**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
                  1934For
                  the quarterly period ended June 30, 2005o
              Transition
                  Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange
                  ActFor
                  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 ofIncorporation 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 þ 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 þ
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
  The
        number of shares of the issuer’s common equity outstanding as of August 1, 2005
        was 49,219,736 shares of common stock, par value $.001.
  
 
 
  **INDEX
        TO FORM 10-Q FILING**
 **FOR
        THE QUARTER ENDED JUNE 30, 2005**
 
 **TABLE
        OF CONTENTS**
 
 **PART
        I.**
 **FINANCIAL
        INFORMATION**
 **Page****Item
                  1.**
              **Financial
                  Statements****Consolidated
                  Balance Sheets as of June 30, 2005 and September
                  30, 2004**
              **3****Unaudited
                  Consolidated Statements of Operations for the Three-
                  and Nine-Month Periods Ended June 30, 2005 and June 30,
                  2004**
              **4****Unaudited
                  Consolidated Statement of Cash Flows for the
                  Nine-Month Periods Ended June 30, 2005 and June 30,
                  2004**
              **5****Notes
                  to the Unaudited Consolidated Financial
                  Statements**
              **6****Item
                  2.**
              **Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations**
              **15****Item
                  3.**
              **Quantitative
                  and Qualitative Disclosures About Market
                  Risk**
              **28****Item
                  4.**
              **Controls
                  and Procedures**
              **28****PART
                  II****OTHER
                  INFORMATION****Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
              **29****Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**
              **29****Item
                  6.**
              **Exhibits**
              **30****SIGNATURES**
  *Table
            of Contents*
  PART
        I - FINANCIAL
        INFORMATION
  ITEM
                  1.
              FINANCIAL
                  STATEMENTS
 
 **YP
        CORP. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **June
                  30,**
              
              **September
                  30,****2005**
              
              **2004****(unaudited)****Assets**Cash
                  and equivalents
              
              $
              9,004,290
              
              $
              3,576,529Restricted
                  cash
              
              
              365,000
              
              
              -Accounts
                  receivable, net of allowance for doubtful accounts of $963,654
                  and
                  $3,400,575
              
              
              6,217,833
              
              
              8,362,283Prepaid
                  expenses and other current assets
              
              
              1,187,910
              
              
              822,919Income
                  tax refund receivable
              
              
              -
              
              
              1,239,436Deferred
                  tax asset
              
              
              148,362
              
              
              352,379Total
                  current assets
              
              
              16,923,395
              
              
              14,353,546Accounts
                  receivable, long term portion, net of allowance for doubtful accounts
                  of
                  $85,522 and $269,662
              
              
              1,317,970
              
              
              2,075,334Customer
                  acquisition costs, net of accumulated amortization of $3,821,547
                  and
                  $5,096,669
              
              
              3,022,645
              
              
              4,482,173Property
                  and equipment, net
              
              
              485,865
              
              
              725,936Deposits
                  and other assets
              
              
              60,919
              
              
              239,060Intangible
                  assets, net of accumulated amortization of $3,139,328 and
                  $2,446,403
              
              
              4,981,102
              
              
              3,326,274Advances
                  to affiliates
              
              
              -
              
              
              3,894,862Total
                  assets
              
              $
              26,791,896
              
              $
              29,097,185**Liabilities
                  and Stockholders' Equity**Accounts
                  payable
              
              $
              501,539
              
              $
              1,210,364Accrued
                  liabilities
              
              
              767,644
              
              
              542,481Income
                  taxes payable
              
              
              505,458
              
              
              -Notes
                  payable- current portion
              
              
              -
              
              
              115,868Total
                  current liabilities
              
              
              1,774,641
              
              
              1,868,713Deferred
                  income taxes
              
              
              183,099
              
              
              1,116,314Total
                  liabilities
              
              
              1,957,740
              
              
              2,985,027Commitments
                  and contingencies
              
              
              -
              
              
              -Series
                  E convertible preferred stock, $.001 par value, 200,000 shares
                  authorized,
                  127,840 and 128,340 issued and outstanding, liquidation preference
                  $38,202
              
              
              10,866
              
              
              10,909Common
                  stock, $.001 par value, 100,000,000 shares authorized,48,964,728
                  and
                  50,071,302 issued and outstanding
              
              
              48,965
              
              
              50,071Paid
                  in capital
              
              
              10,577,670
              
              
              11,375,384Treasury
                  stock
              
              
              (1,606,131
              )
              
              -Deferred
                  stock compensation
              
              
              (3,872,075
              )
              
              (5,742,814
              )Retained
                  earnings
              
              
              19,674,861
              
              
              20,418,608Total
                  stockholders' equity
              
              
              24,834,156
              
              
              26,112,158Total
                  liabilities and stockholders' equity
              
              $
              26,791,896
              
              $
              29,097,185
 
 See
        accompanying notes to consolidated financial statements.
  3
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 
 **Three
                  Months Ended June 30,**
              
              **Nine
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  revenues
              
              $
              6,517,158
              
              $
              16,890,361
              
              $
              19,151,922
              
              $
              47,098,181Cost
                  of services
              
              
              925,805
              
              
              8,195,264
              
              
              2,921,322
              
              
              19,678,248Gross
                  profit
              
              
              5,591,353
              
              
              8,695,097
              
              
              16,230,600
              
              
              27,419,933Operating
                  expenses:General
                  and administrative expenses
              
              
              3,320,434
              
              
              3,271,624
              
              
              9,886,929
              
              
              9,142,889Sales
                  and marketing expenses
              
              
              1,565,536
              
              
              1,667,040
              
              
              4,896,063
              
              
              4,403,385Depreciation
                  and amortization
              
              
              383,503
              
              
              243,261
              
              
              977,382
              
              
              639,173Total
                  operating expenses
              
              
              5,269,473
              
              
              5,181,925
              
              
              15,760,374
              
              
              14,185,447Operating
                  income
              
              
              321,880
              
              
              3,513,172
              
              
              470,226
              
              
              13,234,486Other
                  income (expense):Interest
                  expense and other financing costs
              
              
              -
              
              
              (5,643
              )
              
              (8,610
              )
              
              (13,310
              )Interest
                  income
              
              
              29,859
              
              
              104,540
              
              
              206,621
              
              
              261,905Other
                  income (expense)
              
              
              (584,988
              )
              
              436,464
              
              
              (477,535
              )
              
              782,617Total
                  other income (expense)
              
              
              (555,129
              )
              
              535,361
              
              
              (279,524
              )
              
              1,031,212Income
                    before income taxes and cumulativeeffect of accounting
                    change
              
              
              (233,249
              )
              
              4,048,533
              
              
              190,702
              
              
              14,265,698Income
                  tax benefit (provision)
              
              
              83,465
              
              
              (1,409,113
              )
              
              (92,982
              )
              
              (4,992,994
              )Income
                    before cumulative effect ofaccounting change
              
              
              (149,784
              )
              
              2,639,420
              
              
              97,720
              
              
              9,272,704-
              
              
              -Cumulative
                    effect of accounting change (net ofincome taxes of $53,764 in
                    2005)
              
              
              -
              
              
              -
              
              
              99,848
              
              
              -Net
                  income (loss)
              
              $
              (149,784
              )
              $
              2,639,420
              
              $
              197,568
              
              $
              9,272,704Net
                  income (loss) per common share:Basic:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              (0.00
              )
              $
              0.06
              
