic listings contain
        the business name, address, and telephone number for almost 17 million U.S.
        businesses. We strive to maintain a listing for almost every business in
        America
        in this format.
 
 We
        generate revenues from advertisers that desire increased exposure for their
        businesses. As described below, advertisers pay us monthly fees in the same
        manner that advertisers pay additional fees to traditional print Yellow Pages
        providers for enhanced advertisement font, location or display. The users
        of our
        website are prospective customers for our advertisers, as well as the other
        businesses for which we publish basic listings.
 
 Our
        primary product is our Internet Advertising PackageTM, or IAP. Under this
        package, advertisers pay for additional exposure by purchasing a Mini-WebPageTM.
        In order to provide search traffic to our advertiser’s Mini-WebPage, we elevate
        the advertiser to a preferred listing status, at no additional charge. We
        also
        provide our IAP advertisers with enhanced presentation and additional unique
        products, such as larger font, bolded business name, map directions, ease
        of
        communication between our advertisers and users of our website, a link to
        the
        advertiser’s webpage, as well as other benefits.
  12
 *Table
            of Contents*
  *Customer
        Counts*
 
 The
        success of our business model is based on our ability to retain, add and
        efficiently bill our subscribers.
 
 There
        have been different methodologies employed in the reporting of customer count.
        To more properly reflect customer count we now only count billed listings.
        A
        billed listing is defined by management as any listing that has successfully
        been submitted through one of our billing channels or in the case of listings
        billed by direct invoice only those listings that have paid for their
        listing at the end of the reporting period.
 
 Management
        believes that this change when coupled with the knowledge of our average
        price
        and percentage of returns and allowances will provide greater insight into
        our business model for the public.
 
 When
        this
        change is applied to the last 5 Quarters our key disclosures would look as
        follows:
 
 **Quarter
                  Ended**
              
              **Previously
                  Reported Quarter-End Customer Count**
              
              **Billed
                  Listings at Quarter-End**
              
              **Average
                  Billed Listings During Quarter**
              
              **Gross
                  Revenue**
              
              **Returns
                  and Allowance (% of Gross Revenue)**
              
              **Net
                  Revenues**
              
              **Average
                  Monthly Gross Revenue per Average Billed Listing**December
                  31st,
                  2005
              
              N/A
              
              95,876
              
              90,809
              
              8,328,583
              
              8.43%
              
              7,626,776
              
              $30.57September
                  30th,
                  2005
              
              92,000
              
              84,879
              
              81,342
              
              6,856,082
              
              11.71%
              
              6,052,936
              
              $28.10June
                  30th,
                  2005
              
              108,000
              
              92,600
              
              83,096
              
              7,419,827
              
              12.17%
              
              6,517,158
              
              $29.76March
                  31st,
                  2005
              
              105,000
              
              76,774
              
              76,633
              
              7,527,086
              
              14.38%
              
              6,444,609
              
              $32.74December
                  31st,
                  2004
              
              95,000
              
              64,616
              
              82,579
              
              7,502,125
              
              17.49%
              
              6,190,155
              
              $30.28
  *Recent
        Operating Results*
 
 We
        bill
        our customers through four primary channels: LEC billing, ACH billing, recurring
        credit card and direct invoice. During the end of 2004 and throughout 2005,
        we
        had been reducing our use of LEC billing channels as the LEC’s policies
        regarding the use of our check mailer as our primary letter of authorization
        prevented us from billing many existing customers through this particular
        billing channel. Additionally, the major LECs (i.e. Regional Bell Operating
        Companies or RBOCs) prevented us from billing any new customers acquired
        via
        check mailers. As such, we transitioned a significant number of our customers
        to
        alternate billing means, the most significant of which was ACH billing. ACH
        billing is less expensive than LEC billing; however, many of our customers
        view
        this as a less desirable billing method, leading to increased
        cancellations..
 
