Edgar Filing: YP CORP - Form 10KSB/A

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A

Amendment No. 2

(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________ to ____________

Commission File Number: 0-24217

YP CORP.
(Name of Small Business Issuer in its Charter)

NEVADA 85-0206668
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

4840 EAST JASMINE STREET,
SUITE 105, MESA, ARIZONA 85205
(Address of principal executive
offices) (Zip Code)

(480) 654-9646
(Issuer's telephone number)

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

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

COMMON STOCK, $.001 PAR VALUE
(Title of Class)

YP.NET, INC.
(Former Name)

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

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

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

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

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

Transitional Small Business Disclosure Format: Yes [ ] No [X]

DOCUMENTS INCORPORATED BY REFERENCE: None.

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-KSB/A (this "Amendment") amends the Company's
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003,
originally filed on December 31, 2003 ("Original Filing") and as amended
previously on January 30, 2004 solely for the purpose of making the amendments
set forth herein. In addition, in connection with the filing of this Amendment
and pursuant to the rules of the Securities and Exchange Commission, the Company
is including with this Amendment certain currently dated certifications.

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

PART I

Forward-Looking Statements

Part I of this Annual Report on Form 10-KSB, includes statements that constitute
"forward-looking statements." These forward-looking statements are often
characterized by the terms "may," "believes," "projects," "expects," or
"anticipates," and do not reflect historical facts. Specific forward-looking
statements contained in Part I of this Annual Report include, but are not
limited to: (i) our expected continued success in our direct mail marketing
program; (ii) the expected success of our branding strategy; (iii) our
anticipated entry into other countries; and (iv) our strategy to begin marketing
to national accounts.

Forward-looking statements involve risks, uncertainties and other factors, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements and cause them
to materially differ from those contained in the forward-looking statements
include those identified in the section below titled "Certain Risk Factors
Affecting Our Business" in Part II, as well as other factors that we are
currently unable to identify or quantify, but may exist in the future.

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

ITEM 1. DESCRIPTION OF BUSINESS

General

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

We use a business model similar to print Yellow Page publishers. We publish
basic directory listings ("Basic Listings"), free of charge. Like Yellow Page
publishers, we generate revenues from those advertisers ("Advertisers") that
desire increased exposure for their businesses. Our Basic Listings contain the
business name, address and phone number for almost 18 million U.S. businesses.
We strive to maintain a listing for almost every business in America in this
format.

As described below, Advertisers pay us monthly fees in the same manner that
advertisers pay additional fees to traditional print Yellow Page providers for
enhanced advertisement

font, location or display. The users ("Users") of our website(s) are prospective
customers for our Advertisers.

We offer several different upgrades to our advertising customers:

Internet Advertising Package(TM) ("IAP"). Under this package, the Advertiser
pays for additional exposure by purchasing a Mini-WebPage(TM). This Mini-WebPage
contains, among other useful information, a 40-word description of the business,
hours of operation and detailed contact information. This product is easily
searched by Users on their personal computers, as well as cellular phones and
other hand-held devices. In order to provide search traffic to the Advertiser's
Mini-WebPage, we elevate the Advertiser to a preferred listing ("Preferred
Listing") status, at no additional charge. As such, the preferred Advertiser
enjoys the benefit of having its advertisement displayed in a primary position
before all Basic Listings in that particular category when Users perform
searches on our site(s). The Mini-WebPage is easily accessed and modified by
Advertisers. We also provide our Internet Advertising customers with enhanced
presentation and additional unique products:

- larger font;
- bolded business name;
- map directions;
- a Click2Call feature, whereby a User can place a telephone call to the
Internet Advertising customer by clicking the icon that is displayed
on the Mini-WebPage. This initiates a telephone call by the Advertiser
to the user, in a conference call type format. Once both are connected
it functions as a regular phone call. Because we cover all charges for
this telephone call, it is free of charge to both the User and the
Internet Advertising customer. We have an agreement with WebDialogs,
Inc. to provide this service;
- a link to the Internet Advertiser's own webpage; and
- additional distribution network for Preferred Listings. This feature
gives additional exposure to our Internet Advertising customers by
placing their Preferred Listing on several online directory systems.
This service is currently free of charge to our Advertisers.

The Internet Advertising Package currently costs the Advertiser $24.95 per month
($21.95 for new Advertisers). As of September 30, 2003, we had signed up
approximately 250,000 Internet Advertising Packages. Currently, this product
accounts for over 95% of our revenue.

Online QuickSite Package(TM) ("QuickSite(TM)"). For those IAP Advertisers that
do not have their own website and that desire to provide more information than
is offered through the IAP Mini-WebPage, we will design and create an eight
page, template-driven, website for the Advertiser, a QuickSite. We charge the
Advertiser a set-up fee of $200.00 and an additional $39.95 per month for
hosting services for their QuickSite. We receive $12.50 per QuickSite sold
through our distribution chain rather than the full $39.95. We receive the
$200.00 set-up fee for all QuickSite customers, provided that we

handle the set-up, even from those customers obtained through third-party
agents, such as EZSitemaster. Once set up, the Advertiser can access their new
QuickSite online and make modifications at their discretion. This essentially
serves the same function as do display advertisements in the print Yellow Page
books, except that it can be changed more often to meet Advertisers' needs.
Users can access these QuickSites on the World Wide Web or from the Advertisers
Preferred Listing or Mini-WebPage. As of September 30, 2003, we had created and
currently host approximately 265 QuickSites.

Internet Dial-Up Package(TM) ("IDP"). We offer our Internet Advertising
customers a cost-effective and efficient Internet dial-up package to take
advantage of the benefits offered by on-line access. This allows our Advertisers
who do not have Internet access to take full advantage of the IAP and QuickSite
packages that we offer. In certain geographical areas, we have offered a bundled
product whereby the IAP Advertiser can either pay for the advertising or the
IDP, in which case they will receive the other service free. To date,
approximately 40,000 Internet Advertising customers utilize the service without
charge. However, we intend to expand and market this package to new Advertisers
in the next fiscal year at a cost of $34.95 per month for a bundled product.
Those Advertisers that already have the free service will retain their current
bundled pricing.

Marketing. Unlike most print Yellow Page companies that sell advertising space
by visiting or calling potential advertisers in their area, we solicit
advertisers for our Internet Advertising Package exclusively by direct mail. We
believe this enables us to offer our products and services at more affordable
rates than our competitors. Moreover, we believe direct mail is a less expensive
form of marketing than visiting or calling potential customers. Currently, our
direct mail marketing program includes a promotional incentive, generally in the
form of a $3.50 activation check that a solicited business simply deposits to
activate the service and become an Internet Advertising customer on a
month-by-month basis. As a method of third-party verification, the depositing
bank verifies that the depositing party is in fact the solicited business. Upon
notice of activation by a depositing bank, we immediately contact the business
to confirm the order and obtain the information necessary to build their
Mini-WebPage. Within 30 days of activation, we also send a confirmation card to
the business. To ensure our goal of 100% customer satisfaction, we offer a
cancellation period of 120 days and a full refund. Our direct mail marketing
program complies with and, in many instances, exceeds the United States Federal
Trade Commission ("FTC") requirements as established by agreement signed between
the Company and the FTC in September 2001.

Billing. Similar to the local Regional Bell Operating Companies, we are approved
to bill our products and services directly on most of our Advertisers' local
phone bill. We believe that this is a significant competitive advantage as few
independent Yellow Page companies are authorized to do business in this fashion.

Benefits to Advertisers. For advertisers, we believe that online Yellow Pages
provide significant competitive advantages over existing print directories. For
example, the ability of online advertisers to access and modify their displays
and advertisements often results

in more current information. Additionally, online advertisers can more readily
advertise temporary or targeted specials or discounts. We provide added value to
our Advertisers who have purchased our Internet Advertising Packages through
promotion and branding of our website to bring customers to our Advertisers. We
believe that the large number of Internet Advertising Packages, that includes
the Mini-WebPages, provides Users with more information, which is more readily
available on our sites, compared to our competitors. We believe that we provide
Users with what they are looking for, more quickly and more efficiently. We
believe the attraction of such Users will, over the long-term, result in more
sales for our Internet Advertisers.

Moreover, we provide additional value through our relationships. We provide the
vast majority of the Preferred Listings on a number of competitors' websites,
including www.switchboard.com, www.myareaguide.com, as well as on www.go2.com.
------------------- ------------------- -----------
The go2 site has exclusive contracts with providers like Verizon Wireless, AT&T
Wireless, ALLTEL, Nextel and Sprint to also provide this information to their
cellular phone and hand-held device subscribers.

From a User's Standpoint. A National, online Yellow Pages allows the User to
access information nationally rather than relying exclusively on local listings
like those provided in print Yellow Page directories. In addition, our product
offerings allow Users to find and take advantage of advertisers' current special
offerings and discounts. We also provide easy access to such information through
desktop or laptop computers, cellular phones or hand-held devices, such as
personal digital assistants. We believe our offering of a national online Yellow
Pages service meets the growing demand for immediate access and the increasing
need and trend of Users who are more frequently traveling to areas outside the
areas serviced by their local print directories.

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

Growth Strategies and Initiatives

Internet Advertising Package. We currently derive almost all of our revenue from
selling IAPs. During fiscal 2003, we continued our direct mail marketing program
to acquire additional Internet Advertising customers. We regularly solicit
potential advertisers from a database of approximately 18 million U.S.
businesses. This database is continually updated to account for new or closed
businesses, as well as updated contact information. As a result of this program,
we have increased our IAP customer count from 113,565 at September 30, 2002 to
255,376 at September 30, 2003. This total represents less than 2 % of the total
available market of 18 million U.S. businesses according to Acxiom USA. During
fiscal 2004 and beyond, we plan to continue aggressively marketing additional
IAPs using our direct mail marketing program.

Branding. We plan to further embark upon a substantial campaign to brand our
YP.Com name and our products. We seek to become the "internet Yellow Pages of
choice" to advertisers and Users performing searches. We plan to use various
forms of media, which may include print, television, radio, billboard and
movie-theater advertising in select markets or nationally. We believe such
branding will help to attract Users to our websites, as well as advertisers to
sign-up for our IAP and/or other service offerings. The goal of our branding is
to obtain instant customer recognition of our offerings that, over time, may
enhance the response rate of our direct mail marketing program.

Expansion of Service Offerings to Other Countries. We are currently exploring
our ability to offer our services in other English-speaking countries, which we
believe we could accomplish without hiring a significant number of additional
people or incurring additional training costs.

Marketing of QuickSite. Until recently, we have not focused our marketing
efforts on the QuickSite service offering. As a part of a test market, we
maintained three full-time sales people and experimented with less traditional
lines of selling, such as through third party agents like EZsitemaster, Inc.
Through these efforts, we acquired an aggregate of 265 QuickSite customers
during fiscal 2003. Of this number, none were acquired through EZsitemaster. In
fiscal 2004, we will continue these efforts, as well as test marketing the use
of our direct mail marketing program tailored for this product. We believe that
this marketing effort may produce additional revenues.

Internet Dial-Up Package. We will test market this product at $16.95 per month
in fiscal 2004. We also plan to begin charging new Advertisers for our bundled
product, consisting of the IAP and IDP, in certain geographical areas.
Initially, this bundled product will cost the new Advertiser $34.95 per month.
This pricing will save the Advertiser approximately 8% over the individual stand
alone prices. We believe this offering will enhance revenue by raising the price
to the Advertiser for each ISP/IDP sold at very little additional cost to us.

National Accounts Marketing. Currently, we have limited our marketing efforts to
individual business units, rather than national accounts such as hotel chains,
automobile dealers, etc. We believe a significant opportunity exists to offer
our IAP and other service offerings to such national accounts on a bulk basis,
which, if successful, may result in additional revenues. We plan to hire or
contract with a dedicated sales force, as well as customer account
set-up/maintenance personnel.

The Internet Yellow Page Market

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

Approximately 13% of Yellow Page directory inquiries were conducted online in
2002 compared with 2% in 2000. According to a Kelsey Group report, the total
Yellow Pages directory industry is expected to grow at an annual rate of seven
percent through 2008, resulting in an increase in total spending from
approximately $15 billion in 2003 to an estimated $21.3 billion in 2008.
However, the vast majority of this anticipated growth is expected to be in the
online Yellow Pages advertising industry rather than traditional print
advertising. Specifically, the Kelsey Group forecast estimates the online Yellow
Pages advertising market to grow at an annual rate of 59% per year through 2008
or from approximately $500 million in 2003 to an estimated $5.2 billion in 2008.
This is compared to an expected 2.5% annual rate of growth in the traditional
print Yellow Pages market from approximately $14.5 billion in 2003 to an
estimated $16.1 billion in 2008. These anticipated rates of growth would result
in the online Yellow Pages advertising industry achieving a market share of 25%
of the total Yellow Pages advertising industry in 2008 compared to a current
market share of just three percent.

Based upon our revenues of approximately $30 million of the currently estimated
$500 million online Yellow Page market, we believe that we have approximately
six percent of the fragmented online Yellow Page market and is therefore one of
the leading online Yellow Page companies in terms of revenue.

Internet usage provides the User with the following major advantages over print
Yellow Pages:

- More current and extensive listing information.
- Immediate access to business listings across the nation from any
location.
- Broad accessibility via computers and hand-held devices, such as
mobile phones and personal digital assistants.
- Features such as mapping, direct calling to the advertiser and e-mail
at the click of a button may also be available.

There are also a number of advantages that an Internet Yellow Pages listing
offers to our Advertisers:

- Lower costs for a given level of content.
- The ability to easily access and modify their displays and
advertisements, which allows for temporary or targeted specials or
discounts.

This market information is summarized in chart form below.

------------------------------------------------------------------
ADVERTISING REVENUE
$ BILLIONS (1)
===================================================================
2003 MARKET SHARE 2008% GROWTH PER YEAR MARKET SHARE
====== ==== ============= ===== =============== =============

PRINT. 14.5 97% 16.1 2.5% 75%
------ ---- ------------- ----- ---------------- -------------
ONLINE 0.5 3% 5.2 59% 25%
====== ==== ============= ===== ================ =============
TOTAL. 15 100% 21.3 7% 100%
-------------------------------------------------------------------

(1) Source: The Kelsey Group and the Yellow Pages Integrated Media Association
(YPIMA)

Pricing

We currently price our Internet Advertising Package for new Advertisers at
$21.95 per month, which includes all of the service benefits previously
described. By comparison, our major Internet competitors are priced
significantly higher. The table below sets forth the major direct online
competitors, along with current monthly price estimates; the companies include
independent Internet Yellow Page providers and the online versions made
available by telephone companies.