              $
              0.00
              
              $
              0.20Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              -
              
              $
              0.00
              
              $
              -Net
                  income (loss) applicable to common stock
              
              $
              (0.00
              )
              $
              0.06
              
              $
              0.00
              
              $
              0.20Diluted:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              (0.00
              )
              $
              0.05
              
              $
              0.00
              
              $
              0.19Cumulative
                  effect of accounting change
              
              $
              -
              
              $
              -
              
              $
              0.00
              
              $
              -Net
                  income (loss) applicable to common stock
              
              $
              (0.00
              )
              $
              0.05
              
              $
              0.00
              
              $
              0.19Weighted
                  average common shares outstanding:Basic
              
              
              44,860,228
              
              
              47,294,551
              
              
              46,060,709
              
              
              47,033,977Diluted
              
              
              44,860,228
              
              
              48,096,618
              
              
              46,296,626
              
              
              47,805,915
 
 See
        accompanying notes to consolidated financial statements.
  4
 *Table
            of Contents*
  **YP
        CORP. AND SUBSIDIARIES**
 **UNAUDITED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 
 **Nine
                  Months Ended June 30,****2005**
              
              **2004**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              197,568
              
              $
              9,272,704Adjustments
                    to reconcile net income to net cashprovided by operating
                    activities:Depreciation
                  and amortization
              
              
              977,381
              
              
              639,171Amortization
                  of deferred stock compensation
              
              
              1,105,763
              
              
              622,901Issuance
                  of common stock as compensation for services
              
              
              119,500
              
              
              -Non-cash
                  gain on transaction with affiliates
              
              
              171,865
              
              
              -Cumulative
                  effect of accounting change
              
              
              (99,848
              )
              
              -Deferred
                  income taxes
              
              
              (782,962
              )
              
              172,897Loss
                  on disposal of equipment
              
              
              -
              
              
              36,932Provision
                  for uncollectible accounts
              
              
              (54,492
              )
              
              -Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              2,956,306
              
              
              (6,896,403
              )Customer
                  acquisition costs
              
              
              1,459,528
              
              
              (963,668
              )Prepaid
                  and other current assets
              
              
              (207,201
              )
              
              (477,007
              )Restricted
                  cash
              
              
              (365,000
              )
              
              -Deposits
                  and other assets
              
              
              178,141
              
              
              34,900Accounts
                  payable
              
              
              (708,825
              )
              
              83,182Accrued
                  liabilities
              
              
              225,163
              
              
              (805,464
              )Income
                  taxes payable
              
              
              1,744,894
              
              
              1,149,857Advances
                  to affiliates (accrued interest)
              
              
              (157,972
              )
              
              -Net
                  cash provided by operating activities
              
              
              6,759,809
              
              
              2,870,002CASH
                  FLOWS FROM INVESTING ACTIVITIES:Advances
                  made to affiliates and related parties
              
              
              -
              
              
              (2,725,000
              )Repayments
                  of advances made to affiliates and related parties
              
              
              -
              
              
              1,175,000Expenditures
                  for intangible assets
              
              
              (346,751
              )
              
              (299,425
              )Purchases
                  of equipment
              
              
              (44,387
              )
              
              (353,311
              )Net
                  cash used for investing activities
              
              
              (391,138
              )
              
              (2,202,736
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Series
                  E preferred stock dividends
              
              
              (780
              )
              
              -Common
                  stock dividends
              
              
              (940,355
              )
              
              (499,983
              )Proceeds
                  from conversion of preferred stock
              
              
              225
              
              
              -Net
                  cash used for financing activities
              
              
              (940,910
              )
              
              (499,983
              )INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              5,427,761
              
              
              167,283CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              3,576,529
              
              
              2,378,848CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              9,004,290
              
              $
              2,546,131
 
 See
        accompanying notes to consolidated financial statements
 
 5
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED 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 June 30, 2005 and for the
        three and nine months ended June 30, 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, 2004 and for the year then ended
        included in the Company’s annual report on Form 10-KSB for the year ended
        September 30, 2004.
  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.
  6
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 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 is not
          adopting
          the provisions of FAS 123R prior to its effective date. Rather, the Company
          is
          changing 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 nine months ended June
          30, 2005. Because stock grants are now recorded net of estimated forfeitures,
          the cumulative effect of this change also reduced Additional Paid in Capital
          and
          Deferred Compensation by $1,013,000 and $1,166,000, respectively, at October
          1,
          2004. The effect of the change was to decrease net income by $1,000 (net
          of
          income taxes of $1,000) for the three months ended June 30, 2005 and increase
          net income by $72,000 (net of income taxes of $43,000) for the nine months
          ended
          June 30, 2005.
 The
        estimated pro forma effects of the accounting change on the Company’s results of
        operations for the three and nine months ended June 30, 2004 are as
        follows:
 
 **Three
                  Months**
                **Ended****June
                  30,**
                **2004**
              
              **Nine
                  Months**
                **Ended****June
                  30,**
                **2004**As
                  reported:Net
                  income
              
              $
              2,639,000
              
              $
              9,273,000Basic
                  net income per share
              
              $
              0.06
              
              $
              0.20Diluted
                  net income per share
              
              $
              0.05
              
              $
              0.19Pro
                  forma amounts reflecting the accounting change applied
                  retroactively:Net
                  income
              
              $
              2,606,000
              
              $
              9,325,000Basic
                  net income per share
              
              $
              0.06
              
              $
              0.20Diluted
                  net income per share
              
              $
              0.05
              
              $
              0.20Weighted
                  average common shares outstanding:Basic
              
              
              47,294,551
              
              
              47,033,977Diluted
              
              
              48,096,618
              
              
              47,805,915
  7
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 3.
              BALANCE
                  SHEET INFORMATION
 
 Balance
        sheet information is as follows:
 
 **June
                  30, 2005**Current
              
              Long-Term
              
              TotalGross
                  accounts receivable
              
              $
              7,182,000
              
              $
              1,404,000
              
              $
              8,586,000Allowance
                  for doubtful accounts
              
              
              (964,000
              )
              
              (86,000
              )
              
              (1,050,000
              )Net
              
              $
              6,218,000
              
              $
              1,318,000
              
              $
              7,536,000
  **September
                  30, 2004**Current
              
              Long-Term
              
              TotalGross
                  accounts receivable
              
              $
              11,763,000
              
              $
              2,345,000
              
              $
              14,108,000Allowance
                  for doubtful accounts
              
              
              (3,401,000
              )
              
              (270,000
              )
              
              (3,671,000
              )Net
              
              $
              8,362,000
              
              $
              2,075,000
              
              $
              10,437,000Components
                of allowance for doubtful accounts are as
                follows:
  **June
                  30, 2005**
              
              **September
                  30,**
                **2004**Allowance
                  for dilution and fees on amounts due from billing
                  aggregators
              
              $
              765,000
              
              $
              2,978,000Allowance
                  for customer refunds
              
              
              285,000
              
              
              638,000Other
                  allowances
              
              
              -
              
              
              55,000$
              1,050,000
              
              $
              3,671,000Property
                  and equipment consists of the following:
 