 In
        fiscal
        2006, we began acquiring new customers via telemarketing campaigns, which
        are
        allowed to be billed via LECs. These telemarketing campaigns have reopened
        the
        LEC billing channel as a viable billing channel Additionally, our monthly
        billing rates are higher for customers acquired via telemarketing campaigns.
        For
        these reasons, we expect to continue to expand our telemarketing campaigns
        in
        the future. Check mailings remain a component of our marketing efforts and
        a
        significant increase in the volume of our mailings have contributed to our
        recent revenue growth.
 
 The
        following represents a summary of recent financial results:
  **Q1
                  2006**
              
              **Q4
                  2005**
              
              **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**Net
                  Revenues
              
              $
              7,626,776
              
              $
              6,052,936
              
              $
              6,517,158
              
              $
              6,444,609
              
              $
              6,190,155Gross
                  margin
              
              
              6,510,430
              
              
              4,993,639
              
              
              5,591,353
              
              
              5,583,676
              
              
              5,055,571Operating
                  expenses
              
              
              5,689,644
              
              
              6,295,000
              
              
              5,269,473
              
              
              5,199,870
              
              
              5,291,031Operating
                  income (loss)
              
              
              820,786
              
              
              (1,301,361
              )
              
              321,880
              
              
              383,806
              
              
              (235,460
              )Net
                  income (loss) (1)(1)
              
              
              435,031
              
              
              (815,727
              )
              
              (149,784
              )
              
              298,280
              
              
              49,072
  13
 *Table
            of Contents*
  
 (1)
        The
        following non-recurring items are relevant to our recent quarterly operating
        results, each of which are further described herein:
  ____
                ·
                  ______
                First
                    quarter of fiscal 2006 - includes an increase of general and
                    administrative expenses totaling approximately $338,000 related
                    to
                    separation costs with our former Chief Executive Officer and
                    in increase
                    in other expenses associated with an additional accrual of $172,000
                    relating to an outstanding legal matter .
                _____·
                Fourth
                    quarter of fiscal 2005 - includes an increase of general and
                    administrative expenses totaling approximately $212,000 relating
                    to the
                    termination of consulting agreements with certain of our former
                    officers
                    and an increase in sales and marketing expense of $921,000 associated
                    with
                    a change in the amortization period of our customer acquisition
                    costs,
                    offset by a reduction of general and administrative expenses
                    of
                    approximately $295,000 associated with the true-up of estimates
                    of
                    forfeitures of restricted stock grants.·
                Third
                    quarter of fiscal 2005 - includes losses of $328,000 associated
                    with a
                    litigation settlement and approximately $282,000 associated with
                    our
                    agreement to settle outstanding amounts due from two of our largest
                    stockholders (with the loss being equal to the difference between
                    the fair
                    value of debt forgiven and the value of the consideration
                    received).·
                First
                    quarter of fiscal 2005 - includes a gain of approximately $100,000
                    (net of
                    tax effects) associated with the cumulative effect of an accounting
                    change
                    with respect to our restricted stock grants.
 The
        following represents the breakdown of net billings by channel during recent
        fiscal quarters:
  **Q1
                  2006**
              
              **Q4
                  2005**
              
              **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**
              
              **Q4
                  2004**LEC
                  billing
              
              
              35%
              
              
              32%
              
              
              23%
              
              
              26%
              
              
              49%
              
              
              64%ACH
                  billing
              
              
              54%
              
              
              54%
              
              
              64%
              
              
              56%
              
              
              42%
              
              
              32%Direct
                  billing and other
              
              
              11%
              
              
              14%
              
              
              13%
              
              
              18%
              
              
              9%
              
              
              4%
   *Recent
        Developments*
 
 On
        January 19, 2006, we entered into a Separation Agreement with Chris Broquist,
        our Chief Financial Officer, pursuant to which Mr. Broquist and the Company
        have
        agreed to terminate their employment relationship effective February 28,
        2006.
        Pursuant to the terms of the Separation Agreement & General Release, among
        other items, Mr. Broquist will receive a severance package consisting of
        six
        months of compensation and health benefits and the continued vesting of his
        restricted stock and Mr. Broquist has agreed not to compete with the Company
        or
        solicit any of the employees of the Company for a period of two
        years.
 