- Switchboard- $35.00 per month
- Smartpages (offered by Southwestern Bell)- $39.00- $49.00 per month
- Super- Pages (offered by Verizon)- $55.00- $90.00 per month
- Dex-Media (offered by Qwest) - $60.00 per month

In addition to our lower price, we believe that our product offerings in many
cases are superior. For example, Superpages charges their $55.00 per month price
for a bolded-listing only. Our lower price includes the Mini-WebPage, which
includes much more information, as well as the rest of the benefits of the IAP.
Moreover, our pricing advantage is even more significant when compared with the
printed Yellow Pages. For a Yellow Page listing with comparable information
content, an advertiser would typically pay over $500 per year. This listing in
the printed Yellow Pages would include a business description of comparable size
to our Internet offering but would of necessity lack our Click2Call feature,
mapping directions, and link to the Advertisers website. Moreover, as mentioned
previously, our online Yellow Page advertisement offering has an almost
unlimited degree of flexibility in terms of changing content and adding special
informational items at any time throughout the year. This feature is only
available to printed Yellow Page advertisers as the books are republished
infrequently throughout the year.

Products and Services

We use a business model similar to print Yellow Page publishers. We publish
basic directory listings ("Basic Listings"), free of charge, on our Internet
business directory. Like Yellow Page publishers, we generate revenues from those
Advertisers that desire increased exposure for their businesses. Our Basic
Listings contain the business name, address and phone number for almost 18
million U.S. businesses. We strive to maintain a listing for almost every
business in America in this format.

For those advertisers that want to get additional exposure for their businesses
or to fully take advantage of connectivity to the World Wide Web, we offer
additional products and services for a fee. We offer several different upgrades
to our advertising customers:

Internet Advertising Package(TM) ("IAP"). Under this package, the Advertiser
pays for additional exposure by purchasing a Mini-WebPage. This Mini-WebPage
contains, among other useful information, a 40-word description of the business,
hours of operation and detailed contact information. This product is easily
searched by Users on their personal computers, as well as cellular phones and
other hand-held devices. In order to provide search traffic to the Advertiser's
Mini-WebPage, we elevate the Advertiser to a preferred listing ("Preferred
Listing") status, at no additional charge. As such, the preferred Advertiser
enjoys the benefit of having its advertisement displayed in a primary position
before all Basic Listings in that particular category when Users perform
searches on our site(s). The Mini-WebPage is easily accessed and modified by
Advertisers. We also provide our Internet Advertising customers with enhanced
presentation and additional unique products:

We primarily market for IAP's through our direct mail marketing program. (See
Marketing)

We have developed various convenient billing methods for our IAP customers so
that they can easily pay our fees each month and we do not need to support a
large labor pool of personnel to bill customers and process payments. Our most
common billing method is direct billing of our IAP services on the Advertisers
local phone bill. (Local Exchange Carrier or "LEC" billing). We can also - - -
process one-time and repetitive credit card payments and direct debits to the
Advertisers bank account ("ACH" Billing). We also provide invoice billing for
those Advertisers that prefer to pay by check. (For more information about our
billing programs, see Billing)

IAP Directory Service and Search Engine - Our directory service is built around
four integrated components providing our Advertisers with a visible presence on
the Internet and mobile devices, such as cellular phones and Personal Digital
Assistants. YP.Com- The front end of our directory services and the showcase of
our technology and marketing capabilities is our website YP.Com. The YP.Com
website is currently in its fifth generation of development; enhancements are on
going and on a recurring schedule to meet the increased demand for our services
and products. The website provides several key and easy to use features: timely
information, simple search, search tips, reverse phone number lookup, mapping,
and residential and business directory listings.

The Internet Advertising Package leverages the technologies associated with our
YP.Com website, Search Engine distribution network, Directory and Search Engine
technologies.

Online QuickSite Package(TM) ("QuickSite(TM)"). For those IAP customers that do
not have their own website and that desire to provide more information than is
offered through the IAP Mini-WebPage, we will design and create an eight page,
template-driven, website for the customer, a QuickSite. We charge the Advertiser
a set-up fee of $200.00 and an additional $39.95 per month for hosting services
for their QuickSite. We receive $12.50 per QuickSite sold through our
distribution chain rather than the full $39.95. We receive the $200.00 set-up
fee for all QuickSite customers, provided that we handle the set-up, even from
those customers obtained through third-party agents, such as EZSitemaster. Once
set up, the Advertiser can access their new QuickSite online and make
modifications at their discretion. This essentially serves the same function as
do display advertisements in the print Yellow Page books, except that it can be
changed more often to meet Advertisers' needs. Users can access these QuickSites
on the World Wide Web or from the Advertiser's Preferred Listing or
Mini-WebPage. As of September 30, 2003, we had created and currently host
approximately 265 QuickSites.

We outsource to Community IQ, d/b/a Vista.com, the work of producing usable
templates for, as well as the hosting of, the QuickSites. Our agreement with
Vista that was originally for three years and has automatic, successive renewal
terms of one year each, unless either Vista or the Company gives the other party
90 days' prior advance notice of its intention not to renew. The initial
three-year term expires on September 18, 2004. This agreement allows us to focus
on marketing the sites for additional revenue without the need for additional
hardware, software or technical support personnel. In recent discussions, the
parties have agreed to enhanced cooperation in the marketing and development of
the QuickSites. Our cost for Vista's hosting of the QuickSites is $6.50 per
QuickSite per month.

During fiscal 2003, we began test marketing the QuickSites through a variety of
channels. One of the test markets we developed is the concept of working through
other agents and selling into their networks. We hired an outside company to
represent our products through their distribution channel. We have a three-year
multilevel marketing agreement with EZsitemaster, Inc. to resell our QuickSites
to small business owners and other website operators, who in turn may resell to
their own small business owners. Of our 265 QuickSite customers, none were
obtained through EZSitemaster. The original

term of this agreement expires in January 2006. However, the agreement has
automatic, successive one-year renewal terms unless either party gives the other
party 90 days' prior advance notice of its intention not to renew. Under the
agreement, EZsitemaster pays us $12.50 per website per month that it sells
through its distribution channel.

In addition, EZsitemaster will develop additional website templates using the
Vista platform for both the Company and EZsitemaster to sell. These templates
are referred to as EZsites. These EZsites add to our suite of products and the
variety of services we offer to our Advertisers without any additional work.
When we sell these EZsites, we will pay EZsitemaster a sliding scale fee based
on the hosting price we charge. Since we currently sell all template driven
websites, including the EZsites, under the QuickSite nameplate for a monthly
hosting fee of $39.95, we will pay EZsitemaster $1.00 per month for each EZsite
used. A provision under the agreement allows us to outsource custom sites to
EZsitemaster for those Advertisers desiring to provide even more information to
Users than is currently provided by our QuickSites. Under that arrangement, we
will evenly split with EZsitemaster any revenue created.

Currently, all set-up fees and monthly hosting fees are paid by the Advertisers
by charging of their credit cards. Provisions under the Vista contract allow the
Company to collect these credit card payments directly from the Advertisers if
it should so chose. However, since this product is in its infancy, the Company
has elected to have Vista collect those payments on its behalf. Once collected,
Vista supplies a detailed billing statement to us with each payment. We then pay
to EZsitemaster the portion they are due. However, once we begin our direct mail
marketing program, we will also utilize LEC and/or ACH billing methods. (See
Billing for more detail).

We currently outsource to Vista the technologies supporting our QuickSite
product offering. However, if it makes strategic sense to do so, we do have the
capability and the capacity to easily convert from a Vista provided turn -key
operation to an internally managed solution. However, we currently do not
anticipate any changes to our relationship with Vista.

Internet Dial-Up Package(TM) ("IDP"). We offer our Internet Advertising
customers a cost-effective and efficient Internet dial-up package to take
advantage of the benefits offered by on-line access. This allows our Advertisers
who do not have Internet access to take full advantage of the IAP and QuickSite
packages that we offer. In certain geographical areas, we have offered a bundled
product whereby the IAP customer can either pay for the advertising or the IDP,
in which case they will receive the other service free. To date, approximately
40,000 Internet Advertising customers utilize the service without charge.
However, we intend to expand and market this package to new Advertisers in the
next fiscal year at a cost of $34.95 per month for a bundled product. Those
Advertisers that already have the free service will retain their current bundled
pricing.

The technology for the Internet Dial Up Package is implemented as a combination
of an outsourced service contract for the technologies and communications
services with an

internally developed and managed User management and access provisioning system.
The telephone dial-up communications service will be provided by GlobalPOPs, a
national wholesaler and provider of Internet dial-up access. Access to the
dial-up service is managed by our customer service team. The customer service
team communicates directly with the Advertiser to determine the closest local
dial-up access number the Advertiser is to use and assists the Advertiser with
the appropriate configuration necessary to effect a connection with GlobalPOPs
nationwide network. If the user is mobile, we provide an option for nationwide
toll free access to GlobalPOPs network. When an Advertiser dials into their
local access number, GlobalPOPs connects with our customer database to
authenticate the request for access. Upon successful authentication the
Advertiser is granted access to the GlobalPOPs network and to the Internet.
Under our agreement with GlobalPOPS, we pay $.15 per hour of service used with a
minimum of $450 per month.

We previously used Dial-Up Services, Inc., d/b/a Simple.Net, Inc., an Internet
service provider beneficially owned by one of our directors, to provide IDP and
other services to our customers. Simple.Net charged us $2.50 per customer per
month for such Internet access. Our monthly charge to some of our Advertisers
includes this Internet access service. Effective January 31st, 2004, Simple. Net
will no longer provide any services to us. Although the Separation Agreement
between the parties provides for a 30-day extension until March 2nd 2004,
neither Simple.Net nor we believe that this time period will be needed. Due to
the growth of our IDP customer base, it has now become possible to buy wholesale
Internet access from third party providers for less than Simple.Net could now
provide. Accordingly, we have recently signed an agreement with GlobalPOPs to
provide IDP service to our Advertisers. We had originally entered into the
agreement with Simple.Net because it was uneconomical for us to incur the
minimum charges for such an agreement with a third party provider when our
Advertiser base was smaller.

Marketing

Unlike most print Yellow Page companies, which sell their advertising space by
having sales representatives personally visit or call each potential advertiser
in their area, we solicit advertisers for our Internet Advertising Package
primarily through direct mail. This direct mail component is an essential
element, which enables us to offer our products and services on a nationwide
basis, which would not be economically possible or manageable through use of
sales representatives making personal visits or calls to potential advertisers.
In addition, we believe direct mail is a less expensive and more predictable
form of marketing than physically visiting or calling potential advertisers and
therefore allows us to offer potential advertisers quality products and services
at much more affordable rates than our competitors.

Currently, our direct mail marketing program includes a direct mail
solicitation, which is made up of several pages describing in detail our
products, services, pricing, instructions on how to sign up for the service as
well as how the potential advertiser will be billed. Included in this
solicitation is a promotional sign-up incentive, generally in the form of a
$3.50 activation check ("Sign Up Check"), made payable in the name of their
business. If

a potential advertiser is interested in, and wishes to order our service, all
the advertiser needs to do in order to sign-up for our service is deposit the
incentive Sign Up Check in the advertiser's bank account. Because a check made
out to the name of a business can only be deposited in that businesses account,
the advertiser's bank then acts as a third-party verifier, confirming that the
solicited advertiser is in fact the advertiser ordering the service. This
deposited check then acts as a written Letter of Authorization ("LOA")
(authenticated by the advertiser's bank), which we obtain from each and every
advertiser prior to activating any service or billing.

Once the Advertiser deposits the Sign Up Check, a series of events begins. Our
staff then places a telephone call to the Advertiser to confirm the sale, update
the business information to be listed, provide our toll free number and obtain
additional information to build the Mini-WebPage for the Advertiser. During this
call, our staff again asks if the Advertiser has any additional questions
regarding our service and repeats our toll-free number for any future questions.

In addition to the written Letter of Authorization and telephone call, we also
send each and every new Advertiser a written "Order Confirmation Card" within 30
days, thanking them for choosing to do business with us, informing them of our
120-day no risk money back policy, verifying the advertising information to be
displayed, confirming their order and the monthly fee which they have agreed to.
We also again at this time provide the Advertiser with our 800 number so that
the Advertiser may call us at any time and ask any additional questions which
they may have in the future or to simply cancel the service.

We have found that this form of solicitation is cost effective, quick and easy
for the potential advertiser, efficiently and effectively provides third-party
order verification, effectively eliminates potential slamming or cramming
issues, complies with and, in many instances, exceeds the United States Federal
Trade Commission ("FTC") requirements as established by the agreement that we
signed with the FTC in September 2001, and helps ensure our goal of 100%
advertiser satisfaction.

The target audience for our direct mail marketing program is every business in
America. Currently, according to Acxiom, USA, that list is almost 18 million
strong. We generally solicit in this fashion about 1 million businesses per
month.

In September 2003, we signed a five-year agreement with CHG Allied, Inc.("CHG").
CHG is a marketer to various types of medical practitioners. We plan to use
CHG's database of medical practitioners in our direct mail marketing
solicitation efforts. We will pay all printing and other mailing costs
associated with this effort. Also, we will additionally pay CHG $0.75 per month
per CHG client subscribing and paying for our Preferred Listing service. We will
pay such fee for a period of up to 36 months or for the time the CHG subscriber
enlists and pays for the Preferred Listing service, whichever is shorter. CHG is
affiliated with Vital Living, Inc., a public reporting company involved in the
development and marketing of nutritional products to physicians.

As part of a test market, we currently have three full time sales people
dedicated to selling our QuickSite service, as well as contacting Advertisers
that have expressed interest in an Internet Advertising Package through our
partners. We call this our Winback program.

Our sales department is a turnkey operation whereby the representatives are able
to sell our QuickSite service, as well as develop the Advertiser's website
in-house. Our sales representatives are also able to activate a new IAP for our
customers. These representatives have received the same training as our Inbound
Customer Service Representatives to ensure they are fully prepared to
accommodate Advertiser requests. Once the test market is completed, the actual
department will be expanded in our Las Vegas offices.

In order to provide more leads from different sources than our own customer
base, we made an arrangement in the fourth quarter of fiscal 2003 with Pike
Industries, a/k/a Yellow.com ("Yellow") relating to sales leads that Yellow
sends to us and that actually result in new Advertisers signing up for both the
IAP and the QuickSite. We will pay Yellow $35 a one- time fee for every such
sale's lead that results in an advertiser sign-up for the Company. However, such
payment will be made only after the second months' payment by such new
advertiser. That fee is earned by Yellow on the second month of billing and
there are no refunds to us if they later cancel. However, since we sell this as
a bundle with the IAP and QuickSite, we will have obtained $329.80 before any
fee is paid to Yellow. This agreement is on a month-to-month basis.

Mailing List Generation. To generate the leads for our mailing list operation,
we purchase approximately 12-18 million business directory listings each from
three of the largest information providers in the North American market. We
refer to each information provider's list of business listings as a data set
("data set"). Our financial performance allows us to purchase business listing
data from information providers such as Acxiom, InfoUSA and Experian on a
monthly basis. Each data set consists of 12-18 million records with each record
composed of several attributes such as company name, address, employment range,
phone number, United States Standard Industrial Classification ("SIC") and
Standard Yellow Page Heading ("SYHP") codes. While SYPH is proprietary to our
information provider Acxiom, we believe our fluency in multiple industrial
classifications and the additional cost and effort of acquiring data from
several sources gives us a competitive edge over companies that purchase data
from only a single provider of information or a provider that does not verify
the accuracy of the information for each business listing. We continue to
evaluate the accuracy of data provided to us by our information providers and
continuously expand our list of information providers as necessary in order to
maintain a competitive advantage.