 **June
                  30, 2005**
              
              **September
                  30,**
                **2004**Leasehold
                  improvements
              
              $
              439,000
              
              $
              439,000Furnishings
                  and fixtures
              
              
              298,000
              
              
              298,000Office,
                  computer equipment and other
              
              
              1,038,000
              
              
              993,000Total
              
              
              1,775,000
              
              
              1,730,000Less
                  accumulated depreciation
              
              
              (1,289,000
              )
              
              (1,004,000
              )Property
                  and equipment, net
              
              $
              486,000
              
              $
              726,000
 
 4.
              COMMITMENTS
                  AND CONTINGENCIES
 
 At
        June
        30, 2005, future minimum annual lease payments under operating lease agreements
        for fiscal years ended September 30 are as follows:
  Remainder
                  of Fiscal 2005
              
              $
              74,000Fiscal
                  2006
              
              
              336,000Fiscal
                  2007
              
              
              29,000Fiscal
                  2008
              
              
              5,000Thereafter
              
              
              -Total
              
              $
              444,000
  8
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 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 June 30, 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.
  Commitments
        to Stockholders
 
 As
        part
        of the December 2003 agreement between the Company and two of its largest
        stockholders, Morris & Miller, Ltd. and Mathew & Markson, Ltd., the
        Company terminated all prior obligations to make advances to these stockholders.
        Accrued interest on outstanding balances are reflected in the Advances to
        Affiliates line item of the accompanying balance sheet.
 
 As
        part
        of this agreement, the Company agreed to pay recurring quarterly dividends
        of
        not less than $0.01 per share to all of its common stockholders, subject
        to
        applicable law and certain restrictions with respect to the Company’s
        liquidity *.* The
        quarterly dividend associated with the third
        quarter of fiscal 2005 was
        declared and paid in July 2005 and, therefore, was not accounted for in the
        three months ended June 30, 2005 *.* In
        connection with the Transfer and Repayment Agreement described in Note 6,
        as of
        April 1,2005, the Company is 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.
  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 at that
        time and through which each entities’ support staff provided executive
        management services to the Company. During
        the fiscal year ended September 30, 2004, the Company terminated the Executive
        Consulting Agreements with the entities controlled by its former CEO, former
        Executive Vice President of Marketing, and former CFO. In the case of the
        former
        CEO, the Company agreed to pay Sunbelt Financial Concepts, Inc. $960,000
        over
        two years in lieu of the amounts due under the original contract, which called
        for approximately $2.6 million in payments over three years. In the case
        of the
        former Executive Vice President of Marketing, the Company agreed to pay
        Advertising Management & Consulting Services, Inc. $697,000 over two years
        in lieu of the amounts due under the original contract, which called for
        approximately $1.9 million in payments over three years. In the case of the
        former CFO, the Company paid MAR & Associates, Inc. $120,000 over six months
        in lieu of the amounts due under the original contract, which called for
        approximately $750,000 in payments over three years. With respect to these
        agreements, approximately $1,360,000 of the settlement payments described
        above
        has been allocated to non-compete agreements, as paid, based on values
        determined by an independent third party valuation firm. The non-compete
        agreements extend for six years. The balance of the payments were to be expensed
        as incurred as two of the agreements called for ongoing services to be provided
        over a two-year period.  See
        Note
        6.
  9
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 During
          the three months ended December 31, 2004, the Company terminated the remaining
          Executive Consulting Agreement with Advanced Internet Marketing, Inc.,
          an entity
          controlled by DeVal Johnson, a director and former Executive Vice President.
          Under the terms of this termination agreement, the Company agreed to pay
          $368,000 over an 18-month period of time. Approximately $281,000 of this
          amount
          has been allocated to non-compete agreements, as paid. See Note
          6.
 
 Subsequent
        to June 30, 2005, the Company has terminated each of the termination agreements
        and paid all remaining amounts owed thereunder. See Note 9.
 
 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 received an arbitration judgment
        involving disputed fees associated with a former public relations firm. Under
        the terms of this judgment, the Company is obligated to pay $328,000, inclusive
        of legal fees and associated expenses. The loss associated with this judgment
        was accrued in the third fiscal quarter of 2005 and is reflected in other
        income
        and expense in the accompanying consolidated statement of operations. In
        accordance with the terms of the judgment, the Company has established a
        bond in
        the amount of $365,000 which is reflected as restricted cash in the accompanying
        balance sheet. The Company is currently appealing the arbitrator’s decision.
 
 10
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 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:
  **Three
                  Months Ended June 30,**
              
              **Nine
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Income
                  (loss) before cumulative effect of accounting change
              
              $
              (150,000
              )
              $
              2,639,000
              
              $
              98,000
              
              $
              9,273,000Less:
                  preferred stock dividends
              
              
              -
              
              
              -
              
              
              (1,000
              )
              
              (1,000
              )Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              
              (150,000
              )
              
              2,639,000
              
              
              97,000
              
              
              9,272,000Cumulative
                  effect of accounting change
              
              
              -
              
              
              -
              
              
              100,000
              
              
              -Net
                  income (loss) applicable to common stock
              
              $
              (150,000
              )
              $
              2,639,000
              
              $
              197,000
              
              $
              9,272,000Basic
                  weighted average common shares outstanding
              
              
              44,860,228
              
              
              47,294,551
              
              
              46,060,709
              
              
              47,033,977Add
                  incremental shares for:Unvested
                  restricted stock
              
              
              -
              
              
              562,529
              
              
              136,636
              
              
              560,547Series
                  E convertible preferred stock
              
              
              -
              
              
              111,240
              
              
              75,565
              
              
              108,689Outstanding
                  warrants
              
              
              -
              
              
              127,698
              
              
              23,716
              
              
              102,701Diluted
                  weighted average common shares outstanding
              
              
              44,860,228
              
              
              48,096,018
              
              
              46,296,626
              
              
              47,805,915Net
                  income (loss) per share:Basic:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              (0.00
              )
              $
              0.06
              
              $
              0.00
              
              $
              0.20Cumulative
                  effect of accounting change
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00Net
                  income (loss) applicable to common stock
              
              $
              (0.00
              )
              $
              0.06
              
              $
              0.00
              
              $
              0.20Diluted:Income
                  (loss) applicable to common stock before cumulative effect of accounting
                  change
              
              $
              (0.00
              )
              $
              0.05
              
              $
              0.00
              
              $
              0.19Cumulative
                  effect of accounting change
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00Net
                  income (loss) applicable to common stock
              
              $
              (0.00
              )
              $
              0.05
              
              $
              0.00
              
              $
              0.19
  The
        following potentially dilutive securities were excluded from the calculation
        of
        net income per share because the effects are antidilutive:
 
 **Three
                  Months Ended June 30,**
              
              **Nine
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Warrants
                  to purchase shares of common stock
              
              
              500,000
              
              
              125,000
              
              
              375,000
              
              
              125,000Series
                  E convertible preferred stock
              
              
              127,840
              
              
              -
              
              
              -
              
              
              -Shares
                  of non-vested restricted stock
              
              
              3,523,400
              
              
              377,500
              
              
              2,964,744
              
              
              377,5004,151,240
              
              
              502,500
              
              
              3,339,744
              
              
              502,500
  11
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 
 6.
              RELATED
                  PARTY TRANSACTIONS
  As
        described in Note 4, the former
        CEO, CFO, Executive Vice President and Corporate Secretary provided their
        services and those of their respective staffs through separate entities
        controlled by these individuals. All
        of
        these contracts were terminated prior to June 30, 2005. The
        following table includes the compensation paid to these entities during
        the three months ended June 30, 2005 and the amounts remaining to be paid
        as of
        June 30, 2005, pursuant to the termination agreements between the Company
        and
        the former officers’ respective entities.
  **Payments
                  Under**
                **Termination**
                **Agreements
                  for the**
                **Quarter
                  Ended**
              
              **Remaining**
                **Termination**
                **Payments
                  as of****June
                  30, 2005**
              
              **June
                  30, 2005**Sunbelt
                  Financial Concepts
              
              $
              53,000
              
              $
              497,000Advertising
                  Management & Consulting Services, Inc.
              