 At
        a
        meeting of our Board of Directors, held on January 8, 2006, John T. Kurtzweil,
        R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from
        our
        Board of Directors and their respective committees on which they were serving.
        Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and
        Elisabeth Demarse were elected to the Board of Directors of the Company.
        In
        addition, Daniel L. Coury, Sr., a current member of our Board of Directors,
        was
        elected Chairman of the Board and Mr. Cunningham was appointed to serve as
        the
        Chairman of the Audit Committee of our Board of Directors.
 
 On
        November 3, 2005, we entered into a Separation Agreement with Peter J. Bergmann
        in connection with his resignation as Chairman and President of our company.
        Under the terms of this agreement, Mr. Bergmann resigned as Chief Executive
        Officer during the second quarter of fiscal 2006. Mr. Bergmann will receive
        a
        cash payment of $337,500 and will continue to vest in a portion of his
        stock-based compensation earned during his tenure, in accordance with the
        terms
        of this agreement.
  14
 *Table
            of Contents*
  *Attorneys
        General Complaints Concerning Direct Marketing Mail Solicitation*
 
 We
        have
        received a number of notices from the Attorney General offices of the States
        of
        Nevada, Nebraska, and Oregon concerning consumer complaints about the use
        of our
        direct mail solicitation. In Nebraska, the notice required us to cease and
        desist the use of our check mail program in that State immediately. The notices
        generally claim that the promotional check mailer practice engaged in by
        the
        Company violates state consumer protection statutes and deceptive trade
        practices acts.
 
 We
        believe that the language in the various state statutes referenced is very
        vague
        as to what constitutes a deceptive trade practice or misleading practice,
        such
        that they are subject to wide-ranging constructions. Moreover, we do not
        believe
        that we are in violation of the referenced statutes. To this end, we are
        maintaining an ongoing dialogue with the various states in an effort to dispel
        such concerns, explain the non-deceptive nature of our business solicitations,
        and, if practicable, tailor our marketing practices so as to comply with
        the
        various states’ interpretation of what conduct would not violate the applicable
        consumer protection statutes.
 
 Our
        current cooperative posture, however, does not obviate the possibility of
        a
        particular State Attorney General instituting formal action against us in
        a
        wider attempt to curb solicitations for business utilizing check promotions.
        We
        hope to continue our good faith discussions with these various States Attorney
        General offices in an effort to formulate a uniform set of standards to be
        used
        to determine if any specific check solicitation violates consumer protection
        laws. However, to the extent future standards are deemed too onerous, we
        may
        consider pursuing a legal course of action challenging those
        standards.
  **Results
        of Operations**
  *Net
        Revenues*
 
 **Net
                  Revenues****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              7,626,776
              
              $
              6,190,155
              
              $
              1,436,621
              
              
              23
              %
 
 The
        increase in revenues for the three months ended December 31, 2005, as compared
        to December 31, 2004, was largely due to an increased customer count
        attributable to expanded marketing efforts. As discussed in “Executive Overview
        - Recent Operating Results” above, we increased our number of monthly check
        mailers and introduced telemarketing campaigns. Our use of telemarketing
        campaigns has reopened LEC billing as an effective means of billing new
        customers. Additionally, our monthly billing rates are higher for customers
        acquired through telemarketing efforts, which has also contributed to our
        revenue growth.
  Although
        we have concentrations of risk with our billing aggregators (as described
        in the
        Notes to Unaudited Consolidated Financial Statements included elsewhere in
        this
        Quarterly Report) these aggregators bill via many underlying LECs. As we
        no
        longer have any significant concentrations of customers with any single LEC,
        we
        do not expect any future changes in billing practices with our remaining
        LECs to
        have a material adverse impact on our net revenues.
 