Our agreement with InfoUSA became effective as of July 2002. It was for an
initial term of one year with automatic renewal for one year terms unless either
party provides 90 days' written notice prior to the end of a term of its
intention to terminate. We paid an original license fee of $20,000, plus
$6,665.67 for each quarterly update of the data set in the first year and now
pay $5,000 per each quarterly update.

Our agreement with Experian became effective as of February 2003. It has an
indefinite term until either party notifies the other of its intention to
terminate. The only consideration exchanged for the data set was the Company's
agreement to perform televerification and data set analysis.

Our agreement with Acxiom became effective as of March 2001. It was for an
initial term of two years with automatic renewal for one year terms unless
either party provides notice prior to the end of a term of its intention to
terminate. There is a $30,000 annual license fee for the data sets under this
agreement. Initially we paid $60,000 upon execution of the contract as advance
payment for the first two years of license fees.

The technology for generating a mailing list is comprised of a proprietary
application and five databases for generating a mailing list of leads. Data is
sent to us monthly from each information provider in an electronic format for
integration into a database. After data has been refreshed in each provider
database, our proprietary application performs a comparison and merge process
between data sets. The proprietary algorithm within our application improves the
quality of the record by verifying the accuracy of the information for every
business listing sent to us. We compare information from each information
provider to determine matching records, unique records and the method employed
to verify the information for each business listed to gauge the accuracy for
each respective information provider.

Technology and Infrastructure

We believe that we have developed technologies to support the timely delivery of
information requested by a user of the system. We believe the quality and
timeliness of the content is unmatched by any print medium. A staff of senior
engineers experienced in large-scale system design and computer operation
develops and maintains the technology. We believe we are particularly adept at
large-scale database management, design, data modeling, operations and content
management. Technology is employed in all aspects of the business. To focus on a
quality and timely product, we have divided the technology staff and technology
base into a business operations unit and an advanced technologies group
dedicated to our directory services product.

In the business operations element of the technology operation, we have
developed several cornerstone technologies to support a sophisticated call
center, automated billing of customers, customer relationship management and
automated mailing campaign.

Billing Operation. Our billing process allows us to deliver high levels of
service to our customers through convenient and timely options. The primary
billing method leverages our relationships with Local Exchange Carriers (LECs)
and/or Regional Bell Operated Companies (RBOCs), more commonly known to
customers as their local phone company. By using this channel, we believe we
experience increased collection percentages, reduced chances of internal theft
due to direct fund transfers and higher trust

with our customers because our fees ride a pre-existing bill they are already
accustomed to receiving. Additionally, we decrease our costs by avoiding the
need for a dedicated collections department, utilizing the collection
departments of the LECs and greatly reducing the number of paper invoice
customers. In cases where this billing method is not available, we offer
alternative paper-less billing methods, including recurring credit-card payments
and direct bank account withdrawal ("ACH") options.

Internally, the billing process is executed using a two-tier architecture that
consists of foundation and business platforms. Our foundation platform is
anchored with Microsoft as the primary partner leveraging their SQL Server
product line. This alliance aligns us technically with a stable industry
standard with proven scaling ability to meet our aggressive growth needs. The
option to have multiple processors ensures we will be able to handle our planned
customer base growth. System stability is enabled through built-in design
features like high availability, simplified database administration and security
features. Our business applications tier rests on a program suite that consists
of partner provided utilities and our own utilities developed specifically to
our billing process. By having light-weight development abilities in-house, we
have authority of our application, which allows us greater flexibility, greater
security and reduced dependencies on an external entity. These programs also
reduce LEC submittal fees by cleaning our customer billing submittals prior to
formal submission, and optimizes which provider best suits our needs and
maximizes profit potential.

Call Center Operation. We aspire to provide the best customer service in the
industry. To aid in that effort, sophisticated call center technologies are
employed to support teams dedicated to servicing customer needs, managing the
provisioning of new customers and the sale of additional services to existing
customers. The call center operation is composed of a high-volume telephone
switch to manage the high volume of calls. Call volume is managed using
sophisticated applications to manage, distribute and analyze workload across and
between call center representatives. Since our call center is staffed six days a
week, an automated call attendant is only employed after hours, Sunday or during
holidays.

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

Site Design and Facilities. The site is implemented as set of fourteen
large-scale, high-performance Unix servers with accompanying large-scale storage
subsystems that are

organized into layers and groups. Each layer and group provides different
functionality across the site. The site is organized to allow the integration of
new information and functionality without any interruption of service. To ensure
our site is continuously available to our users, the site is housed at
environmentally controlled co-location facilities geographically distributed and
repeated between three locations in Arizona, Nevada and Florida. The co-location
service is provided by XO Communications, a leader and national provider of
telecommunications services and facilities. The sites are interconnected by a
high-performance, scalable and highly-reliable state of the art fiber data
network.

Directory Service and Search Engine. Our directory service is built around four
integrated components providing our customers with a visible presence on the
Internet and mobile devices such as cellular phones and Personal Digital
Assistants.

High-Performance Database and Search Engine. We believe we provide the most
complete and high performing directory service in the market today. Our
proprietary database enables us to collect and merge data from multiple sources
to provide extensive and accurate content for our users. With the release of our
xDirectory(TM), YPbroker(TM), YPlookup(TM) and YPmatch(TM) technologies in 2004,
we expect to be the first to market real-time search feedback on accuracy,
search time, spellchecking, synonym matching, automated content delivery and
multiple source data merging in a simple to use paradigm. We believe these
technologies will simplify the search process and provide the most relevant
content to suit our customers' and User's needs. Ultimately, these technologies
are expected to increase recurrent use.

xDirectory(TM) - The platform for our High-Performance Database and Search
Engine - We believe we provide the most complete and high performing directory
service in the market today. xDirectory is a proprietary content management
system and repository for extensible data merged from multiple sources of North
American listing data. While some of our competitors merge data from multiple
sources, we believe the scale of their operations and financial performance
prohibits the acquisition of data from all of the data providers in the North
America. xDirectory also serves as a platform for several proprietary features:
real-time search feedback on accuracy, search time, spellchecking, synonym
matching, geographical positioning, automated content syndication and the
proprietary algorithms to perform listing data match up and merging into a
uniquely accurized record.

Extensible Record - Our financial performance, industry focus and market
leadership allows us to purchase and merge data from the largest information
providers in North America and to merge that data with our extensive in-house
customer data set to form the largest and therefore most comprehensive content
in the market. This effort provides users of our directory services the greatest
number of results per search. With the release of our xDirectory, we will be
able to weigh the accuracy of a wide variety of attributes from the source
record for inclusion into the merged record. xDirectory's proprietary algorithm
for identifying accurate information and removing inaccuracies during the merge
process is complemented by our customer service standard of call verifying the

attributes of a given record to obtain a market and industry unique 40-word
description of the business.

DirectXML(TM) - The technology supporting our content syndication program and
distribution network. DirectXML(TM) integrates between our proprietary content
management system and distribution network to deliver up-to-date syndicated
content. DirectXML(TM) leverages the XML standard for the definition,
interoperability, transmission, validation and interpretation of data between
systems and organizations.

Search Engine-to-Search Engine Distribution. We add value by increasing our
customer's visibility by providing automated conduits and content delivery to
numerous search engines besides our own. We can deliver content both on the
Internet and on mobile devices such as cell phones and Personal Digital
Assistants. Our market position and volume allows us to provide content to any
of our listed partnerships at a cost below what can be accomplished by direct
negotiation. We will enhance further the capabilities of this global
distribution network with the release of the YPbroker(TM) technology in 2004 by
providing high volume automated updates of records at least weekly, and where
possible, daily to our distribution partners.

YP.Com. The front end of our directory services and the showcase of our
technology and marketing capabilities is our website, YP.Com. The YP.Com website
is currently in its fifth generation of development; enhancements are on-going
and on a recurring schedule to meet the increased demand for our services and
products. The website provides several key and easy to use features: timely
information, simple search, search tips, reverse phone number lookup, mapping,
and residential and business directory listings.

Internet Advertising Package Technology. The Internet Advertising Package
leverages the technologies associated with our YP.Com website, Search Engine
distribution network, Directory and Search Engine technologies.

QuickSite Technology. We currently outsource to Vista the technologies
supporting our QuickSite product offering. However, when it makes strategic
sense to do so, we do have the capability and the capacity to easily convert
from a Vista provided turn -key operation to an internally managed solution.

Internet Dial-Up Package Technology. The technology for the Internet Dial Up
Package is implemented as a combination of an outsourced service contract for
the technologies and communications services with an internally developed and
managed User management and access provisioning system. The telephone dial-up
communications service will now be provided by Global Pops, a national
wholesaler and provider of Internet dial -up access. Access to the dial up
service is managed by our customer service team. The customer service team
communicates directly with the Advertiser to determine the closest local dial up
access number the Advertiser is to use and assists the Advertiser with the
appropriate configuration necessary to effect a connection with Global Pops
nationwide network. If the user is mobile, we provide an option for nationwide
toll free access to Global Pops network. When an Advertiser dials into their

local access number, Global Pops connects with our customer database to
authenticate the request for access. Upon successful authentication the
Advertiser is granted access to the Global Pops network and to the Internet.

Mailing List Generation. To generate the leads for our mailing list operation,
we purchase approximately 12-18 million business directory listings each from
three of the largest information providers in the North American market. We
refer to each information provider's list of business listings as a data set
("data set"). Our financial performance allows us to purchase business listing
data from information providers such as Acxiom, InfoUSA and Experian on a
monthly basis. Each data set consist of 12-18 million records with each record
composed of several attributes such as company name, address, employment range,
phone number, United States Standard Industrial Classification ("SIC") and
Standard Yellow Page Heading ("SYHP") codes. The SIC is numeric code established
by the federal government to identify the type of business. It qualifies the
industrial or commercial product or service into 99 primary categories, using a
two-digit code from 01-99. Similar to SIC, the SYPH is also a numeric code to
identify the type of business. SYPH differs by expanding the code to nine digits
as opposed to SIC's two digit classification. The additional numeric digits in
the code increase the number of classifications significantly to over 75,000
possible types of business. We are fluent in both SIC and SYPH classifications
and our products reflect both standards when classifying a type of business by
creating a business listing and therefore a lead record that is a composite of
SIC and SYPH.

We believe our fluency in multiple industrial classifications and the additional
cost and effort of acquiring data from several sources gives us a competitive
edge over companies that purchase data from only a single provider of
information or a provider that does not verify the accuracy of the information
for each business listing. We continue to evaluate the accuracy of data provided
to us by our information providers and continuously expand our list of
information providers as necessary to maintain a competitive advantage.

We believe the quality of a lead from each information provider's data set
cannot be evaluated by business count alone. Other factors including overall
quality, duplicates, out of business records and records without phone numbers
must be considered. Each information provider verifies the information for each
business listing differently, some will attempt to verify information for each
business by phone while others will attempt to verify by using a United States
Postal Service Certified Address Standardization ("CAS") process for converting
addresses to a standard zipcode-4 format required to qualify for lower bulk
mailing rates.

information for every business listing sent to us. We compare information from
each information provider to determine matching records, unique records and the
method employed to verify the information for each business listed to gauge the
accuracy for each respective information provider. A unique record is one that
exists only in a single provider's data set. The number of unique records varies
from month to month and is one of the reasons we purchase from multiple sources.
Following the merge process, our proprietary mailing application employs
sophisticated filtering process to determine address accuracy and facilitate the
delivery of the solicitation check. An electronic file is finally generated of a
list of leads. The generated list is then sent to our publisher with the name of
the business, address of the lead and type of business.

Strategic Alliances

In order to service Users more effectively and to extend our brand to other
Internet sources, we have entered into strategic relationships with business
partners offering content, technology and distribution capabilities.

We have cross-marketing agreements with other Websites. Generally, the nature of
these agreements relate to the reciprocal linking of websites without any
compensation to either party. We have cross-marketing arrangements with
approximately 600 Websites. These agreements allow us to increase the page views
for our Advertisers' listings and also provide the Users of certain websites the
ability to also achieve additional page views by being listed on our related
websites. We believe these arrangements are important to the promotion of YP.Net
and YP.Com, particularly among new Internet users who may access the Internet
through these other Websites. These co-promotional arrangements typically are
terminable at will.

In addition, we have distribution agreements with several websites, including My
Area Guides, go2.com, Switchboard Incorporated ("Switchboard"), and Pike Street
Industries, a/k/a, Yellow.com ("Pike"), as well as others. These agreements
allow us to increase the page views for our Advertisers' listings. We pay My
Area Guides, go2.com, Switchboard and Pike, $6,000, $24,000, $20,000 and $20,000
per month, respectively, for such agreements.

Our search engine placement agreement with Overture.Com is on a month-to month
basis. Overture.com provides visibility to the Company's website so that we can
provide traffic to our Advertisers. By the payment of monthly fees ranging from
$15,000 to $20,000 Overture tries to insure that our site will be one of the
highest placed sites when Yellow Page searches are done on major search engines
such as MSN and Yahoo to name a few.

In fiscal 2003, we signed a license agreement with Palm, Inc. ("Palm") to become
a provider of Yellow Page content on hand-held devices, including "personal data
assistants," or "PDAs" using the Palm operating system. We will provide this
content to Palm through a hypertext link from the Palm operating system to our
website. The cost of this agreement was $20,000 up-front for two years, which
has been paid. This agreement

is renewable for successive two-year periods unless either party elects to
terminate the agreement with no less than 60 days' notice prior to the end of
the then-current term. We are currently undergoing the quality assurance process
with Palm before linking with the Palm operating system. This process is
expected to be completed on or before March 31, 2004.

We also utilize WebDialogs in a co-promotional effort to provide automatic
dialing services to our website Users to allow these Users to place a call to
one of our Preferred Listing customers by simply clicking a button. This
function powers our click2call feature.

Subsequent to year-end, we signed a letter of intent with SurfNet Media Group,
Inc. ("SurfNet"), a digital media distribution technology company. SurfNet is a
public reporting company. The letter of intent discusses the parties' intention,
upon negotiation and preparation of a definitive agreement, to provide the
Company the exclusive right to use SurfNet's patented Metaphor technology in
Internet Yellow Pages applications. Such enhancements may include our ability to
offer our Internet Advertising customers the opportunity to deliver streaming
audio and video from their Mini-WebPage. The parties also plan to execute a more
definitive agreement relating to a licensing and/or other business arrangement
by March 31, 2004.

We have also managed revenue sharing partnerships with Amazon.com, Buy.com,
Stamps.com, Vista.com, EZSitemaster, Inc. and TheWallStreetJournal.com, among
others, that allow us to generate revenue by purchases made through the link on
our home page. To date, the amount of revenue generated from these partnerships
is immaterial, or less than 1%.