              
              32,000
              
              $
              339,000Advanced
                  Internet Marketing, Inc.
              
              
              44,000
              
              $
              164,000$
              129,000
              
              $
              1,000,000
  On
        April
        1, 2005, the Company and Morris & Miller, Ltd. and Matthew and Markson,
        Ltd., (together, the “Shareholders”) entered into a Transfer and Repayment
        Agreement (the “Agreement”). Under the Agreement, the Shareholders satisfied all
        of their outstanding debt obligations to the Company (previously reflected
        as
        Advances to Affiliates in the accompanying Consolidated Balance Sheet) as
        follows:
 
 ·
              The
                  Shareholders agreed to surrender and deliver to the Company 1,889,566
                  shares of its common stock previously owned by the Shareholders
                  (included
                  in Treasury Stock at June 30, 2005);
 
 ·
              The
                  Shareholders forgave $115,865 of debt owed by the Company to the
                  Shareholders and all related accrued interest;
 
 ·
              The
                  Shareholders released any liens they previously had on any shares
                  of the
                  Company’s common stock;
 
 ·
              The
                  Shareholders assigned certain intellectual property to the Company;
                  and
 
 ·
              The
                  Shareholders agreed to a non-compete and non-solicitation agreement
                  whereby the Shareholders and their affiliates agree not to compete
                  with
                  the Company or solicit any customers for a period of five years.
 
 This
        transaction resulted in a non-cash charge of $282,000 for the quarter ended
        June
        30, 2005 equal to the difference between the carrying value of the Advances
        to
        Affiliates and the value of the consideration received. The fair value of
        the
        common stock received was $1,606,000 and was based on the market value of
        the
        common stock as of the date of the agreement. The fair values of the
        intellectual property and non-compete and non-solicitation agreement were
        $180,000 and $1,821,000 and were determined based on independent appraisals.
        The
        intellectual property and non-compete
        and non-solicitation agreement are included in intangible assets in the
        consolidated balance sheet and will be amortized over their estimated useful
        lives of 36 and 60 months, respectively.
 
 12
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 7.
              CONCENTRATION
                  OF CREDIT RISK
 
 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 June 30, 2005, the Company had bank balances exceeding those
        insured limits by
        approximately $8,679,000.
  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
        June 30, 2005 was $5,203,000, net of  an
        allowance for doubtful accounts of $509,000. The net receivable from that
        billing services provider at June 30, 2005, represents approximately 69%
        of the
        Company’s total net accounts receivable at June 30, 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 expects to adopt the provisions of SFAS 123R in the first
        quarter of
        fiscal 2006
        on a
        prospective basis and does not expect this to have a material effect on its
        financial condition or results of operations.
 
 13
 *Table
              of Contents*
 **YP
              CORP. AND SUBSIDIARIES**
 **NOTES
              TO UNAUDITED CONSOLIDATED FINANCIAL
              STATEMENTS**
 
 9.
              SUBSEQUENT
                  EVENT
 
 As
        discussed in Note 6, the Company had obligations as of June 30, 2005 to pay
        approximately $1,000,000 to former executives and officers under three
        termination agreements in exchange for consulting services and non-compete
        agreements. In August, 2005, the Company decided to accelerate these payments
        and conclude all related consulting activities. As the portion of the
        termination payments attributable to consulting services are amortized over
        the
        contractual period of service, the remaining unamortized balance of
        approximately $212,000 at June 30, 2005 will be charged to expense in the
        fourth
        quarter of fiscal 2005. The non-compete portion of the termination agreements
        remain unchanged and will continue to be expensed over the life of the
        non-compete agreements.
 
 *   *   *
 
 14
 *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 and
        nine
        months ended June 30, 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-KSB for the year ended September 30,
        2004.
  **Forward-Looking
        Statements**
  This
        portion of this Quarterly 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 Quarterly Report include, but
        are
        not limited to our (i ) assertion that there is an expectation of tremendous growth in online
        advertising; (ii) expectation that our adoption of the provisions of SFAS
        123R
        in the first quarter of fiscal 2006 on a prospective basis will not have
        a
        material effect on its financial condition or results of operations; (iii)
        expectation that our revenues, customer count and operating income will continue
        to grow in the fourth quarter of fiscal 2005 as we continue to migrate customers
        to alternative billing channels, attract new customers through marketing
        initiatives and engage in cost containment activities; and (iv) expectation
        that
        cost of services will continue to be directly correlated to our usage of
        LEC
        billing channel.
  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” in the Company’s Annual Report
        on Form 10-KSB for the year ended September 30, 2004, 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.
  15
 *Table
              of Contents*
  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 over 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.
  *Definition
        and Explanation of Customer Counts*
 
 In
        an
        effort to bring clarity and transparency to our operations, we believe it
        is
        important to provide a concise but detailed explanation of how we arrive
        at our
        customer count set forth in the “Results of Operations - Net Revenues” section
        of this MD&A and elsewhere in this Quarterly Report.
 
 Our
        customer count metric includes those who were successfully billed for the
        month
        in which they received a listing, but only includes customers that are not
        more
        than 30 days past due in paying on their account. Once an account exceeds
        the
        30-day past due period, the account is no longer considered to be a customer
        and
        is removed from our customer count. It is important to recognize that activation
        alone does not constitute inclusion in our customer count. The customer must
        have also been billed through one of our billing channels - LEC, ACH or direct
        invoice.
  *Changes
        in Billing Practices*
 
 Until
        late 2004, we billed most of our customers directly through their monthly
        phone
        bill (referred to as LEC billing). As discussed in recent SEC filings, our
        revenues have been negatively impacted by recent changes in LEC billing
        practices, which require us to perform additional procedures to confirm new
        and
        existing customers before we are allowed to bill via certain local telephone
        companies. There has also been an increasing presence of Competitive Local Exchange Carriers, or CLECs ,
        in the
        local telephone market. If an advertiser changes its telephone service from
        a
        LEC to a CLEC, we are no longer able to utilize LEC billing channels to bill
        for
        services, which may adversely impact our revenues.
 
 16
 *Table
              of Contents*
 
 During
        the fiscal quarter ended June 30, 2005, we continued to deal with the impacts
        of
        the billing issues. As a result, we have made strides to reduce our dependence
        on LEC billing and have identified effective alternative methods of billing
        our
        customers. We
        have
        migrated a substantial portion of our customers to automated
        clearing house, or ACH, billing,
        which is less expensive, has a faster collection time than LEC billing, and
        presents minimal dilution. However, it is time-consuming and labor-intensive
        to
        convert customers from one billing channel to another and can result in missed
        billings or customer cancellations. In situations where we cannot bill a
        customer via LEC or ACH billing, or in instances where the customer requests
        that we bill them directly, we utilize direct invoices. Direct billing has
        a
        higher percentage of uncollectible accounts than other billing methods and,
        therefore, is our least attractive billing option.
 