 The
        price
        for our IAP product ranges from $17.95 to $39.95 per month.
  15
 *Table
            of Contents*
  *Cost
        of Services*
 
 **Cost
                  of Services****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              1,116,346
              
              $
              1,134,584
              
              $
              (18,238
              )
              
              (2
              )%
 
 While
        our
        cost of services has remained largely consistent in the first quarter of
        fiscal
        2006 as compared to the first quarter of fiscal 2005, it has declined as
        a
        percentage of net revenues. This decrease is directly attributable to a
        reduction in our dilution expense as a result of our transition from LEC
        billing
        to alternative billing methods during fiscal 2005. Billings through LEC
        channels, which drives a substantial majority of our dilution expense, was
        35%
        of total billings in the first quarter of fiscal 2006 from 49% of total billings
        in the first quarter of fiscal 2005. A significant portion of these customers
        were converted to ACH and direct billing methods, which have minimal dilution. Additionally,
        we have engaged the services of an additional third-party service provider
        that
        has resulted in decreased fees for a portion of our LEC-billed
        customers.
 
 We
        have
        recently begun acquiring new customers serviced through our LEC billing
        channels. To the extent we increase our use of LEC billing channels, our
        future
        cost of services as a percentage of net revenues is likely to
        increase.
 
 *Gross
        Profit*
 
 **Gross
                  Profit****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              6,510,430
              
              $
              5,055,571
              
              $
              1,454,859
              
              
              29
              %
 
 The
        increase in our gross profits was due primarily to increased revenues as
        discussed above. Gross margins increased to 85.4% of net revenues in the
        first
        quarter of fiscal 2006 compared to 81.7% of net revenues in the first quarter
        of
        fiscal 2005 due to decreased dilution in fiscal 2006.
  *General
        and Administrative Expenses*
 
 **General
                  and Administrative Expenses****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              3,758,849
              
              $
              3,320,296
              
              $
              438,553
              
              
              13
              %
 
 General
        and administrative expenses increased primarily due to approximately $338,000
        of
        one-time settlement costs associated with the separation agreement with our
        former Chief Executive Officer that was incurred during the first quarter
        of
        fiscal 2006. We also experienced increased costs of approximately $208,000
        associated with reconfirmation, mailing, billing and other customer-related
        expenses and increased non-cash compensation costs of approximately $245,000
        associated with restricted stock awards to employees. These increases were
        offset by decreased cash compensation costs stemming from staffing reductions
        and other cost containment initiatives that took place during fiscal 2005.
 
 Our
        general and administrative expenses consist largely of fixed expenses such
        as
        compensation, rent, utilities, etc .
        Therefore, we do not consider short-term trends of general and administrative
        expenses as a percent of revenues to be meaningful indicators for evaluating
        operational performance.
 
 The
        following table sets forth our recent operating performance for general and
        administrative expenses:
  16
 *Table
            of Contents*
 
 **Q1
                  2006**
              
              **Q4
                  2005**
              
              **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**Compensation
                  for employees, consultants, officers and directors
              
              $
              2,423,537
              
              $
              2,215,276
              
              $
              2,115,674
              
              $
              1,869,135
              
              $
              2,201,308Other
                  G&A costs
              
              $
              817,826
              
              $
              697,436
              
              $
              600,442
              
              $
              608,428
              
              $
              809,396Reconfirmation,
                  mailing, billing and other customer-related costs
              
              $
              517,486
              
              $
              432,447
              
              $
              535,861
              
              $
              635,624
              
              $
              309,592
  *Sales
        and Marketing Expenses*
 
 **Sales
                  and Marketing Expenses****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              1,533,791
              
              $
              1,610,493
              
              $
              (76,702
              )
              
              (5
              )%
 
 Sales
        and
        marketing expense decreased in the first quarter of fiscal 2006 as compared
        to
        the first quarter of fiscal 2005 due to a decrease in amortization expense
        and
        decreased advertising and promotional expenditures. We capitalize certain
        direct
        marketing expenses and amortize those costs over a period of time that
        approximates the estimated life of the customer. In the fourth quarter of
        fiscal
        2005, this amortization period was reduced from 18 months to 12 months. Because
        the amount of capitalized costs that were subject to amortization was smaller
        during the first quarter of fiscal 2006 as compared to the first quarter
        of
        fiscal 2005, we incurred less amortization expense, despite the fact that
        the
        amortization period has been reduced.
 