Since the founding of our wholly-owned subsidiary, Telco, in 1998 and continued
through our acquisition of Telco in June of 1999, we have been members of the
Yellow Pages Integrated Media Association ("YPIMA"), the Association of
Directory Publishers ("ADP") and the Direct Marketing Association ("DMA"). These
organizations are trade associations for Yellow Page publishers or others that
promote the quality of published content and advertising methods. One of the
primary responsibilities of these organizations and of its members is to promote
the growth of legitimate Yellow Page companies that provide real value to their
advertisers and to the general public at large, while working to expose those
companies that take advantage of consumers. We plan to take an even more active
role in fiscal 2004.

Billing

Our billing process allows us to deliver high levels of service to our customers
through convenient and timely billing/payment options. Our primary option is to
bill our customers on their local telephone bill. A vast majority of our
Advertisers are billed in this manner. By way of description, when the Regional
Bell Operating Companies ("RBOC's") charge for inclusion in their Yellow Page
Directories, they charge the business directly on their monthly business phone
bill. This primary billing method

leverages our relationships with the local telephone companies ("LECs") or, as
they are sometimes called, RBOCs. By using this billing method, we believe we
benefit from increased collection percentages, reduced chances of internal theft
due to direct fund transfers and higher trust with our Advertisers because our
fees appear on a pre-existing bill they are already accustomed to receiving.
Additionally, we believe we decrease our costs by avoiding the need for a
dedicated collections department, utilizing the collection departments of the
LECs and greatly reducing the number of paper invoice customers. In cases where
our primary billing method is not available, we offer alternative paper-less
billing methods, including recurring credit-card payments and direct bank
account withdrawal ("ACH") options. Our very last option and the least
attractive for us is the use of direct bill invoices. We only use direct bill
invoices in instances where the customer requests this service, or no other
billing method is available.

During the fourth quarter of this fiscal year, we have concentrated on doing
business with paying customers as opposed to activated customers. In September
2003, we revised the method by which we count our IAP advertisers. We now
differentiate between "paying IAP advertisers" and "activated IAP advertisers."
Paying IAP advertisers, as the name implies, are those advertisers that are
actually currently paying for the IAP service. The terms activated IAP
advertisers or activated advertisers are broader and more inclusive terms. They
include those advertisers that are currently paying for the IAP service, as well
as those advertisers that either have signed-up for the IAP service but have not
yet been billed or have been billed but have not yet remitted to us their fees.

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

By enhancing our filtering methods both at the point of marketing and on the
billing process, we have been able to reduce the number of duplicate records
that we mail and bill to. Additionally by being able to compare records from
multiple list vendors, we have been able to have more up-to-date information
so that we can remove those businesses that recently closed and add new and
additional business information faster. With our changes to our internal
controls, we are able to verify, more quickly and accurately which customers'
area code has changed or which business has changed their phone number or
closed. All of these improvements have added to the number of paying customers
if not to the actual number of activated customers.

aggressive growth needs. The option to have multiple processors ensures we will
be able to handle our planned customer base growth. System stability is enabled
through built-in design features like high availability, simplified database
administration and security features. Our business applications tier rests on a
program suite that consists of partner provided utilities and our own utilities
developed specifically to our billing process. By having light-weight
development abilities in-house, we have authority of our application, which
allows us greater flexibility, greater security and reduced dependencies on an
external entity. These programs also reduce LEC submittal fees by cleaning our
customer billing submittals prior to formal submission, and optimize which
provider best suits our needs and maximizes profit potential.

Billing Service Agreements

In order to bill our Advertisers through their LECs, we are required to use one
or more billing service integrators. These integrators have been approved by
various LECs to provide billing, collection, and related services through the
LECs. We have entered into customer billing service agreements with Integretel,
Inc. ("IGT," f/k/a "eBillit" and currently "PaymentOne") and more recently with
ACI Communications, Inc., f/k/a OAN Billing, Inc., for these services. Under
these agreements, our service providers bill and collect our charges to our
Advertisers through LEC billing. These amounts, net of reserves for bad debt,
billing adjustments, telephone company fees (3-7% of billings, depending upon
the number of records submitted) and billing company fees (approximately 3% of
billings), are remitted to us on a monthly basis. Other costs associated with
LEC billing Telco or LEC holdbacks and dilution, which ranges from 10-20% of
billings. On August 1, 2002, we signed a three-year agreement with PaymentOne.
This agreement automatically renews for successive terms of one year each unless
either party provides 90 days' written notice of its desire not to renew. Our
agreement with ACI Communications is effective through September 1, 2004 and
automatically renews for successive one-year periods unless either party
notifies the other party in writing at least 90 days prior to the expiration
date. Presently, we are primarily billing though these integrators.

As previously mentioned, the Company also has the ability to charge Advertisers
by charging their credit card and/or debiting their bank account ("ACH"). We
currently execute our credit card charges through IAuthorizer, Inc. and our ACH
debits are currently processed through PaymentOne.

Check Processing Agreements

As previously discussed, our primary marketing efforts are through direct mail
solicitations. Currently, our direct mail marketing program includes a
promotional incentive generally in the form of a $3.50 activation check that a
solicited business simply deposits to activate the service and become an
Internet Advertising customer on a month by month basis. As a method of
third-party verification, the depositing bank, or another third-party
verification service provider verifies that the depositing party is in fact the
solicited business. Upon notice of activation by a depositing bank, we
immediately

contact the business to confirm the order and obtain the information necessary
to build their Mini-WebPage. The Company uses two primary service-providers that
serve as third-party verification of the Advertisers' order, as well as
providing us with the relevant information necessary for us to bill the
Advertisers.

For the fiscal year ended September 30, 2003, this third-party verification
service was provided by FSMC, a unit of Travelers Express Company, Inc., which
is a subsidiary of Viad Corp, a public reporting company, as well as by Bank of
the Southwest. There are no written agreements with FSMC or Bank of the
Southwest. The Bank of the Southwest has informed us that it plans to outsource
its check processing services. As a result, we plan to decrease or eliminate our
reliance upon and use of the Bank of the Southwest for this service.

On August 8, 2003, we signed a three-year agreement with Integrated Payment
Systems, Inc., a unit of First Data Corporation, a public reporting company,
which is expected to replace Bank of the Southwest as a service provider for
check processing.

Customer Service

Our customer service department is comprised of four main departments; Inbound,
Outbound, Quality Assurance and Administration. Our goal is 100% customer
satisfaction. We believe that our goal of providing the best customer service
rests with our ability to assist our customers with every need in each and every
contact with us. Whether the customer contacts us with billing questions, to
order an IAP, QuickSite or IDP or even technical questions or complaints, we
strive to satisfy each customer We believe this goal will, over time, set us
apart from our competitors, We believe the success of customer service starts
with the support and direction given to all employees. The call center is
managed with a ratio of no more than 8 employees to 1 supervisor, with the teams
of supervisors and employees remaining constant in order to provide effective
on-going development. The supervisors report to a Department Managers who in
turn report to the Call Center Manager.

In order for Senior Management to stay informed of employee and customer
feedback, bi-weekly meetings and focus groups are held with the Call Center
Manager and the employees to obtain and provide feedback. In addition, all
Supervisors and Managers attend weekly development training to improve their
management skills. In order to provide the best possible experience for our
customers and advertisers we begin by hiring and training only those
representatives that meet our stringent guidelines. Each Customer Service
Representative ("CSR") goes through one week of training with daily coaching
following graduation from training. The CSRs are monitored daily by the
supervisors, Quality Assurance and management. Calls are documented with call
details, strengths, and areas for improvement. The Supervisors and CSRs develop
action plans to improve or to continue providing outstanding customer care.

Inbound Call Center. Our call center supports incoming calls from our
Advertisers for all of our products. The Inbound customer service
representatives are responsible for taking

calls for billing, technical service, and general questions. The customer
service representatives are empowered to activate new accounts, adjust accounts
with credits, accept payments, change the billing method, and cancel accounts.
Our proprietary customer service representative software is tiered in order to
limit the actions taken with an Advertiser's account dependant on the employee's
position. (See Technology for more information.) If a customer service
representative is unable to accommodate the customer's request, a Supervisor is
given the call to ensure the customer is satisfied. In addition, requests beyond
those a Supervisor can handle are given to a Department Manager or our Quality
Assurance group. The customer service representatives have the ability to update
Advertiser's accounts, by adding or changing a Mini-WebPage containing the 40
word description, changing hours of operation, changing the business category,
and adding the link to the customer's website and email. Once the customer
service representative makes the requested changes, the new information will
appear on our website the following business day. This ability allows the
Advertiser to make timely changes to their listing. The Inbound Customer Care
number is generally staffed 6 days a week.

Outbound Calling. In March 2003, our Outbound department met its goal of
becoming fully staffed. This center was established to assist our IAP customers
to get full benefit for the advertising they had purchased. The Outbound
customer service representatives primarily call those Advertisers who recently
signed up for our products. They confirm the sale and in the case of an
Advertiser who had purchased an IAP they obtain the information to build their
Mini-Webpage. Once the Outbound customer service representative speaks with the
Advertiser and obtains all the information for the Advertiser's listing, that
listing is then sent to our proofreaders. Every listing that is updated is
proofread prior to being placed on our site. This additional step ensures that
our Advertisers are represented professionally and accurately to their
customers. Since our Outbound customer service representatives only call
existing or new Advertisers we are not affected by the "National Do Not Call"
list recently enacted by the United States Congress.

Quality Assurance. The Quality Assurance group became fully staffed and
operational February 3rd, 2003. The goal of the Quality Assurance group is to
monitor Inbound and Outbound calls, take escalated calls, perform Customer
Satisfaction Surveys, and make test calls into our Customer Care line on a
random basis. The Quality Assurance department reports directly to the call
center manager to ensure separation from Inbound and Outbound.

In addition to the Quality representatives, we have a Training & Process
Development Supervisor that reports to the Quality Assurance manager. The
supervisor's responsibility is to produce and distribute training material to
the entire call center to ensure consistent information is provided to all
departments.

Administration. The purpose of our administration department is to assist our
customers with timely feedback when requested through the mail, e-mail or by
facsimile. In addition to the customer service representatives answering
incoming calls, we have

individuals trained to assist customers via email. Our site and our incoming
greeting on the telephone give our customers and our site users our email
address. The emails are reviewed daily and generally answered within one
business. We have found that many Advertisers prefer to email us with their
changes and are very satisfied with our response time and ability to respond to
their request. The Administration department receives, sorts, and distributes
all incoming and outgoing mail. They are also responsible for filing the hard
copies of the cashed incentive checks. All information that is sent to our
Advertisers or potential customers that is sent by the call center is routed
through the Administration department in order to ensure accurate and consistent
information is sent.

Regulation & Self- Regulation

When our Quality Assurance Department was formed, one of its chief goals was to
establish internal self- guidelines so that we could regulate ourselves.
Management believes that by being proactive with our employees, we can ensure
that our Advertisers, customers, prospective customers and former customers all
get treated fairly and according to the law.

In our marketing, we believe that we have in all cases exceeded the requirements
set with the United States Federal Trade Commission ("FTC").

Current law requires our solicitations to be understood by a simple majority of
reasonable individuals. However, our goal is to create solicitations that are
clearly understood by all recipients. Prior to each major revision of any
solicitation being printed and distributed, it is reviewed by members of our
Quality Assurance Team and Marketing teams. Once approved by the Quality
Assurance Team, the draft solicitation must be approved by our internal legal
compliance representative and outside legal counsel who assesses the
solicitation relative to existing legal compliance requirements, as well as our
own high standards of quality control, keeping in mind the goal of widespread
comprehension stated above. The solicitation is then sent to the general counsel
of the Yellow Pages Integrated Media Association (YPIMA) for a independent third
party legal review. This general counsel was chosen by the Company for this
review because, in fulfilling his duties for the YPIMA, he deals with the
Federal Trade Commission and various State and Local Agencies in overseeing and
detecting misleading Yellow Page solicitations. Upon approval at this level, the
solicitation is provided to our Billing Integrators, where it must pass their
legal review as well. Finally, it is sent to the Local Exchange Carriers' legal
departments, which ensure that the solicitation complies with all Federal
Communication Commission ("FCC") guidelines as well. The LEC also periodically
sends the solicitation to the United States Postal Service for review to be sure
it meets their guidelines.

All of our direct marketing sales are verified in writing by the endorsement of
the activation check by our new Advertiser, the Advertiser's bank verifies that
the correct entity is depositing the check and therefore taking advantage of our
offer. Then we send confirmation cards to both the accounting and marketing
departments of our new Advertisers. We attempt to contact each new Advertiser to
confirm the sale and obtain additional information from them to use to build
their Mini-WebPage. Lastly, to ensure

100% customer satisfaction, we offer a 120 cancellation period whereby each new
Advertiser has 120 days to try our products and, if not completely delighted,
they can cancel and receive a full refund.

The Federal Trade Commission requires us to send a confirmation card to a new
Advertiser within 80 days of the deposit of an activation check. However, we
have elected to send the card in approximately 30 days or less from the date of
deposit.

At almost every point of contact with Advertiser and prospective advertisers, we
provide a toll free 800 number through which their questions are answered and
they have simple method of cancellation if they are dissatisfied for any reason.
The Inbound Customer Care number is generally staffed six days a week.

In order to ensure the accuracy and completeness of the Company's financial
information, in May, 2002 the independent members of the Company's Board of
Directors engaged the services of Jerrold Pierce, a former Senior Special Agent
of the Criminal Investigations Division of the Internal Revenue Service for
seven western states. Mr. Pierce performs unannounced inspections of the
Company's financial records at least once every quarter. Mr. Pierce reports his
findings directly to the independent members of the Board and to the Board in
its entirety. To date, Mr. Pierce has found no irregularities in the financial
statements under current management.

Due to the rapid growth of Internet communications, laws and regulations
relating to the Internet industry have been adopted. Such laws include
regulations related to user privacy, pricing, content, taxation, copyrights,
distribution, and product and services quality. Concern regarding Internet user
privacy has led to the introduction of federal and state legislation to protect
Internet user privacy. In addition, the FTC has initiated investigations and
hearings regarding Internet user privacy that could result in rules or
regulations that could adversely affect our business. As a result, the adoption
of new laws or regulations could limit our ability to conduct targeted
advertising, or distribute or to collect user information.

Existing laws and regulations or ones that may be enacted in the future could
have a material adverse effect on our business. These effects could include
substantial liability including fines and criminal penalties, preclusion from
offering certain products or services and the prevention or limitation of
certain marketing practices. As a result of such changes, our ability to
increase our business through Internet usage could also be substantially
limited.

Competition

We operate in a highly competitive and rapidly expanding Internet services
market, however our primary market sector is business-to-business services, as
opposed to a pure technology industry. We compete with online services, website
operators, and advertising networks. We also compete with traditional offline
media, such as television, radio, traditional Yellow Pages directory publishers
and print share advertising. Our

services also compete with many directory website production businesses and
Internet information service providers. Our largest competitors are local
exchange carriers, or local phone companies, which are generally referred to as
LECs also known as local telephone companies. The principal competitive factors
of the markets that we compete in include personalization of service, ease and
use of directories, quality and responsiveness of search results, availability
of quality content, value-added products and services and access to end-users.
We compete for advertising listings with the suppliers of Internet navigational
and informational services, high-traffic websites, Internet access providers and
other media. This competition could result in significantly lower prices for
advertising and reductions in advertising revenues. Increased competition could
have a material adverse effect on our business.