 The
        following represents the breakdown of net billings by channel during recent
        fiscal quarters:
  **Q3
                  2005**
              **Q2
                  2005**
              **Q1
                  2005**
              **Q4
                  2004**
              **Q3
                  2004**LEC
                  billing
              23%
              26%
              49%
              67%
              92%ACH
                  billing
              64%
              56%
              42%
              30%
              6%Direct
                  billing
              13%
              18%
              9%
              3%
              2%
  *Recent
        Financial Results*
 
 The
        following represents a summary of recent financial results:
 
 **Q3
                  2005**
              **Q2
                  2005**
              **Q1
                  2005**
              **Q4
                  2004**
              **Q3
                  2004**Revenues
              $
                  6,517,158
              $6,444,609
              $6,190,155
              $10,069,924
              $16,890,361Gross
                  margin
              5,591,353
              5,583,676
              5,055,571
              4,990,492
              8,695,098Operating
                  expenses
              (5,269,473)
              (5,199,870)
              (5,291,031)
              (5,518,453)
              (5,213,413)Operating
                  income (loss)
              321,880
              383,806
              (235,459)
              (527,961)
              3,481,685Net
                  income (loss)1
              (149,784)
              298,280
              49,072
              (311,721)
              2,639,420
  1 Net
        loss
        for the third quarter of 2005 includes losses totaling approximately $610,000
        relating to non-recurring events as described in the “Other” section of this
        Executive Overview
 
 Our
        revenues have been adversely affected as we transition from LEC billing to
        other
        billing methods. During this transitional period, we have experienced increased
        customer cancellations and missed billings as we continue to gather the
        information necessary to convert customers to more desirable billing methods
        such as ACH billing.
 
 Despite
        the effects of the transition from LEC billing, we have experienced the
        following recent operating trends:
 
 ·
              Increased
                  our quarterly net revenues by approximately 5% during the last
                  two
                  quarters
 
 ·
              Stabilized
                  our operating expenses over the last three quarters despite incurring
                  an
                  estimated $1.1 million of incremental expenses over the last nine
                  months
                  associated with the transition from LEC billing to other billing
                  methods.
                  This is a result of proactive measures taken to reduce operating
                  expenses,
                  including personnel reductions, contract renegotiations, and other
                  cost
                  containment measures
 
 17
 *Table
              of Contents*
 
 ·
              Increased
                  quarterly operating income by almost $850,000 since the fourth
                  quarter of
                  fiscal 2004 despite a 35% reduction in our quarterly net revenues
                  during
                  the same period. This increase is due largely to our use of less-expensive
                  billing channels and reduced operating expenses as described
                  above.
 
 We
        expect
        that our revenues and customer count will continue to grow in the fourth
        quarter
        of fiscal 2005 as we continue to migrate customers to alternative billing
        channels and to attract new customers through marketing initiatives. We also
        expect to increase operating income in the fourth quarter of fiscal 2005
        through
        revenue growth and continued cost containment activities.
 
 We
        utilize significant estimates and judgments in preparing our financial
        statements. These estimates and judgments are evaluated and updated on a
        periodic basis. During the fourth quarter of 2005, we will be reevaluating
        estimates and judgments pertaining to, among other things, estimated forfeitures
        of restricted stock awards used to determine compensation expense and the
        estimated average period of retention for new customers used to determine
        the
        amortization period for customer acquisition costs. Any changes to such
        estimates will be recorded using the prospective method, whereby the effect
        of
        the change is allocated ratably over the remaining periods. Such changes
        could
        impact our expectation of increasing operating income in the fourth quarter
        of
        fiscal 2005.
  *Recent
        Developments*
 
 On
        August
        11, 2005, we
        decided to accelerate all remaining payments and conclude all related consulting
        activities associated with the termination agreements with former executives
        and
        officers outlined in Note
        6 in
        the Notes to Unaudited Consolidated Financial Statements. As
        the
        portion of the termination payments attributable to consulting services are
        amortized over the contractual period of service, the remaining unamortized
        balance of approximately $212,000 at June 30, 2005 will be charged to expense
        in
        the fourth quarter of fiscal 2005. The non-compete portion of the termination
        agreements remain unchanged and will continue to be expensed over the life
        of
        the non-compete agreements.
 
 On
        August
        11, 2005, Alistair Johnson-Clague was appointed to our board of directors
        as an
        independent director. Mr. Johnson-Clague, President and Chief Executive Officer
        of Hard Dollar Corporation, replaces Deval Johnson, who concurrently resigned
        as
        a director.
 
 Mr.
        Johnson-Clague brings to YP Corp. close to 30 years of experience working
        in the
        information technology industry. At Hard Dollar, Mr. Johnson-Clague’s team is
        the leading provider of integrated estimating and job control software for
        the
        construction management industry. Before joining Hard Dollar, Mr. Johnson-Clague
        was the President and General Manager of USinternetworking, Inc. where he
        led
        the Siebel Business Unit in application, consulting, engineering, partnering
        and
        marketing decisions. Prior to joining USinternetworking, he served as General
        Manager and Vice President of the Software and IBM division of Avnet, Inc.
        (NYSE:AVT), a Fortune 500 company specializing in the distribution of
        electronics, computers and software. Before Avnet, Mr. Johnson-Clague worked
        for
        12 years at JBA Holdings Plc, the sixth largest ERP software firm in the
        world.
        He held numerous positions during his tenure at JBA, including President
        of
        JBA’s Computer and Software Solutions Divisions. In these roles, he was
        responsible for the overall direction of the divisions' financial earnings
        and
        business plans, customer services, engineering, marketing and human resources
        functions. Mr. Johnson-Clague earned a Bachelor of Arts degree in Business
        Administration from Napier University in Edinburgh, Scotland.
 
 18
 *Table
              of Contents*
 
 On
        June
        23, 2005, John Raven, who has most recently served as our Chief Technology
        Officer, was named the Company’s new Chief Operating Officer. Mr. Raven replaces
        Penny Spaeth who previously served as Chief Operating Officer.
 
 On
        June
        8, 2005, we announced that five new national accounts had signed an agreement
        to
        advertise on our Web site, YP.Com. 1-800-Flowers, DentalPlans.com, 3 Geeks
        and a
        Mouse, Gurus2Go, and Bids4Rides.com have all chosen to advertise on the site.
        They will receive “National-Preferred” status which gives them a preferred
        listing in all cities, as well as sending users directly to their Web sites.
        If
        a user chooses “florists,” for instance, 1-800-Flowers will appear in a featured
        box on the screen. Beyond the contextual advertising, 1-800-Flowers will
        also
        receive run-of-site advertising (appearing under additional categories) during
        key holiday periods. To date, these national accounts have not resulted in
        significant revenues or operating income. However, they are important to
        our
        overall strategy.
 
 On
        May
        19, 2005, we renewed our $1,000,000 revolving line of credit with Merrill
        Lynch
        Business Financial Services Inc., extending the maturity date from April
        30,
        2005 to April 30, 2006. All other terms and conditions of the original line
        of
        credit remain unchanged.
 