 We
        have
        recently expanded our direct mailings and telemarketing efforts, resulting
        in a
        recent increase in capitalized customer acquisition costs. To the extent
        that we
        continue to expand these efforts, we will experience future increases in
        sales
        and marketing expense related to this amortization.
 
 *Depreciation
        and Amortization*
 
 **Depreciation
                  and Amortization****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              397,004
              
              $
              360,242
              
              $
              36,762
              
              
              10
              %
 
 The
        increase in depreciation and amortization expense is attributable to increased
        amortization of intangible assets associated with website development costs
        put
        in place during fiscal 2005 and amortization of a non-compete agreement that
        was
        acquired during the third quarter of fiscal 2005. Amortization relating to
        the
        capitalization of our direct mail marketing costs is included in marketing
        expenses, as discussed previously.
 
 *Operating
        Income*
 
 **Operating
                  Income (Loss)****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              820,786
              
              $
              (235,460
              )
              $
              1,056,246
              
              
              (449
              )%
 
 Our
        operating income increased substantially due primarily to revenue increases
        as
        previously described.
  17
 *Table
            of Contents*
  *Other
        Income (Expense)*
 
 **Other
                  Income (Expense)****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              (188,545
              )
              $
              86,365
              
              $
              (274,910
              )
              
              (318
              )%
 
 The
        change in other income (expense) for the first quarter of fiscal 2006 as
        compared to fiscal 2005 is due primarily to an increase in a legal accrual
        related to an ongoing dispute with a former service provider. Based upon
        recent
        developments in this matter, we have increased the $328,000 accrual previously
        recorded in the third quarter of fiscal 2005 by an additional $172,000 in
        the
        first quarter of fiscal 2006. We continue to pursue all legal means in defending
        this matter.
 
 *Income
        Tax Benefit (Provision)*
  **Income
                  Tax Benefit (Provision)****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              (236,846
              )
              $
              17,370
              
              $
              (254,216
              )
              
              (1464
              )%
  The
        change in our income tax benefit (provision) for the first quarter of fiscal
        2006 as compared to fiscal 2005 is due almost entirely to our increase in
        profitability. We have not experienced a significant change in our effective
        tax
        rates during these periods.
 
 *Cumulative
        Effect of Accounting Change*
 
 **Cumulative
                  Effect of Accounting Change****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              -
              
              $
              99,848
              
              $
              (99,848
              )
              
              0
              %
  During
        the first fiscal quarter of 2005, we changed our method of accounting for
        forfeitures of restricted stock awards to employees, officers, and directors.
        Prior to October 1, 2004, we recognized forfeitures as they occurred .
        Upon occurrence, we reversed the previously recognized expense associated with
        such
        grant. Effective October 1,
        2004 ,
        we
        changed to an expense recognition method that is based on an estimate of
        the
        number of shares that are ultimately expected to vest. We believe that this
        is a
        preferable method as it provides less volatility in expense recognition.
        Additionally, while both methods of accounting for forfeitures are acceptable
        under current guidance, the implementation of FAS 123R
        (effective during the first
        quarter of fiscal 2006) will no longer permit us to recognize forfeitures
        as
        they occur .
        This
        change resulted in an increase to net income of $99,848, net of income taxes
        of
        $53,764, during the first quarter of fiscal 2005.
 