Many of our competitors have greater capital resources than us. These capital
resources could allow our competitors to engage in advertising and other
promotional activities that will enhance their brand name recognition at levels
we cannot match. The LECs, given their existing local access customers, have
brand name recognition and access to potential customers.

We believe that we are in a position to successfully compete in these markets
due to the lack of material debt on our books, our recent ability to produce
significant cash and the effectiveness of our direct mail marketing program. We
further believe that we can compete effectively by continuing to provide quality
services at competitive prices and by actively developing new products for
customers.

We believe that our Outbound Calling Center, which is utilized to obtain the
information necessary to build the Mini-WebPages, is a competitive advantage.
The information garnered is not available from any other single source and is
unique to our website. We believe it allows Users to have readily available
information that is easy to understand and from which they can make their buying
decisions. Because of the brevity of the Mini-WebPage information it is easily
assessable by Users on their mobile phones and other hand-held devices. We
believe that our receipt of over 160,000 updates means that our site contains
more useful information than our competitors and that over time Users will find
our site more useful than competitor sites. We further believe that this, in
turn, will translate into more page views and Advertisers.

Employees

As of December 26, 2003, we do not have any employees. However, we do have 119
full time and four part- time independent contractors engaged either directly by
the Company, through employee leasing or through temporary help agencies. Such
team members are not covered by any collective bargaining agreements, and we
believe our relations with our team members are good.

Company History

We were originally incorporated as a New Mexico company in 1969 and the Company
was re-incorporated in Nevada in 1996 as Renaissance Center, Inc. Our Articles
of Incorporation were restated in July 1997 and our name was changed to
Renaissance International Group, Ltd. Effective July 1998, we changed our name
to RIGL Corporation. In June 1999, we acquired Telco Billing, Inc. ("Telco") and
commenced our current operations through this wholly-owned subsidiary. In
October 1999, we amended our Articles of Incorporation to change our corporate
name to YP.Net, Inc. to better identify our company with our current business
focus.

From August through December 1999, we abandoned all subsidiaries previously
involved in the multi-media software and medical billing and practice management
areas. With the acquisition of Telco, our business focus shifted to the Internet
Yellow Page services business and this business is currently our main source of
revenue. Telco is operated as our wholly owned subsidiary.

ITEM 2. DESCRIPTION OF PROPERTY

During fiscal 2002, we renewed our long-term operating lease with Art Grandlich
d/b/a McKellips Corporate Square on the 16,772 square foot corporate office that
is located in Mesa, Arizona for approximately $120,000 annually. This lease
expires in June 2006. This facility contains our customer service call center,
as well as certain administrative resources.

In October 2003, our wholly owned subsidiary, Telco, signed a three-year lease
with Tomorrow 33 Convention, LP on a facility in Las Vegas, Nevada consisting of
annual lease payments of approximately $201,000. This facility is approximately
3,500 square feet and is our corporate headquarters and the primary operating
facility of Telco. The lease is an operating lease for accounting purposes. This
location will shortly replace Telco's facility in Boulder City, Nevada. This
space was necessary to accommodate Telco's expanding sales and accounting staff.

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

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock

Our common stock trades publicly on the OTC Bulletin Board under the symbol
"YPNT."

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

FISCAL YEAR QUARTER ENDED HIGH LOW
----------- ------------------- ----- -----

2002 December 31, 2001 $0.23 $0.06
March 31, 2002 $0.37 $0.12
June 30, 2002 $0.20 $0.05
September 30, 2002 $0.11 $0.05
2003 December 31, 2002 $0.13 $0.04
March 31, 2003 $0.24 $0.08
June 30, 2003 $1.25 $0.14
September 30, 2003 $2.41 $0.56

Holders of Record

On December 26, 2003, there were approximately 425 shareholders of record of our
common stock according to our transfer agent. The Company has no record of the
number of shareholders who hold their stock in "street" name with various
brokers.

Dividend Policy

We have one class of outstanding preferred stock (Series E Preferred Stock), of
which there are currently, 131,840 shares issued and outstanding. Each share of
Series E Preferred Stock is entitled to and receives a dividend of $0.015 per
year, payable in quarterly installments of $0.00375.

To date, we have not paid cash dividends on our common stock. However,
subsequent to year end and during the quarter ending December 31, 2003 , we
entered into an agreement with two of our significant shareholders, Morris &
Miller, Ltd and Mathew and Markson, Ltd., whereby we agreed, subject to
applicable laws, to declare and pay a cash dividend of at least $.01 per share
to all of our common stock shareholders within 60 days of the end of each fiscal
quarter commencing no later than April 30th, 2004 for our fiscal quarter ended
March 31, 2004, and for each fiscal quarter thereafter based on the record date
announced by our Board of Directors.

Sales of Unregistered Securities

During fiscal 2003, we issued the following shares as payment for legal
services. These shares were issued to the following attorneys relating to the
favorable resolution of several legal proceedings whereby the Company was the
Plaintiff in recovering shares

from various consultants who did not provide the agreed-upon services. The
issuances of these shares were exempt from registration under the Securities Act
of 1933, as amended, pursuant to Section 4(2) of that act as a transaction not
involving a public offering. This exemption was available in connection with the
issuances because (i) the shares were issued only to persons or parties who the
Company believed were "accredited investors" within the meaning of Regulation D
under that act; (ii) no form of general solicitation or general advertising was
used in connection with the transactions; and (iii) the parties receiving the
shares had access to complete information concerning our company, acquired the
shares for investment and not with a view to the distribution thereof, and
otherwise were not underwriters within the meaning of Section 2(11) of the
Securities Act. There were no underwriters involved in these transactions.

Date Recipient Total Shares Value

June 16, 2003 Peter Strojnik 261,750 $183,225
May 1, 2002 . Dwight Flickeng 176,896 22,996
May 1, 2002 . Kevin Flickenge 75,813 9,856
May 1, 2002 . Joseph McDaniel 191,219 24,858

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

For a description of our significant accounting policies and an understanding of
the significant factors that influenced our performance during the fiscal year
ended September 30, 2003, this "Management's Discussion and Analysis" should be
read in conjunction with the Consolidated Financial Statements, including the
related notes, appearing in Item 7 of this Annual Report.

Forward-Looking Statements

This portion of this Annual Report on Form 10-KSB, includes statements that
constitute "forward-looking statements." These forward-looking statements are
often characterized by the terms "may," "believes," "projects," "expects," or
"anticipates," and do not reflect historical facts. Specific forward-looking
statements contained in this portion of the Annual Report include, but are not
limited to: (i) our expectation that legal costs relating to the litigation
involving our CEO will not be significant after December 31, 2003; (ii) our
projection that capital expenditures will not increase at the same rate in the
future; (iii) our anticipation of the cessation of advances to affiliates and
the beginning to pay a cash dividend on our common stock in fiscal 2004; (iv)
our belief that our direct mail marketing costs in fiscal 2004 will be
consistent with our expenditures in fiscal 2003; and (v) our expectation that
initial costs incurred in our branding initiative will not immediately result in
financial benefit to the Company.

Forward-looking statements involve risks, uncertainties and other factors, which
may cause our actual results, performance or achievements to be materially
different from

those expressed or implied by such forward-looking statements. Factors and risks
that could affect our results and achievements and cause them to materially
differ from those contained in the forward-looking statements include those
identified in the section below titled "Certain Risk Factors Affecting Our
Business," as well as other factors that we are currently unable to identify or
quantify, but may exist in the future.

Executive Overview

Business Summary

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

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

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

Sales and Marketing

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

exceeds the United States Federal Trade Commission, or "FTC," requirements as
established by an agreement between our company and the FTC.

IAP advertisers

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

Methods of Billing

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

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

Accounting Policies and Procedures

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Estimates and Assumptions

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

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

- REVENUE RECOGNITION:

Our revenue is generated by customer subscriptions for directory and
advertising services. Our billing and collection procedures include significant
involvement of outside parties. We obtain customers through direct mail
advertising. When a customer subscribes to our service we create an electronic
customer file, which is the basis for the billing. We submit gross billings
electronically to third party billing aggregators. These billing aggregators
compile and format the information submitted to us and forward the billing
records to appropriate LECs. The billing for our service flows through to
monthly bills of the individual LEC customers. The LECs collect our billing and
remit amounts to the billing aggregators who in turn remit funds to us. Within
this process, there are numerous adjustments, charges and holdbacks implemented
by the billing aggregators and LEC's.

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

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

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

o Direct bill customers. We bill many subscribers directly. Our
---------------------
collection rate on these billings is significantly lower than those
processed through the LECs. We track collections on direct billed
customers and recognize revenue from those customers based on the
historical collection rates. Our recent collection experience on these
billings is approximately 10% to 12%.

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

- ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Cash is received through the process discussed above. We have contractual
advance rates with our third party billing aggregators. The billing aggregators
report to us their holdbacks. These holdbacks include those submitted by the
LECs. Some of these holdbacks may take 12-18 months to collect and "true-up"
with the billing aggregators. We estimate an allowance for doubtful accounts on
the basis of information provided by the billing aggregators. This information
is an indicator of timely payments

made by our subscribers. At September 30, 2003, the allowance for doubtful
accounts was approximately 30% of gross accounts receivable.

- CARRYING VALUE OF INTELLECTUAL PROPERTY:

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

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

- CAPITALIZATION OF DIRECT RESPONSE ADVERTISING COSTS AND AMORTIZATION
THEREOF:

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

- INCOME TAXES:

Management evaluates the probability of the utilization of the deferred
income tax assets. The Company has estimated a $1,373,000 deferred income tax
asset at September 30, 2003. Of that amount, $979,000 related to net operating
loss carryforwards at September 30, 2003. Management determined that because the
Company has been generating taxable income it was appropriate to recognize the
deferred income tax asset related to the net operating loss carryforward.
Management is required to make judgments and estimates related to the timing and
utilization of net operating loss carryforwards, utilization of other deferred
income tax assets, applicable tax rates and feasible tax planning strategies.

Future Outlook

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

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

- add additional independent directors to our Board of Directors;

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

- engage a national auditing firm;

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

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

Recent Developments

Litigation by others against our Chairman and CEO

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

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

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

Termination of the Revolving Loan Agreements With Our Major Shareholders-Mathew
and Markson and Morris & Miller, LTD ("M&M's")

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

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

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

Morris & Miller, Ltd.

$275,000 on January 30, 2004
$300,000 on February 27, 2004
$500,000 on March 31, 2004
Sufficient funds to pay 3 years interest on April 9, 2004

Mathew and Markson, Ltd.

$50,000 on January 30, 2004
$100,000 on February 27, 2004
$75,000 on March 31, 2004
Sufficient funds to pay 3 years interest on April 9, 2004

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

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

Termination of Our Relationship with Simple.Net.

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

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

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

Results of Operations

Fiscal Year End September 30, 2003 Compared to Fiscal Year End September
30,2002.

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

Our IAP Advertiser count increased to 255,376 at September 30, 2003 compared to
113,565 at September 30, 2002, an increase of approximately 125%. Relating to
the conversion of certain Advertisers to monthly telephone billing, in August,
2003, we analyzed our database of IAP Advertisers that were being billed via
direct monthly invoice to determine which of these Advertisers were eligible to
be billed on their monthly telephone bill. As a result of this analysis, we
determined that 46,717 Advertisers were eligible for monthly telephone billing.
As previously described under "Billing" and in the Financial Statement
footnotes, our revenue recognition and collections are significantly higher when
Advertisers are billed on their monthly telephone bills rather than through
direct invoice. Relating to our price increase, we now

charge $21.95 monthly versus $17.95 previously for new IAP Advertisers. In
addition, the monthly charge to existing IAP Advertisers was increased to $24.95
monthly upon the first anniversary of their listing. This price increase was
instituted on March 20, 2003.

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

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

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

Cost of services for Fiscal 2003 was $8,357,768 compared to $3,497,678, an
increase of 139%. The increase in cost of services is due to the increased IAP
customer count, as well as the increase in our direct mail solicitation effort
whereby we are currently mailing, on average, approximately 1 million mailers to
businesses each month. Cost of services as a percent of net revenue was
approximately 27% for Fiscal 2003 compared to 28% for Fiscal 2002. Gross margins
improved to 73% in Fiscal 2003 compared to 72% in Fiscal 2002. The improvement
in gross margin results from the leveraging of certain fixed costs, included in
cost of services, over a larger customer base.

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

percent of net revenue was approximately 26% in Fiscal 2003 compared to 38% in
Fiscal 2002.

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

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

The cost of the Yellow-Page.Net URL was capitalized at its cost of $5,000,000.
The URL is amortized on an accelerated basis over the twenty-year term of the
licensing agreement. Amortization expense on the URL was $351,933 for the year
ended September 30, 2003. Annual amortization expense in future years related to
this URL is anticipated to be approximately $350,000-450,000.

Operating income in Fiscal 2003 was $9,222,868 compared to $2,820,625 in fiscal
2002 representing an increase of approximately 227%. As a percent of net
revenue, operating income was approximately 30 % in Fiscal 2003 versus
approximately 22% in Fiscal 2002. The increase in operating income resulted from
the previously mentioned increases in net revenue as well as the leveraging of
part of our fixed costs, included in cost of services and general and
administrative expenses, over a larger customer base

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

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

Other expense (income) was a net of $648,908 in income in Fiscal 2003 versus
$704,523 of income in Fiscal 2002. In Fiscal 2003, other expense (income)
consists of other income of $1,039,521 offset by other expense of $390,612
resulting in net other income of $648,908 In Fiscal 2002, other expense/(income)
consists of other income of $704,523. The primary components of other income of
$1,039,521 in Fiscal 2003 and

$740,523 in Fiscal 2002, respectively, are technical and service income from
Simple.net ($618,612 and $300,900, respectively) and gains related to stock
settlements due to favorable outcomes in these settlements ($357,906 and
$395,772,respectively). The primary components of other expense of $390,612 in
Fiscal 2003 are legal expenses incurred relating to stock settlements of
$240,935.

Income before income taxes was $9,961,043 in Fiscal 2003 and $3,450,489 in
Fiscal 2002, representing an increase of approximately 189%. As a percent of net
revenue, income before income taxes was 32% in Fiscal 2003 compared to 27% in
Fiscal 2002.

The income tax provision was $2,037,152 in Fiscal 2003 compared to an income tax
benefit of $245,974 in Fiscal 2002. The increase in the income tax provision is
the result of our increased profitability in Fiscal 2003 offset by the use of
our net operating loss carryforwards. During Fiscal 2003 and 2002, our
structured certain transactions related to its merger with Telco that allowed
the Company to utilize net operating losses that were previously believed to be
unavailable or limited under the change of control rules of Internal Revenue
Code 382.

Net income for Fiscal 2003 was $7,923,891, or $0.18 per share, compared to
$3,696,463 or $0.09 per share for Fiscal 2002, an increase in net profit of
approximately 114% despite a much higher tax provision in Fiscal 2003. The
increase in net income resulted from the increased IAP Advertiser count and
associated revenue cited above with a less than corresponding increase in
expenses cited above offset by the greater tax provision in Fiscal 2003. Net
profit as a percent of revenue decreased to approximately 26% in Fiscal 2003
from 29%% in Fiscal 2002 due to the Company increased tax provision in Fiscal
2003 compared to Fiscal 2002 as well as the previously-mentioned legal costs.