 On
        May
        18, 2005, we announced the adoption of a $3 million stock repurchase program.
        To
        date, we have not made any repurchases of our stock under the program. For
        additional information on repurchases made during the third quarter of fiscal
        2005, see Part II, Item 2 below.
 
 During
        the third fiscal quarter of 2005, we received an arbitration judgment involving
        disputed fees associated with a former public relations firm. Under the terms
        of
        this judgment, we are obligated to pay $328,000, inclusive of legal fees
        and
        associated expenses. The loss associated with this judgment was accrued in
        the
        third fiscal quarter of 2005 and is reflected in other income and expense
        in the
        accompanying consolidated statement of operations. In accordance with the
        terms
        of the judgment, we have established a bond in the amount of $365,000 which
        is
        reflected as restricted cash in the accompanying balance sheet. We are currently
        appealing the arbitrator’s decision.
 
 On
        April
        1, 2005, we entered into a Transfer and Repayment Agreement (the “Agreement”)
        with Morris & Miller, Ltd. and Matthew and Markson, Ltd. (together, the
“Shareholders”). Under the Agreement, the Shareholders satisfied all of their
        outstanding debt obligations to us (previously reflected as Advances to
        Affiliates in the accompanying Consolidated Balance Sheet included elsewhere
        in
        this report). This transaction resulted in a non-cash charge of $282,000
        for the
        quarter ended June 30, 2005 equal to the difference between the fair value
        of
        debt forgiven and the value of the consideration received. This loss is
        reflected in Other Income (Expense) in the accompanying Statement of Operations
        included elsewhere in this report. See the more detailed discussion of this
        matter in note 6 in the Notes to Unaudited Consolidated Financial Statements.
 
 19
 *Table
              of Contents*
 
 In
        connection with the Transfer and Repayment Agreement, 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.
 
 **Results
        of Operations**
  *Net
        Revenues*
 
 **Net
                  Revenues****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended June 30,
              
              $
              6,517,158
              
              $
              16,890,361
              
              $
              (10,373,203
              )
              
              (61
              )%Nine
                  Months Ended June 30,
              
              $
              19,151,922
              
              $
              47,098,181
              
              $
              (27,946,259
              )
              
              (59
              )%
 
 
 The
        decrease in revenues for the three and nine months ended June 30, 2005, as
        compared to the corresponding periods ending June 30, 2004, was largely due
        to
        declines in our paying subscriber base resulting from our LEC billing issues.
        The following table sets forth our quarter-end customer counts:
 
 **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**
              
              **Q4
                  2004**
              
              **Q3
                  2004**
              
              **Q2
                  2004**
              
              **Q1
                  2004**108,000
              
              105,000
              
              95,000
              
              196,000
              
              224,000
              
              265,000
              
              253,000
 
 We
        experienced significant customer count declines from the third quarter of
        2004
        to the first quarter of 2005 as a result of our transition from LEC billing
        to
        other billing channels as described in the “Executive Overview” section above.
        Since reaching a quarterly low of 95,000 in the first quarter of fiscal 2005,
        we
        have increased our customer count in each of the last two quarters.
 
 During
        the third quarter of fiscal 2005, we were unable to bill approximately 12,000
        of
        our customers via our LEC channel due to a significant change in the billing
        practices of one of our LECs similar to those described in “Executive Overview”
above. While we took measures to transition these customers to alternative
        billing channels, our revenues were negatively impacted by this event. Despite
        these negative impacts, however, we were still able to increase our customer
        count during the third quarter of fiscal 2005. See “Executive Overview -
        Explanation of Customer Counts” ** in
        this
        MD&A for an explanation of our customer count.
 
 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 $29.95 per month.
  20
 *Table
              of Contents*
  Cost of Services
  **Cost
                  of Services****2005**
              
              **2004**
              
              **Change**
              
              **Percent**Three
                  Months Ended June 30,
              
              $
              925,805
              
              $
              8,195,264
              
              $
              (7,269,459
              )
              
              (89
              )%Nine
                  Months Ended June 30,
              
              $
              2,921,322
              
              $
              19,678,248
              
              $
              (16,756,926
              )
              
              (85
              )%
 
 The
        decrease in our cost of services is directly attributable to a reduction
        in our
        dilution expense as a result of our transition from LEC billing to alternative
        billing methods. Billings through LEC channels, which drives a substantial
        majority of our dilution expense, decreased to 23% of total billings in the
        third quarter of fiscal 2005 from over 95% of total billings in the third
        quarter of fiscal 2004. A significant portion of these customers were converted
        to ACH and direct billing methods, which have minimal dilution. We expect
        cost
        of services to continue to be directly correlated to our usage of LEC billing
        channels.
 
 *Gross
        Profit*
  **Gross
                    Profit****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                5,591,353
                
                $
                8,695,097
                
                $
                (3,103,744
                )
                
                (36
                )%Nine
                    Months Ended June 30,
                
                $
                16,230,600
                
                $
                27,419,933
                
                $
                (11,189,333
                )
                
                (41
                )%
 
 The
        decrease in our gross profits was due to decreased revenues resulting from
        the
        previously mentioned decrease in IAP advertisers, offset in part by the
        decreased dilution as discussed above. Gross margins increased to 85.8% of
        net
        revenues in the third quarter of fiscal 2005 compared to 51.5% of net revenues
        in the third quarter of fiscal 2004 due to decreased dilution in fiscal 2005.
  *General
        and Administrative Expenses*
  **General
                    and Administrative Expenses****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                3,320,434
                
                $
                3,271,624
                
                $
                48,810
                
                
                1
                %Nine
                    Months Ended June 30,
                
                $
                9,886,929
                
                $
                9,142,889
                
                $
                744,040
                
                
                8
                %
 ****
 General
        and administrative expenses were largely consistent for the third quarter
        of
        fiscal years 2005 and 2004. However, there were changes to certain components
        of
        such expenses. During the third quarter of fiscal 2005, as compared to the
        third
        quarter of fiscal 2004, we experienced increased costs of approximately $293,000
        associated with our efforts to reconfirm our existing subscriber base and
        increased non-cash compensation costs of approximately $350,000 associated
        with
        restricted stock awards to employees. These increases were offset by decreased
        legal costs associated with the conclusion of several outstanding legal matters
        in fiscal 2004, and general expense reductions associated with cost-containment
        initiatives. General and administrative expenses for the first nine months
        of
        fiscal 2005 were higher than the first nine months of fiscal 2004 due primarily
        to increased costs of approximately $527,000 associated with reconfirming
        existing customers and $582,000 for expenses related to ACH notices, paper
        invoices and other customer mailings associated with the conversion of many
        of
        our customers from LEC billing to other billing methods. This was partially
        offset by reduced legal costs.
  21
 *Table
              of Contents*
  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.
  We
        have
        been successful in reducing our general and administrative expenses, despite
        incurring significant costs associated with the transition from LEC billing
        to
        acceptable alternate billing methods. The following table sets forth our
        recent
        operating performance for general and administrative expenses:
 
 **Q3
                  2005**
              
              **Q2
                  2005**
              
              **Q1
                  2005**
              
              **Q4
                  2004**
              
              **Q3
                  2004**Reconfirmation,
                  mailing, billing and other customer-related costs
              
              $
              535,861
              
              $
              635,624
              
              $
              309,592
              
              $
              132,390
              
              $
              244,324Compensation
                  for employees, consultants, officers and directors
              