 *Net
        Income (Loss)*
 
 **Net
                  Income (Loss)****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended December 31,
              
              $
              435,031
              
              $
              49,072
              
              $
              385,959
              
              
              787
              %
 
 The
        substantial increase in net income for the three months ended December 31,
        2005
        is due primarily to increased revenues, offset by increased income tax expense
        and the effects of the cumulative effect of accounting change in fiscal 2005,
        each of which is described above.
  **Liquidity
        and Capital Resources**
  18
 *Table
            of Contents*
 
 Net
        cash
        provided by operating activities decreased $1,579,070, or 61 %, to $1,009,298
        for the three months ended December 31, 2005, compared to $2,588,368 for
        the
        three months ended December 31, 2004. During the first quarter of fiscal
        2005,
        we generated a significant portion of our operating cash flow from the
        conversion of many of our customers from LEC billing to alternate billing
        channels that have a shorter collection time. During the first quarter of
        fiscal
        2006, we did not have a significant amount of such conversions. Additionally,
        during the first quarter of fiscal 2006, we made substantial investments
        in
        direct customer acquisition costs as compared to the first quarter of fiscal
        2005, where we had no such investments.
  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. Additionally, approximately
        51%
        of our accounts receivable are due from a single aggregator.
  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 12 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.
  There
        was
        no net cash used for investing activities for the first three months of fiscal
        2006. During the first three months of fiscal 2005, cash used for investing
        activities was $8,732 which consisted of purchases of equipment.
  Net
        cash
        used for financing activities was $90,026 for the first three months of fiscal
        2006 and consisted exclusively of acquisitions of our common stock through
        our
        stock repurchase program.
 
 We
        had
        working capital of $ 13,809,239 as of December 31, 2005, compared to $13,374,172
        as of September 30, 2005. Our cash position increased during the past three
        months to over $9,000,000 at December 31, 2005 from approximately $8,100,000
        at
        the end of fiscal 2005.
  We
        maintain a $1,000,000 credit facility with Merrill Lynch Business Financial
        Services Inc., 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 1% of the committed amount.
        Outstanding advances are secured by all of our existing and acquired tangible
        and intangible assets located in the United States. There was no balance
        outstanding at December 31, 2005. The line has been renewed for an additional
        one-year period, extending the maturity date to April 30, 2006.
 
 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. As of December 31, 2005, we were in
        compliance with the covenants and are able to fully draw on the credit
        facility.
  Until
        April 1, 2005, we were contractually obligated to pay a $0.01 per share dividend
        each quarter, subject to compliance with applicable laws, to all common
        stockholders, including those who hold unvested restricted stock. We are
        no
        longer required to pay quarterly dividends. Future dividend payments will
        be
        evaluated by the Board of Directors based upon earnings, capital requirements
        and financial position, general economic conditions, alternative uses of
        capital
        and other pertinent factors.
  19
 *Table
            of Contents*
 
 During
        the third quarter of fiscal 2005, our Board of Directors initiated the
        repurchase of up to $3 million of our common stock from time to time on the
        open
        market or in privately negotiated transactions. To date, we have reacquired
        775,850 shares at an aggregate cost of $655,635 under the program.
 
 The
        following table summarizes our contractual obligations at December 31, 2005
        and
        the effect such obligations are expected to have on our future liquidity
        and
        cash flows: .
 
 **Payments
                  due by Period****Total**
              
              **Fiscal
                  2006**
              
              **Fiscal
                  2007**
              
              **Fiscal
                  2008**
              
              **Thereafter****Contractual
                  Obligations**Lease
                  commitments
              
              $
              313,000
              
              $
              277,000
              
              $
              28,000
              
              $
              8,000
              
              $
              -Termination
                  agreements
              
              $
              337,500
              
              $
              337,500
              
              $
              -
              
              $
              -
              
              $
              -
 
 We
        believe that our existing cash on hand and cash flow from operations will
        provide us with sufficient liquidity to meet our operating needs for the
        next
        twelve months.
 