Liquidity and Capital Resources

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

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

Investing Activities. Cash used by investing activities was $2,798,500 for
Fiscal 2003 compared to $244,077 for Fiscal 2002. Advances to affiliates
increased to $1,893,131 in Fiscal 2003 compared to $116,757 in Fiscal 2002. As
described under "Recent Developments," advances to affiliates are expected to
cease in Fiscal 2004. We intend to institute a quarterly $0.01 per share
dividend on our common stock at that time. In Fiscal

2003, we purchased $736,955 of equipment compared to $77,632 in Fiscal 2002.
Increased computer purchases in Fiscal 2003 resulted from the previously
described upgrade to our information technology systems as well as the
establishment of our Quality Assurance and Outbound efforts. We do expect
capital expenditures to increase at this same growth rate in the future.
Expenditures for intellectual property increased to $261,545 in Fiscal 2003
compared to $49,688 in Fiscal 2002. This increase primarily resulted from the
licensing of the YP.Com URL from OnRamp Access, Inc.

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

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

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

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

As previously described, collections on accounts receivables are received
primarily through the billing service aggregators under contract to administer
this billing and collection process. The billing service aggregators generally
do not remit funds until they

are collected. The billing companies maintain holdbacks for refunds and other
uncertainties. Generally, cash is collected and remitted to us over a 90 to 120
day period subsequent to the billing dates. In August 2002, we entered into a
new agreement with its primary billing service provider, PaymentOne, whereby
cash is remitted to us on a sixty day timetable beginning November 2002.

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

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

Morris & Miller, Ltd.

$275,000 on January 30, 2004
$300,000 on February 27, 2004
$500,000 on March 31, 2004
Sufficient funds to pay 3 years interest on April 9, 2004

Mathew and Markson, Ltd.

$50,000 on January 30, 2004
$100,000 on February 27, 2004
$75,000 on March 31, 2004
Sufficient funds to pay 3 years interest on April 9, 2004

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

Certain Risk Factors Affecting Our Business

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

Risks Related to Our Business

WE HAVE A RELATIVELY LIMITED OPERATING HISTORY UPON WHICH INVESTORS CAN EVALUATE
THE LIKELIHOOD OF OUR SUCCESS.

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

- maintain and increase our base of advertisers;

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

- implement and successfully execute our business and marketing
strategy;

- continue to develop and upgrade our technology;

- continually update and improve our service offerings and features;

- provide superior IAP advertiser service;

- respond to industry and competitive developments;

- successfully manage our growth while controlling expenses; and

- attract, retain, and motivate qualified personnel.

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

OUR SUCCESS DEPENDS UPON OUR ABILITY TO ESTABLISH AND MAINTAIN RELATIONSHIPS
WITH OUR ADVERTISERS.

Our ability to generate revenue depends upon our ability to maintain
relationships with our existing advertisers, to attract new advertisers to sign
up for revenue-generating services, and to generate traffic to our advertisers'
websites. We primarily use direct

marketing efforts to attract new advertisers. These direct marketing efforts may
not produce satisfactory results in the future. We attempt to maintain
relationships with our advertisers through IAP advertiser service and delivery
of traffic to their businesses. An inability to either attract additional
advertisers to use our service or to maintain relationships with our advertisers
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.

IF WE DO NOT INTRODUCE NEW OR ENHANCED OFFERINGS TO OUR ADVERTISERS AND USERS,
WE MAY BE UNABLE TO ATTRACT AND RETAIN THOSE ADVERTISERS AND USERS, WHICH WOULD
SIGNIFICANTLY IMPEDE OUR ABILITY TO GENERATE REVENUE.

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

OUR REVENUE MAY DECLINE OVER TIME.

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

OUR QUARTERLY RESULTS OF OPERATIONS COULD FLUCTUATE DUE TO FACTORS OUTSIDE OF
OUR CONTROL, WHICH MAY CAUSE CORRESPONDING FLUCTUATIONS IN THE PRICE OF OUR
SECURITIES.

Our net sales may grow at a slower rate on a quarter-to-quarter basis than
we have experienced in recent periods. Factors that could cause our results of
operations to fluctuate in the future include the following:

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

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

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

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

o changes in our direct marketing efforts,

o IAP advertiser refunds or cancellations, and

o our ability to continue to bill IAP advertisers on their monthly
telephone bills, ACH or credit card rather than through direct
invoicing;

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

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

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

- new product offerings or other actions by our competitors;

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

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

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

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

- a decline in Internet traffic at our website;

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

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

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

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

- announcements by our competitors;

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

- government regulation;

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

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

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

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

OUR ABILITY TO EFFICIENTLY PROCESS NEW ADVERTISER SIGN-UPS AND TO BILL OUR
ADVERTISERS MONTHLY DEPENDS UPON OUR CHECK PROCESSING SERVICE PROVIDERS AND
BILLING AGGREGATORS, RESPECTIVELY.

We currently use three check processing companies to provide us with
advertiser information at the point of sign-up for our Internet Advertising
Package. One of these processors has indicated that it will be outsourcing this
function in the future. Therefore, we have refrained from sending new business
to this check processor. Our ability to gather information to bill our
advertisers at the point of sign-up could be adversely affected if one or more
of these providers experiences a disruption in its operations or ceases to do
business with us.

We also depend upon our billing aggregators to efficiently bill and collect
monies from the Local Exchange Carriers (LEC) relating to the LEC's billing and
collection of our monthly charges from advertisers. We currently have agreements
with two billing aggregators. Any disruption in our billing aggregators' ability
to perform these functions could adversely affect our financial condition and
results of operations.

THE LOSS OF OUR ABILITY TO BILL IAP ADVERTISERS THROUGH LOCAL EXCHANGE CARRIERS
ON THE IAP ADVERTISERS' TELEPHONE BILLS WOULD ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS.

Our business model depends heavily upon our ability to bill advertisers on
their telephone bills through their respective Local Exchange Carriers (LEC).
The existence of the LECs is the result of Federal legislation. In the same
manner, Congress could pass future legislation that obviates the existence of or
the need for the LECs. Additionally, regulatory agencies could limit or prevent
our ability to use the LECs to bill our advertisers. Finally, the introduction
of and advancement of new technologies, such as WiFi technology or other
wireless-related technologies, could render unnecessary the existence of fixed
telecommunication lines, which, accordingly, would again obviate the need for
and access to the LECs. Our inability to use the LECs to bill our advertisers
through their monthly telephone bills would have a material adverse impact on
our results of operations.

WE DEPEND UPON THIRD PARTIES TO PROVIDE CERTAIN SERVICES AND SOFTWARE, AND OUR
BUSINESS MAY SUFFER IF THE RELATIONSHIPS UPON WHICH WE DEPEND FAIL TO PRODUCE
THE EXPECTED BENEFITS OR ARE TERMINATED.

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

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

THE MARKET FOR OUR SERVICES IS UNCERTAIN AND IS STILL EVOLVING.

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

Most potential advertisers have only limited, if any, experience
advertising on the Internet and have not devoted a significant portion of their
advertising expenditures to Internet advertising. Advertisers may find Internet
Yellow Pages advertising to be less effective for meeting their business needs
than traditional methods of Yellow Pages or other advertising and marketing. Our
business, prospects, financial condition or results of operations will be
materially and adversely affected if potential advertisers do not adopt Internet
Yellow Pages as an important component of their advertising expenditures.

WE MAY NOT BE ABLE TO SECURE ADDITIONAL CAPITAL TO EXPAND OUR OPERATIONS.

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

- the pace of expansion of our operations;

- our need to respond to competitive pressures; and

- future acquisitions of complementary products, technologies or
businesses.

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

WE MUST MANAGE OUR GROWTH AND MAINTAIN PROCEDURES AND CONTROLS ON OUR BUSINESS.

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

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

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

WE DEPEND UPON OUR EXECUTIVE OFFICERS AND KEY PERSONNEL.

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

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

OUR BUSINESS IS SUBJECT TO A STRICT REGULATORY ENVIRONMENT.

Existing laws and regulations and any future regulation may have a material
adverse effect on our business. For example, we believe that our direct
marketing programs meet or exceed existing requirements of the United States
Federal Trade Commission (FTC). Any changes to FTC requirements or changes in
our direct or other marketing practices, however, could result in our marketing
practices failing to comply with FTC regulations. As a result, we could be
subject to substantial liability in the future, including fines and criminal
penalties, preclusion from offering certain products or services, and the
prevention or limitation of certain marketing practices.

WE FACE INTENSE COMPETITION, INCLUDING FROM COMPANIES WITH GREATER RESOURCES,
WHICH COULD ADVERSELY AFFECT OUR GROWTH AND COULD LEAD TO DECREASED REVENUES.

Several companies, including Verizon, Yahoo and Microsoft, currently market
Internet Yellow Pages services that directly compete with our services and
products. We

may not compete effectively with existing and potential competitors for several
reasons, including the following:

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

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

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

- some competitors may be able to better adapt to changing market
conditions and IAP advertiser demand; and

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

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

WE MAY FACE RISKS AS WE EXPAND OUR BUSINESS INTO INTERNATIONAL MARKETS.

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

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

- unexpected changes in regulatory requirements;

- potentially adverse tax consequences;

- difficulties in staffing and managing foreign operations;

- changing economic conditions;

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

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

- fluctuations in currency exchange rates.

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

WE MAY BE UNABLE TO PROMOTE AND MAINTAIN OUR BRANDS.

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

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.

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

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

We may decide to initiate litigation in order to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of our proprietary rights. Any such litigation could result in substantial
expense, may reduce our profits, and may not adequately protect our intellectual
property rights. In addition,

we may be exposed to future litigation by third parties based on claims that our
products or services infringe their intellectual property rights. Any such claim
or litigation against us, whether or not successful, could result in substantial
costs and harm our reputation. In addition, such claims or litigation could
force us to do one or more of the following:

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

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

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

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

CURRENT CAPACITY CONSTRAINTS MAY REQUIRE US TO EXPAND OUR INFRASTRUCTURE AND IAP
ADVERTISER SUPPORT CAPABILITIES.

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

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

Risks Related to the Internet

WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, INTERNET YELLOW PAGES SERVICES, AND
IAP ADVERTISER DEMANDS CONTINUE TO EVOLVE.

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

- rapid technological change;

- changes in advertiser and user requirements and preferences;

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

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

In order to compete successfully in the future, we must

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

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

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

OUR FUTURE SUCCESS WILL DEPEND ON CONTINUED GROWTH IN THE USE OF THE INTERNET.

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

WE WILL BE REQUIRED TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN THE INTERNET
INDUSTRY.

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

REGULATION OF THE INTERNET MAY ADVERSELY AFFECT OUR BUSINESS.

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

WE MAY NOT BE ABLE TO OBTAIN INTERNET DOMAIN NAMES THAT WE WOULD LIKE TO HAVE.

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

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

OUR BUSINESS COULD BE NEGATIVELY IMPACTED IF THE SECURITY OF THE INTERNET
BECOMES COMPROMISED.

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

OUR TECHNICAL SYSTEMS COULD BE VULNERABLE TO ONLINE SECURITY RISKS, SERVICE
INTERRUPTIONS OR DAMAGE TO OUR SYSTEMS.

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

IF WE ARE SUED FOR CONTENT DISTRIBUTED THROUGH, OR LINKED TO BY, OUR WEBSITE OR
THOSE OF OUR ADVERTISERS, WE MAY BE REQUIRED TO SPEND SUBSTANTIAL RESOURCES TO
DEFEND OURSELVES AND COULD BE REQUIRED TO PAY MONETARY DAMAGES.

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

Risks Related to Our Securities

STOCK PRICES OF TECHNOLOGY COMPANIES HAVE DECLINED PRECIPITOUSLY AT TIMES IN THE
PAST AND THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.

The trading price of our common stock has risen significantly over the past
twelve months and could continue to be volatile in response to factors including
the following, many of which are beyond our control:

- decreased demand in the Internet services sector;

- variations in our operating results;

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

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

- our failure to meet analysts' expectations;

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

- conditions or trends in the technology industry;

- additions or departures of key personnel; and

- future sales of our common stock.

Domestic and international stock markets often experience significant price
and volume fluctuations that are unrelated to the operating performance of
companies with securities trading in those markets. These fluctuations, as well
as political events,

terrorist attacks, threatened or actual war, and general economic conditions
unrelated to our performance, may adversely affect the price of our common
stock. In the past, securities holders of other companies often have initiated
securities class action litigation against those companies following periods of
volatility in the market price of those companies' securities. If the market
price of our stock fluctuates and our stockholders initiate this type of
litigation, we could incur substantial costs and experience a diversion of our
management's attention and resources, regardless of the outcome. This could
materially and adversely affect our business, prospects, financial condition,
and results of operations.

CERTAIN PROVISIONS OF NEVADA LAW AND IN OUR CHARTER MAY PREVENT OR DELAY A
CHANGE OF CONTROL OF OUR COMPANY.

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

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

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

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

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

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

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

OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES AS PROMULGATED UNDER
THE EXCHANGE ACT.

In the event that no exclusion from the definition of "penny stock" under
the Exchange Act is available, then any broker engaging in a transaction in our
common

stock will be required to provide its IAP advertisers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its sales person in the transaction, and
monthly account statements showing the market values of our securities held in
the IAP advertiser's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the IAP advertiser's confirmation of sale. Certain brokers are less
willing to engage in transactions involving "penny stocks" as a result of the
additional disclosure requirements described above, which may make it more
difficult for holders of our common stock to dispose of their shares.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

YP.NET, INC.

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INDEPENDENT AUDITORS' REPORT 64

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheet at September 30, 2003 65

Consolidated Statements of Operations for the years ended 66
September 30, 2003 and September 30, 2002

Consolidated Statements of Stockholders' Equity for the 67
years ended September 30, 2003 and September 30, 2002

Consolidated Statements of Cash Flows for the 69
years ended September 30, 2003 and September 30, 2002

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Stockholders and Board of Directors of YP.Net, Inc.:

We have audited the accompanying consolidated balance sheet of YP.Net, Inc. as
of September 30, 2003 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended September 30, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in The United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of YP.Net,
Inc. as of September 30, 2003, and the consolidated results of its operations
and cash flows for each of the two years in the period ended September 30, 2003,
in conformity with accounting principles generally accepted United States of
America.

As discussed in Note 1 to the financial statements, the Company's consolidated
statement of operations for the year ended September 30, 2002, had previously
reported net revenues of $13,232,743 which has been decreased by $614,617 due to
reclassifications of certain customer refunds of $313,716 previously reported in
cost of services and $300,901 of revenue generated for services performed for an
affiliate being reclassified as other income. These changes had no effect on
net income for the year ended September 30, 2002. It was also noted that
3,081,500 shares of issued common stock had been improperly included in the
outstanding shares. These shares were actually treasury shares and therefore
should be excluded form the number of shares outstanding. The Company corrected
the error by reclassifying the par value of those shares of $3,082 from the
common stock account to the paid in capital account. This matter had the effect
of overstating the weighted average shares outstanding and the basic and diluted
earnings per share for the year ended September 30, 2002 was therefore increased
from $0.08 to $0.09. These matters were discovered subsequent to the issuance
of the financial statements for the year ended September 30, 2002.