              
              2,184,131
              
              
              1,937,592
              
              
              2,265,863
              
              
              2,458,735
              
              
              2,029,536Other
                  G&A costs
              
              
              600,442
              
              
              608,428
              
              
              809,396
              
              
              950,677
              
              
              1,029,252
  *Sales
        and Marketing Expenses*
  **Sales
                    and Marketing Expenses****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                1,565,536
                
                $
                1,667,040
                
                $
                (101,504
                )
                
                (6
                )%Nine
                    Months Ended June 30,
                
                $
                4,896,063
                
                $
                4,403,385
                
                $
                492,678
                
                
                11
                %
 
 Sales
        and
        marketing expense decreased in the third quarter of fiscal 2005 as compared
        to
        the third quarter of fiscal 2004 due to decreased amortization of capitalized
        direct marketing expenses. We temporarily suspended a portion of our direct
        marketing activities as we transitioned a substantial amount of our customers
        to
        different billing channels over the last few quarters. We resumed our normal
        levels of direct marketing activity in January 2005.
 
 During
        the first nine months of 2005, as compared to 2004, we experienced approximately
        $360,000 of increased expenditures for brand awareness as we attempt to increase
        traffic to our website (prior to September of 2004, page views were below
        54,000,000 per month; current page views exceed 134,000,000 per month or
        a
        nearly 150% increase in monthly page views). Branding expenses include radio
        and
        Internet advertising and fees paid to redirect traffic from other websites.
        The
        remaining increase was primarily due to increased amortization expense in
        2005
        as compared to 2004 as there was a substantial increase in mailings during
        the
        second and third fiscal quarters of 2004 (i.e., there was less amortization
        in
        the first quarter of 2004 as compared to the first quarter of
        2005).
 
 We
        capitalize certain direct marketing expenses and amortize those costs over
        an
        18-month period based on the estimated
        IAP advertiser attrition rates. A substantial portion of the current period
        expense relates to the amortization of costs previously incurred, thereby
        creating a significant fixed component of this expense. Accordingly, revenue
        declines resulted in our sales and marketing expenses increasing as a percentage
        of revenues to 24.0% for the third quarter of fiscal 2005 compared to 9.9%
        for
        the third quarter of fiscal 2004.
  22
 *Table
              of Contents*
  Depreciation and Amortization
  **Depreciation
                    and Amortization****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                383,503
                
                $
                243,261
                
                $
                140,242
                
                
                58
                %Nine
                    Months Ended June 30,
                
                $
                977,382
                
                $
                639,173
                
                $
                338,209
                
                
                53
                %
 
 The
        increase in depreciation and amortization expense is attributable to (i) increased
        depreciation due to additional purchases of equipment related to our upgrade
        in
        infrastructure in the information technology department and hardware purchased
        relating to our quality assurance and outbound marketing initiatives,
        and (ii) increased amortization of intangible assets associated with website development
        costs that were capitalized during 2004 and 2005. Amortization relating to
        the
        capitalization of our direct mail marketing costs is included in marketing
        expenses, as discussed previously.
  *Operating
        Income*
  **Operating
                    Income****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                321,880
                
                $
                3,513,172
                
                $
                (3,191,292
                )
                
                (91
                )%Nine
                    Months Ended June 30,
                
                $
                470,226
                
                $
                13,234,486
                
                $
                (12,764,260
                )
                
                (96
                )%
 
 Our
        operating income declined substantially due primarily to revenue declines
        as
        previously described.
  *Other
        Income (Expense)*
  **Other
                    Income (Expense)****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                (584,988
                )
                $
                436,464
                
                $
                (1,021,452
                )
                
                (234
                )%Nine
                    Months Ended June 30,
                
                $
                (477,535
                )
                $
                782,617
                
                $
                (1,260,152
                )
                
                (161
                )%
  Other
        income (expense) in the third quarter of fiscal 2005 consisted primarily
        of the
        following:
  ·
              A
                  loss of $282,000 from the Transfer and Repayment Agreement as described
                  above in the Executive Overview section of this MD&A and in Note 6 in
                  the Notes to Unaudited Consolidated Financial Statements. This
                  amount is
                  equal to the difference between the carrying value of Advances
                  to
                  Affiliates and the value of the consideration received.
 
 ·
              A
                  loss of $328,000 from an arbitration judgment involving disputed
                  fees
                  associated with a former public relations firm described above
                  in the
                  Executive Overview section of this MD&A.
 
 *Income
        Tax Benefit (Provision)*
  **Income
                    Tax Benefit (Provision)****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                83,465
                
                $
                (1,409,113
                )
                $
                1,492,578
                
                
                (106
                )%Nine
                    Months Ended June 30,
                
                $
                (92,982
                )
                $
                (4,992,994
                )
                $
                4,900,012
                
                
                (98
                )%
  23
 *Table
              of Contents*
 
 The
        change in our income tax benefit (provision) for the third quarter of fiscal
        2005 as compared to fiscal 2004 is due almost entirely to our decrease in
        profitability.
  *Cumulative
        Effect of Accounting Change*
  **Cumulative
                    Effect of Accounting Change****2005**
                
                **2004**
                
                **Change**
                
                **Percent**Three
                    Months Ended June 30,
                
                $
                -
                
                $
                -
                
                $
                -
                
                
                0
                %Nine
                    Months Ended June 30,
                
                $
                99,848
                
                $
                -
                
                $
                99,848
                
                
                100
                %
  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 June 30,
                
                $
                (149,784
                )
                $
                2,639,420
                
                $
                (2,789,204
                )
                
                (106
                )%Nine
                    Months Ended June 30,
                
                $
                197,568
                
                $
                9,272,704
                
                $
                (9,075,136
                )
                
                (98
                )%
 
 We
        reported a n et
        loss
        for the third quarter of fiscal 2005, as compared to a net profit for the
        corresponding period of fiscal 2004. The substantial decrease in net income
        for
        the three and nine months ended June 30, 3005 is due primarily to decreased
        revenues. As a percentage of revenues, net income was (2.3)% for the third
        quarter of fiscal 2005 as compared to 15.6% for the third quarter of fiscal
        2004. As a significant portion of our expenses are fixed, our profitability
        margins are negatively impacted by declines in revenue. The reported loss
        also
        includes one-time charges of $282,000 related to the M&M agreement and the
        $328,000 charge for the judgment related to the aforementioned legal
        matter.
  **Liquidity
        and Capital Resources**
  Net
        cash
        provided by operating activities increased $3,889,807, or 135.5 %, to $6,759,809
        for the nine months ended June 30, 2005, compared to $2,870,002 for the nine
        months ended June 30, 2004. The increase in cash generated from operations
        is
        primarily due to a) the conversion of many of our customers from LEC billing
        to
        alternate billing channels that have a shorter collection time and b) lower
        marketing expenditures during the first nine months of 2005 as we worked
        to
        resolve the previously discussed billing issues.
  