 *   *   *
  20
 *Table
            of Contents*
  ITEM
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
  As
        of
        June 30, 2005, we did not participate in any market risk-sensitive commodity
        instruments for which fair value disclosure would be required under Statement
        of
        Financial Accounting Standards No. 107. We believe that we are not subject
        in
        any material way to other forms of market risk, such as foreign currency
        exchange risk or foreign customer purchases (of which there were none in
        the
        first three months of fiscal 2006 or in any of 2005) or commodity price
        risk.
  ITEM
                  4.
              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 Quarterly Report on Form
        10-Q,
        is recorded, processed, summarized and reported within the time periods
        specified by the Securities and Exchange Commission. Disclosure controls
        are
        also designed with an objective of ensuring that such information is accumulated
        and communicated to our management, including our chief executive officer
        and
        chief financial officer, in order to allow timely consideration regarding
        required disclosures.
  The
        evaluation of our disclosure controls by our principal executive officer
        and
        principal financial officer included a review of the controls’ objectives and
        design, the operation of the controls, and the effect of the controls on
        the
        information presented in this Quarterly 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-Q, and subject to the inherent limitations all as described above, our
        principal executive officer and principal financial officer have concluded
        that
        our disclosure controls and procedures (as defined in Rules 13a-15(e) and
        15d-15(e) under the Securities Exchange Act of 1934) are effective as of
        the end
        of the period covered by this report. They are not aware of any significant
        changes in our disclosure controls or in other factors that could significantly
        affect these controls subsequent to the date of their evaluation, including
        any
        corrective actions with regard to significant deficiencies and material
        weaknesses. During the period covered by this Form 10-Q, 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.
  21
 *Table
            of Contents*
  **PART
        II - OTHER INFORMATION**
  ITEM
                  1.
              LEGAL
                  PROCEEDINGS
 
 None
 
 ITEM
                  1A.
              RISK
                  FACTORS
 
 None
 
 ITEM
                  2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS
 
 **Issuer
        Purchases of Equity Securities**
 Period
                (a)
                    Total Number of Shares (or Units) Purchased
                (b)
                    Average Price Paid per Share (or Unit)
                (c)
                    Total Number of Shares (or Units) Purchased as Part of Publicly
                    Announced
                    Plans or Programs
                (d)
                    Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                    that May
                    Yet Be Purchased Under the Plans or ProgramsOctober
                    2005
                0
                N/A
                0
                N/ANovember
                    2005
                0
                N/A
                0
                N/ADecember
                    2005
                174,600
                0.52
                0
                N/ATotal
                174,600
                0.52
                0
                $2,344,365(1)
 (1) On
        May
        18, 2005, we announced the adoption of a $3 million stock repurchase program.
        To
        date, we have purchased 775,850 shares at an aggregate price of $655,635.
 
 ITEM
                  3.
              DEFAULTS
                  UPON SENIOR SECURITIES
 
 None
 
 ITEM
                  4.
              SUBMISSIONS
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
 
 None
 
 ITEM
                  5.
              OTHER
                  INFORMATION
 
 None
 
 ITEM
                  6.
              EXHIBITS
  The
        following exhibits are either attached hereto or incorporated herein by
        reference as indicated:
 
 Exhibit
                  Number
              
              Description10.1
              
              Separation
                  Agreement, dated November 3, 2005, by and between Peter J. Bergmann
                  and YP
                  Corp.31
              
              Certifications
                  pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 200232
              
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
  22
 *Table
            of Contents*
  SIGNATURES
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
 
 YP.CORP.
  Dated:
                  February 14, 2006
              */s/
                  W. Chris Broquist*W.
                  Chris BroquistChief
                  Financial Officer
  *Table
            of Contents*
 
 EXHIBIT
        INDEX
 
 Exhibit
                  Number
              
              Description10.1
              
              Separation
                  Agreement, dated November 3, 2005, by and between Peter J. Bergmann
                  and YP
                  Corp.31
              
              Certifications
                  pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 200232
              
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002