/s/ EPSTEIN, WEBER & CONOVER, P.L.C.
Scottsdale, Arizona
December 5, 2003

YP.NET, INC.

CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
--------------------------------------------------------------------------

ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 2,378,848
Accounts receivable, net 7,328,624
Prepaid expenses and other current assets 154,276
Deferred tax asset 1,400,637
------------
Total current assets 11,262,385

ACCOUNTS RECEIVABLE - long term portion 1,123,505
CUSTOMER ACQUISITION COSTS,
net of accumulated amortization of $2,913,776 3,243,241
PROPERTY AND EQUIPMENT, net 731,142
DEPOSITS AND OTHER ASSETS 148,310
INTELLECTUAL PROPERTY- URL, net of accumulated
amortization of $1,868,283 3,512,952
ADVANCES TO AFFILIATES 2,126,204
------------
TOTAL ASSETS $22,147,739
============

LIABILITIES AND STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable $ 428,423
Accrued liabilities 1,413,245
Notes payable - current portion 115,868
Income taxes payable 2,689,312
------------
Total current liabilities 4,646,848

DEFERRED INCOME TAXES 27,864
------------

Total liabilities 4,674,712
------------

STOCKHOLDERS' EQUITY:
Series E convertible preferred stock, $.001 par value, 200,000 shares
authorized, 131,840 issued and outstanding, liquidation preference $39,552 11,206
Common stock, $.001 par value, 100,000,000 shares authorized,
55,265,136 issued, 48,560,802 outstanding 48,561
Paid in capital 9,057,187
Deferred stock compensation (3,840,843)
Treasury stock at cost (690,306)
Retained earnings 12,887,222
------------
Total stockholders' equity 17,473,027
------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,147,739
============

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

YP.NET, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
-------------------------------------------------------------

2003 2002
------------ ------------

NET REVENUES $30,767,444 $12,618,126
------------ ------------

OPERATING EXPENSES:
Cost of services 8,357,768 3,497,678
General and administrative expenses 8,657,690 4,754,665
Sales and marketing expenses 3,868,643 963,868
Depreciation and amortization 660,475 581,290
------------ ------------
Total operating expenses 21,544,576 9,797,501
------------ ------------

OPERATING INCOME 9,222,868 2,820,625
------------ ------------

OTHER (INCOME) AND EXPENSES
Interest expense and other financing costs 19,728 92,341
Interest income (108,995) (17,682)
Other expense/(income) (648,908) (704,523)
------------ ------------

Total other income (738,175) (629,864)
------------ ------------

INCOME BEFORE INCOME TAXES 9,961,043 3,450,489

INCOME TAX PROVISION (BENEFIT) 2,037,152 (245,974)
------------ ------------

NET INCOME $ 7,923,891 $ 3,696,463
============ ============

NET INCOME PER SHARE:
Basic $ 0.18 $ 0.09
============ ============

Diluted $ 0.18 $ 0.09
============ ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 45,090,877 41,474,180
============ ============

Diluted 45,090,877 41,474,180
============ ============

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

YP.NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------

COMMON STOCK PREFERRED E TREASURY PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL EARNINGS
------------- -------- ----------- ------- ---------- ----------- -----------

BALANCE OCTOBER 1, 2001 40,732,180 $40,732 - $ - $(171,422) $4,559,888 $1,269,340

Common stock issued for
services 100,000 100 8,900

Common stock received under legal
settlements and placed in treasury (250,000) (250) (267,425)

Series E preferred stock issued
in exchange for common shares (131,840) (132) 131,840 11,206 (11,074)

Series E preferred stock dividends (494)

Net income 3,696,463

------------- -------- ----------- ------- ---------- ----------- -----------
BALANCE
SEPTEMBER 30, 2002 40,450,340 $40,450 131,840 $11,206 $(171,422) $4,290,289 $4,965,309
============= ======== =========== ======= ========== =========== ===========

TOTAL
-----------

BALANCE OCTOBER 1, 2001 $5,698,538

Common stock issued for
services 9,000

Common stock received under legal
settlements and placed in treasury (267,675)

Series E preferred stock issued
in exchange for common shares -

Series E preferred stock dividends (494)

Net income 3,696,463

-----------
BALANCE
SEPTEMBER 30, 2002 $9,135,832
===========

(CONTINUED)

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

YP.NET, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
-------------------------------------------------------------------------------------------------

COMMON STOCK PREFERRED E TREASURY PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL COMPENSATION
------------- -------- ----------- ------- ---------- ---------- --------------

BALANCE OCTOBER 1, 2002 40,450,340 $40,450 131,840 $11,206 $(171,422) $4,290,289 $ -

Common stock issued for
services 7,005,678 7,006 712,678

Common stock received under legal
settlements and placed in treasury (468,216) (468) (473,884) 468

Common stock issued for URL 100,000 100 59,900

Purchase of treasury stock (500,000) (500) (45,000) 500

Series E preferred stock dividends

Common stock issued in restricted
stock plan 1,973,000 1,973 3,993,352 (3,995,325)

Amortization of deferred stock
compensation 154,482

Net income

------------- -------- ----------- ------- ---------- ---------- --------------
BALANCE
SEPTEMBER 30, 2003 48,560,802 $48,561 131,840 $11,206 $(690,306) $9,057,187 $ (3,840,843)
============= ======== =========== ======= ========== ========== ==============

RETAINED
EARNINGS TOTAL
------------ ------------

BALANCE OCTOBER 1, 2002 $ 4,965,309 $ 9,135,832

Common stock issued for
services 719,684

Common stock received under legal
settlements and placed in treasury (473,884)

Common stock issued for URL 60,000

Purchase of treasury stock (45,000)

Series E preferred stock dividends (1,978) (1,978)

Common stock issued in restricted
stock plan -

Amortization of deferred stock
compensation 154,482

Net income 7,923,891 7,923,891

BALANCE
SEPTEMBER 30, 2003 $12,887,222 $17,473,027
============ ============

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

YP.NET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
-------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
------------ ------------

Net income $ 7,923,891 $ 3,696,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 660,475 581,290
Amortization of deferred stock compensation 154,482
Issuance of common stock as compensation for services 719,684 9,000
Gain on settlement of debt (45,362) -
Non-cash income recognized on return of common stock related
to legal settlements (473,884) (267,675)
Deferred income taxes (1,465,915) 490,101
Loss on disposal of equipment 6,932
Provision for uncollectible accounts 1,688,058 1,375,226
Changes in assets and liabilities:
Accounts receivable (6,064,894) (2,580,410)
Customer acquisition costs (1,825,014) (1,224,983)
Prepaid and other current assets (183,196) (44,042)
Deposits and other assets 2,415 (127,438)
Accounts payable 233,027 (119,511)
Accrued liabilities 1,228,470 106,069
Income taxes payable 2,203,069 (736,075)
------------ ------------
Net cash provided by operating activities 4,762,238 1,158,015
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made to affiliate (1,800,000) (116,757)
Expenditures for intellectual property (261,545) (49,688)
Purchases of equipment (736,955) (77,632)
------------ ------------
Net cash used for investing activities (2,798,500) (244,077)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 378,169 -
Principal repayments on notes payable (685,167) (830,677)
Purchase of treasury stock (45,000) -
------------ ------------
Net cash used for financing activities (351,998) (830,677)
------------ ------------

INCREASE IN CASH AND CASH EQUIVALENTS 1,611,740 83,261

CASH AND CASH EQUIVALENTS, beginning of year 767,108 683,847
------------ ------------

CASH AND CASH EQUIVALENTS, end of year $ 2,378,848 $ 767,108
============ ============

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

YP.NET, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS, (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2001
-------------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION:

2003 2002
---------- -------

Interest Paid $ 11,258 $99,541
========== =======

Income taxes paid $1,300,000 $ -0-
========== =======

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

2003 2002
-------- -------

Common stock issued for services $719,684 $ 9,000
======== =======

Common stock issued to purchase intellectual property $ 60,000 $ -0-
======== =======

Common stock exchanged for Series E Convertible Preferred Stock $ - 0 - $11,206
======== =======

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

YP.NET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002
-------------------------------------------------------

1. ORGANIZATION AND BASIS OF PRESENTATION

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

Telco was formed in April 1998, to provide advertising and directory
listings for businesses on its Internet website in a "Yellow Page" format.
-----------
Telco provides those services to its subscribers for a monthly fee. These
services are provided primarily to businesses throughout the United States.
Telco became a wholly owned subsidiary of YP.Net, Inc. after the June 16,
1999 acquisition.

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

The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and include the accounts
and results of operations of the Company and Telco, its wholly owned
subsidiary, for the years ended September 30, 2003 and September 30, 2002.
Certain reclassifications have been made to the September 30, 2002 balances
to conform to the 2003 presentation. These reclassifications to the 2002
financial statements include:

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

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

- It was discovered in the year ended September 30, 2003, that 3,081,500
shares of issued common stock had been improperly included in the
outstanding shares. These shares were actually treasury shares and
therefore should be excluded from the number of shares outstanding.
The Company corrected the error by reclassifying the par value of
those shares of $3,082 from the common stock account to the paid in
capital account. The incorrect number of treasury shares also had the
effect of incorrectly reporting the weighted average shares
outstanding for purposes of the earnings per share calculation. The
weighted average shares outstanding was previously reported as
43,745,045 and has been corrected to 41,474,180. The effect of the
corrected weighted average shares outstanding on the basic and diluted
earnings per share for the year ended September 30, 2002 was an
increase from $0.08 to $0.09.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents: This includes all short-term highly liquid
-----------------------------
investments that are readily convertible to known amounts of cash and have
original maturities of three months or less. At times cash deposits may
exceed government insured limits. At September 30, 2003, cash deposits
exceeded those insured limits by $2,255,000.

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

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

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

Property and Equipment: Property and equipment is stated at cost less
-------------------------
accumulated depreciation. Depreciation is recorded on a straight-line basis
over the estimated useful lives of the assets ranging from 3 to 5 years.
Depreciation expense was $273,340 and $178,058 for the years ended
September 30, 2003 and 2002 respectively.

Revenue Recognition: The Company's revenue is generated by customer
--------------------
subscriptions of directory and advertising services. Revenue is billed and
recognized monthly for services subscribed in that specific month. The
Company utilizes outside billing companies to transmit billing data, much
of which is forwarded to Local Exchange Carriers ("LEC's") that provide
local telephone service. Monthly subscription fees are generally included
on the telephone bills of the customers. The Company recognizes revenue
based on net billings accepted by the LEC's. Due to the periods of time for
which adjustments may be reported by the LEC's and the billing companies,
the Company estimates and accrues for dilution and fees reported subsequent
to year-end for initial billings related to services provided for periods
within the fiscal year. Customer refunds are recorded as an offset to gross
revenue.

Revenue for billings to certain customers whom are billed directly by the
Company and not through the LEC's, is recognized based on estimated future
collections. The Company continuously reviews this estimate for
reasonableness based on its collection experience.

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

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

Financial Instruments: Financial instruments consist primarily of cash,
---------------------
accounts receivable, advances to affiliates and obligations under accounts
payable, accrued expenses and notes payable. The carrying amounts of cash,
accounts receivable, accounts payable, accrued expenses and notes payable
approximate fair value because of the short maturity

of those instruments. The carrying amount of the advances to affiliates
approximates fair value because the Company charges what it believes are
market rate interest rates for comparable credit risk instruments. The
Company has applied certain assumptions in estimating these fair values.
The use of different assumptions or methodologies may have a material
effect on the estimates of fair values.

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

Significant estimates made in connection with the accompanying financial
statements include the estimate of dilution and fees associated with LEC
billings and the estimated reserve for doubtful accounts receivable.

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

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

The Company accounts for stock awards issued to nonemployees in accordance
with the provisions of SFAS 123 and Emerging Issues Task Force ("EITF")
Issue No. 96-18 Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services. Under SFAS 123 and EITF 96-18, stock awards to nonemployees are
accounted for at their fair value as determined under Black-Scholes option
pricing model.

Impairment of Long-lived Assets: The Company assesses long-lived assets for
----------------------------------
impairment in accordance with the provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS 121 requires that the Company assess the value of a
long-lived asset whenever there is an indication that its carrying amount
may not be recoverable. Recoverability of the asset is determined by
comparing the forecasted undiscounted cash flows generated by said asset to
its carrying value. The amount of impairment loss, if any, is measured as
the difference between the net book value of the asset and its estimated
fair value.

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

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

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

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31,

2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. SFAS No. 150 requires the
classification as a liability of any financial instruments with a mandatory
redemption feature, an obligation to repurchase equity shares, or a
conditional obligation based on the issuance of a variable number of its
equity shares. The Company does not have any financial instruments with a
mandatory redemption feature. The Company believes the adoption of SFAS No.
150 will not have a material effect on the Company's financial statements.

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

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

3. ACCOUNTS RECEIVABLE

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

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

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

Subscription receivables that are directly billed by the Company are valued
and reported at the estimated future collection amount. Determining the
expected collections requires an estimation of both uncollectible accounts
and refunds. The net subscriptions receivable at September 30, 2003 was
$214,994.

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

Current Long-Term Total
------------ ----------- ------------

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

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

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

Holdback reserves of Local Exchange Carriers $2,221,441

Reserves held by active third party billing aggregators 757,673

Reserves held by inactive third party billing aggregator 154,037

Reserve for refunds 250,000
----------
$3,383,151
==========

4. INTELLECTUAL PROPERTY

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

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

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

The URL is recorded at its cost net of accumulated amortization. Management
believes that the Company's business is dependent on its ability to utilize
this URL given the recognition of the Yellow page term. Also, its current
-----------
customer base relies on the recognition of this term and URL as a basis for
maintaining the subscriptions to the Company's service. Management believes
that the current revenue and cash flow generated through use of
Yellow-page.net supports the carrying of the asset. The Company
---------------
periodically analyzes the carrying value of this asset to determine if
impairment has

occurred. No such impairments were identified during the year ended
September 30, 2003. The URL is amortized on an accelerated basis over the
twenty-year term of the licensing agreement. Amortization expense on the
URL was $387,135 and $403,232 for the years ended September 30, 2003 and
2002 respectively.