 24
 *Table
              of Contents*
 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
          69%
          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 18 months, the average estimated
        retention period for new customers. General operating cash outflows consist
        of
        payroll costs, income taxes, and general and administrative expenses that
        typically occur within close proximity of expense recognition.
  Net
        cash
        used for investing activities totaled $391,138 for the first nine months
        of
        fiscal 2005 and consisted of expenditures for intangible assets and minor
        purchases of equipment. During the first nine months of fiscal 2004, cash
        used
        for investing activities was $2,202,736 of which the primary component was
        advances to affiliates of $2,725,000.
  Net
        cash
        used for financing activities was $940,910 for the first nine months of fiscal
        2005 and consisted primarily of payments of common stock dividends of $940,355.
        Cash used for financing activities for the nine months ended June 30, 2004
        were
        $499,983 and consisted solely of payments of common stock dividends.
 
 We
        had
        working capital of $15,148,754 as of June 30, 2005, compared to $12,484,833
        as
        of September 30, 2004. Our cash position increased during the past nine months
        to over $9,000,000 at June 30, 2005 from approximately $3,500,000 at the
        end of
        fiscal 2004. Despite our near breakeven performance during the first nine
        months
        of fiscal 2005, our operating expenses consist of a substantial amount of
        non-cash expenses, such as amortization of customer acquisition costs and
        deferred stock compensation, which allows us to continue to grow our cash
        and
        working capital.
  We
        do not
        expect the foregoing trend of significantly increasing our cash position
        to
        continue at the current rate. Our future cash flows may be impacted by a
        number
        of factors, including the following:
 
 ·
              The
                  payment of approximately $1,000,000 for termination of various
                  consulting
                  agreements
 
 25
 *Table
              of Contents*
 
 ·
              Potential
                  repurchases of up to $3 million our common stock from time to time
                  on the
                  open market or in privately negotiated transactions as authorized
                  by our
                  Board of Directors
 
 ·
              Increased
                  marketing expenditures
 
 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 June 30, 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 June 30, 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. The quarterly
        dividend associated with the third fiscal quarter of 2005 was declared and
        paid
        in July 2005 and, therefore, was not accounted for in the three months ended
        June 30, 2005.
 
 In
        connection with the Transfer and Repayment Agreement described in the Executive
        Overview section of this MD&A, 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.
 
 During
        the third quarter of fiscal 2005, our Board of Directors authorized 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 not made
        any
        repurchases of our stock under the program.
 
 26
 *Table
              of Contents*
 
 The
        following table summarizes our contractual obligations at June 30, 2005 and
        the
        effect such obligation are expected to have on our future liquidity and cash
        flows:
  **Payments
                    Due by
                    Period****Total**
                
                **Remainder**
                  **of
                    2005**
                
                **2006**
                
                **2007**
                
                **2008**
                
                **2009**
                
                **Thereafter****Contractual
                    obligations**Lease
                    commitments
                
                $
                444,000
                
                $
                74,000
                
                $
                336,000
                
                $
                29,000
                
                $
                5,000
                
                $
                -
                
                $
                -Termination
                    agreements
                
                
                1,000,000
                
                
                1,000,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -$
                1,444,000
                
                $
                1,074,000
                
                $
                336,000
                
                $
                29,000
                
                $
                5,000
                
                $
                -
                
                $
                -
  Although
        our revenues have recently declined and we have only been slightly profitable
        for the first nine months of fiscal 2005, we believe that our existing cash
        on
        hand will provide us with sufficient liquidity to meet our operating needs
        for
        the next twelve months.
 
 *   *   *
  27
 *Table
            of Contents*
  ITEM3.
              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 nine months of fiscal 2005 or in any of 2004) or commodity price
        risk.
  ITEM4.
              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.
  28
 *Table
            of Contents*
  PART II- OTHER
        INFORMATION
  ITEM2.
              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 ProgramsApril
                      2005
                  1,889,566(1)
                  0.85
                  0
                  N/AMay
                      2005
                  0
                  N/A
                  0
                  N/AJune
                      2005
                  0
                  N/A
                  0
                  N/ATotal
                  1,889,566
                  0.85
                  0
                  $3,000,000(2)
 ( 1 ) On
          April
          1, 2005, YP Corp. and Morris & Miller, Ltd. and Matthew and Markson, Ltd.
          (together, the “Shareholders”) entered into a Transfer and Repayment Agreement
          (the “Agreement”). Under the Agreement, the Shareholders satisfied all of their
          outstanding debt obligations to the Company in part by agreeing to surrender
          and
          deliver to the Company 1,889,566 shares of the Company’s common stock previously
          owned by the Shareholders. The fair value of the shares were determined
          based on
          the market value at the date of the transaction.
  (2) On May
          18, 2005, we announced the adoption of a $3 million stock repurchase program.
          To
          date, we have not made any repurchases of our stock under the
          program.
 ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS.
 
 We
        held
        our 2005 Annual Meeting of Stockholders on April 6, 2005. The following nominees
        were elected to the Company’s Board of Directors to serve for the terms
        indicated or until the earlier of their resignation or election and
        qualification of their successors:
 
 **Nominee**
              
              **Class**
              
              **Term****Ending**
              
              **Votes
                  in Favor**
              
              **Votes
                  Withheld**John
                  T. Kurtzweil
              
              III
              
              2008
              
              46,519,183
              
              380,031Paul
                  Gottlieb
              
              III
              
              2008
              
              46,518,443
              
              380,771
  29
 *Table
            of Contents*
  In
        addition to the foregoing directors, the following individuals continued
        to
        serve as directors. The following individuals are not due for reelection
        until
        the date specified:
 
 **Name**
              
              **Class**
              
              **Current**
                **Term**Peter
                  Bergmann
              
              I
              
              2006DeVal
                  Johnson
              
              II
              
              2007Daniel
                  L. Coury, Sr.
              
              II
              
              2007
 
 Additionally,
        the Company’s stockholders voted upon a proposal to ratify the
        appointment of Epstein, Weber & Conover, P.L.C., as our independent auditors
        for the fiscal year ending September 30, 2005.
 
 **Votes
                  in Favor**
              
              **Opposed**
              
              **Abstained**
              
              **Broker
                  Non-Vote**46,401,908
              
              491,406
              
              -
              
              -
 
 ITEM
                  6.
              EXHIBITS
  The
        following exhibits are either attached hereto or incorporated herein by
        reference as indicated:
 
 
 Exhibit
                Number
              Description
 
 10.1
              Transfer
                  and Repayment Agreement, dated April 1, 2005, by and among YP Corp.,
                  Morris & Miller, Ltd. and Matthew and Markson,
                  Ltd.
 
 10.2
              YP
                  Corp. Line of Credit Renewal Letter from Merrill Lynch Business
                  Financial
                  Services Inc., dated May 19, 2005
 
 31
              Certifications
                  pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002
 
 32
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
  30
 *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:
                  August 15, 2005
              */s/
                  W. Chris Broquist*W.
                  Chris BroquistChief
                  Financial Officer
  *Table
            of Contents*
  EXHIBIT
        INDEX
 
 
 Exhibit
                Number
              Description
 
 10.1
              Transfer
                  and Repayment Agreement, dated April 1, 2005, by and among YP Corp.,
                  Morris & Miller, Ltd. and Matthew and Markson,
                  Ltd.
 
 10.2
              YP
                  Corp. Line of Credit Renewal Letter from Merrill Lynch Business
                  Financial
                  Services Inc., dated May 19, 2005
 
 31
              Certifications
                  pursuant to SEC Release No. 33-8238, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002
 
 32
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002