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

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

Years ended September 30,
2004 $ 431,022
2005 398,528
2006 343,986
2007 236,212
2008 213,035
Thereafter 1,890,169
----------

Total $3,512,952
==========

5. PROPERTY AND EQUIPMENT

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

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

Property and equipment, net $ 731,142
===========

6. NOTES PAYABLE AND LINE OF CREDIT

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

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

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

7. PROVISION FOR INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

During the years ended September 30, 2003 and 2002, the Company structured
certain transactions related to its merger with Telco that allowed the
Company to utilize net operating losses that were previously believed to be
unavailable or limited under the change of control rules of Internal
Revenue Code 382. The deferred income tax asset of $1,471,000 related to
these net operating losses recorded at September 30, 2001, was fully offset
by a valuation allowance. The Company also amended prior year tax returns
reflecting a higher net operating loss carryforward that had initially been
estimated. The additional net operating loss carryforwards previously not
recognized resulted in an income tax benefit of $979,000 that was utilized
to offset some of the income tax provision for the year ended September 30,
2003. Additionally, as a result of these changes and the elimination of the
valuation allowance an income tax benefit of $1,614,716 was recognized for
the year ended September 30, 2002. At September 30, 2003 the Company had a
federal net operating loss carryforward of $2,880,000 and no state net
operating losses. Those operating loss carryforwards expire in 2019 and
2020.

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

2003 2002
------------ ----------

Current Provision $ 3,503,067 $ 486,243
Deferred (Beefit) Provision (1,465,915) (732,217)
------------------------
Net income tax provision $ 2,037,152 $(245,974)
========================

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

2003 2002
------------ ------------

Federal statutory rates $ 3,387,140 34% $ 1,173,166 34%
State income taxes 119,546 1% 241,534 7%
Utilization of valuation allowance - - (1,471,141) (43)%
Change in estimate of NOL due to
changes in structuring and state
income tax rates used (1,465,381) (15)% (143,575) (4)%
Other (4,153) - (45,958) (1)%
----------------------------------------
Effective rate $ 2,037,152 20% $ (245,974) (7)%
========================================

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

Deferred Income Tax Assets:
Book/tax differences in accounts receivable $1,184,103
Deferred compensation 372,532
Book/tax differences in intangible assets 72,140
Net operating loss carryforward 979,138
----------
Total deferred income tax asset 2,607,913
----------

Deferred Income Tax Liabilities:
Book/tax differences in depreciation 10,006
Book/tax differences in customer acquisition costs 1,135,134
----------
Total deferred income tax liability 1,145,140
----------

Net income tax asset $1,462,773
==========

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

During the year ended September 30, 2002, the valuation allowance was
reduced by $1,471,000.

8. LEASES

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

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

2004 $ 427,597
2005 383,679
2006 292,125
----- ----------

Total $1,103,401
----- ==========

9. STOCKHOLDERS' EQUITY

Common Stock Issued for Services
--------------------------------

The Company has historically granted shares of its common stock to
officers, directors and consultants as payment for services rendered. The
value of those shares was determined based on the trading value of the
stock at the dates on which the agreements were made for the services.
During the year ended September 30, 2003, the Company issued 6,300,000
shares of common stock to officers and directors, or entities controlled by
those individuals, valued at $478,750. Additionally, shares were granted
under the Company's Restricted Stock Plan (see Note 14).

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

Common Shares Received and Retired Under Legal Settlements
----------------------------------------------------------

The Company made claims against numerous parties for return of common
shares issued to consultants by former management. Some of these claims
resulted in litigation. During the years ended September 30, 2003 and 2002,
the Company settled with several of those parties resulting in 468,216 and
250,000 shares in 2003 and 2002, respectively, of

the Company's common stock being returned and placed in treasury. These
transactions have been recognized as other income of $473,884 and $267,675
in the accompanying statements of operations for the years ended September
30, 2003 and 2002, respectively. The rescissions of the underlying
consulting agreements and return of the common stock were recorded at the
value of the original transactions that were rescinded, that is, the
recorded expense for the original issuance of the shares was, in effect,
reversed in the years ended September 30, 2003 and 2002. The majority of
the shares were originally issued as consideration under consulting
agreements entered into in the years ended September 30, 1999 and 2000.

Common Stock Issued for URL
---------------------------

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

Series E Convertible Preferred Stock
------------------------------------

During the year ended September 30, 2002, the Company created a new series
of capital stock, the Series E Convertible Preferred Stock. The Company
authorized 200,000, $0.001 par value shares. The shares carry a $0.30 per
share liquidation preference and accrue dividends at the rate of 5% per
annum on the liquidation preference per share, payable quarterly from
legally available funds. If such funds are not available, dividends shall
continue to accumulate until they can be paid from legally available funds.
Holders of the preferred shares shall be entitled, after two years from
issuance, to convert them into common shares on a one-to-one basis together
with payment of $0.45 per converted share.

During the year ended September 30, 2002, pursuant to an existing tender
offer, holders of 131,840 shares of the Company's common stock exchanged
said shares for an equal number of the Series E Convertible Preferred
shares, at the then $0.085 market value of the common stock. As of
September 30, 2003, the liquidation preference value of the outstanding
Series E Convertible Preferred Stock was $39,552, and dividends totaling
$2,472 had been accrued associated with said shares.

Treasury Stock
--------------

The Company typically retains the shares acquired in settlements and
rescissions of the consulting agreements discussed above as treasury stock.
During the year ended September 30, 2003, the Company acquired 468,216
shares of its common stock in rescissions of such agreements. Those shares
are recorded at the value at which they were originally issued. Also,
during the year ended September 30, 2003, the Company acquired 500,000
shares of its common stock from a former consultant to the Company for
$45,000, which was the approximate trading value of those shares at the
time the settlement was reached. At September 30, 2003, there were
6,704,334 shares of stock held in treasury.

10. COMMITMENTS AND CONTINGENCIES

Telco Billing
-------------

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

The "Put" feature has renegotiated and retired. As part of the renegotiated
settlement, the Company provided a credit facility of up to $20,000,000 to
the former Telco shareholders, collateralized by the stock held by these
shareholders, with interest at least 0.25 points higher than the Company's
average cost of borrowing. Additional covenants warrant

that no more that $1,000,000 can be advanced at any point in time and no
advances can be made in excess with out allowing at least 30 days operating
cash reserves or if the Company is in an uncured default with any of its
lenders. At September 30, 2003, the Company had advanced $2,126,204 under
this agreement. The former Telco shareholders have been making interest
payments on the advances but, as allowed under the agreement, have not made
any principal repayments.

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

Billing Service Agreements
--------------------------

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

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

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

Line of Credit Facilities
-------------------------

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

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

Other
-----

The Company's Board of Directors has committed the Company to pay for the
costs of defending a civil action filed against its CEO and Chairman. The
action involves a business that the CEO was formerly involved in. The
Company and at least one officer have received subpoenas in connection with
this matter and the Board believes that it is important to help resolve
this matter as soon as possible. The Board action includes the payment of
legal and other fees for any other officers and directors that may become
involved in this civil action. Through September 30, 2003, the Company has
paid $732,500 on behalf of its CEO relative to this matter. This amount is
presented as compensation expense within general and administrative
expenses in the accompanying statement of operations for the year ended
September 30, 2003.

The Company believes that all civil actions against the CEO related to this
matter have been dismissed subsequent to September 30, 2003. However,
additional legal costs will be incurred to address all matters in
finalizing this issue and, at this time, the Company cannot estimate what
additional costs may be incurred to continue covering the costs related to
this matter, but all such costs shall be deemed to be additional
compensation to the CEO. There can be no assurance that the Company may not
be named a defendant in this action in the future.

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

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

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

11. NET INCOME PER SHARE

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

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

2003 2002
------------ ---------
Per Per
Income Shares Share Income Shares share
----------- ------------ ------- ----------- --------- ---------

Net Income $7,923,891 $ 3,696,463
Preferred stock dividends (1,978) (494)
----------- ------------
Income available to common
Stockholders $7,921,913 $ 3,695,969
=========== ============
BASIC EARNINGS PER SHARE:

Income available to common stockholders $7,921,913 45,090,877 $ 0.18 $3,695,969 41,474,180 $0.09
=========== ======= ===========

Effect of dilutive securities N/A N/A N/A

DILUTED EARNINGS PER SHARE $7,921,913 45,090,877 $ 0.18 $3,695,969 41,474,180 $0.09
=========== ======= =========== =====

12. RELATED PARTY TRANSACTIONS

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

Directors & Officers
----------------------

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

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

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

Sunbelt Financial Concepts, Inc.
--------------------------------

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

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

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

Advertising Management Specialists, Inc.
----------------------------------------

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

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

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

Advanced Internet Marketing, Inc.
---------------------------------

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

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

MAR & Associates
------------------

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

Other
-----

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

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

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

Simple.Net, Inc. ("SN")
-----------------------

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

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

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

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

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

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

13. CONCENTRATION OF CREDIT RISK

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

Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily trade accounts receivable. The
trade accounts receivable are due primarily from business customers over
widespread geographical locations within the LEC billing areas across the
United States. The Company historically has experienced significant
dilution and customer credits due to billing difficulties and uncollectible
trade accounts receivable. The Company estimates and provides an allowance
for uncollectible accounts receivable. The handling and processing of cash
receipts pertaining to trade accounts receivable is maintained primarily by
two third party billing companies. The Company is dependent upon these
billing companies for collection of its accounts receivable. As discussed
in Note 3, the net receivable due from a single billing services provider
at September 30, 2003 was $6,457,998, net of an allowance for doubtful
accounts of $2,269,027. The net receivable from that billing services
provider at September 30, 2003, represents approximately 76% of the
Company's total net accounts receivable at September 30, 2003.

14. STOCK BASED COMPENSATION

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

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

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

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

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

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

2003 2002
-------- --------
Weighted Weighted
Average Average
Exercise Exercise
Price Price
----- -----

Warrants outstanding at beginning of year 500,000 $2.12 500,000 $2.12
Granted -0- -0-
Expired -0- -0-
Exercised -0- -0-
-------------------------------
Outstanding at September 30, 500,000 $2.12 500,000 $2.12
===============================

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

Dividend yield None
Volatility 0.491
Risk free interest rate 4.18%
Expected asset life 2.5 years

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

15. EMPLOYEE BENEFIT PLAN

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

16. OTHER INCOME

Other income for the years ended September 30, 2003 and 2002, includes
gains of $473,884 and $267,000, respectively related to the rescission of
consulting contracts. Additionally, other income for the year ended
September 30, 2003 includes $618,000 of income earned from an affiliate for
technical services provided to that affiliate. The total income is reduced
by expenses incurred in other legal settlements. Also, in the year ended
September 30, 2002, is a gain of $130,000, net of legal costs, resulting
from the settlement of a dispute with one of the Company's former billing
companies.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

The Company's Board of Directors currently consists of five members with each
member serving for a one year term. In connection with an Annual Meeting of
Stockholders scheduled for April 2, 2004, we are asking our stockholders to
approve a proposal that would create a classified board consisting of three
different classes of directors serving for staggered terms. There are no
arrangements or understandings between any of the directors or any other persons
pursuant to which any of the directors have been selected as directors, other
than as described below. There are no "family relationships" among the
directors, as that term is defined by the Securities and Exchange Commission
("SEC"). Set forth below is our current Board of Directors, including their age
and positions with the Company, each as of September 30, 2003, as well as the
anticipated class in which they would serve and the length of their term should
they be elected.

NAME OF NOMINEE CLASS TERM AGE TITLE
-------------------- ----- ---- --- -----

Angelo Tullo I 2007 47 Chairman of the Board of Directors,
Chief Executive Officer and President
DeVal Johnson I 2007 37 Director and Secretary
Peter Bergmann II 2006 54 Director
Daniel L. Coury, Sr. II 2006 49 Director
Gregory B. Crane III 2005 39 Director

ANGELO TULLO. Mr. Tullo has served as the Chairman of the Board of YP.Net since
February 2000. Mr. Tullo was hired as Chief Executive Officer and President on
September 10, 2000. Mr. Tullo has been the president of Sunbelt Financial
Concepts, Inc., an investment banking and consulting firm in Scottsdale,
Arizona, since December 14, 1999. From January 1997 to December 1999, Mr. Tullo
was President and a director of American Business Funding Corp., which was in
the business of accounts receivable factoring for small and medium sized
businesses. For over twenty years, Mr. Tullo has been active as a business
consultant. Mr. Tullo has actively worked in the areas of commercial financing
and factoring for the past ten years. He has owned and operated factoring
companies, leasing companies, consulting companies, wholesale companies,
professional employment organizations, insurance agencies, heating and air
conditioning contractors, retail oil companies, real estate companies and
restaurants. He is a former member of the CEO Club in New York, and currently is
a member and honorary Mesa Chairman of the Presidential Business Roundtable
Committee and the Turnaround Management Association.

Mr. Tullo has been involved with a number of corporate turnaround situations in
which the companies he was associated with faced difficult financial
circumstances. He has been successful with most of these difficult situations.
However, in February 2000, after Mr. Tullo had departed, American Business
Funding Corp. filed for protection under Chapter 11 of the Bankruptcy Code in
the Federal District Court of Arizona. Mr. Tullo had previously been a director,
officer and shareholder of American Business Funding Corp. prior to the time of
its bankruptcy filing. American Business Funding has successfully emerged from
Chapter 11 bankruptcy with an approved plan that fully repays all creditors.

DEVAL JOHNSON. Mr. Johnson has served as a director since October 1999.
Currently, Mr. Johnson serves as Corporate Secretary and Vice President and has
served in those capacities since January 2002 and June 2002, respectively. Prior
to the acquisition of Telco Billing, Inc., our wholly owned subsidiary, Mr.
Johnson was part of the team that created what is now the YP.Com concept. Mr.
Johnson started with Telco in 1997. When Telco

Billing was acquired in June 1999, Mr. Johnson left to create Simple.Net, an
Internet service provider. In October 1999, Mr. Johnson was asked to return to
serve as a Director of the Company, whereupon he was instrumental in refocusing
the Company on its newly acquired business, which resulted in the corporate name
change to YP.Net, Inc. Since that time, Mr. Johnson has been the art director
responsible for the design of the in-house sales presentations, creation of the
corporate logo(s) and image for YP.Net and directs the team that creates and
manages our web presence. In 2001, Mr. Johnson consolidated his other business
interests, GraffitiWorx, a graphic design firm and SiteForce, a web site design
firm, into Advanced Internet Marketing, Inc. to provide design and marketing
services to a variety of companies. Mr. Johnson continues to offer these
services to the Company. Prior to 1997, Mr. Johnson created the PrintPro
franchise concept for Design Concept Printing & Signs, Inc. and headed up their
graphic design department. Mr. Johnson is actively involved with web site
promotion, interactive design, Internet advertising and public relations. Mr.
Johnson continues his business Simple.Net where he serves as an officer and
director.

GREGORY B. CRANE. Mr. Crane has been a director of YP.Net since February 2000.
Since September 2003 he had served as Chief Operating Officer of Telco Billing,
our wholly owned subsidiary and the entity out of which we conduct most of our
operations. Mr. Crane served as the Company's Director of Operations from
February 2000 to September 2000. Mr. Crane has served as President of
Advertising Management and Consulting Services, Inc. ("AMCS") since January 29,
2001. AMCS provides marketing and administrative services, as well as personnel,
to the Company. From mid-1997 to December 2002, Mr. Crane served as a marketing
consultant to Business Executive Services, Inc. ("BESI"), a direct mail
management and processing company. From September 1998 to June 1999, Mr. Crane
was the General Manager of Telco Billing. Mr. Crane has owned and operated
several businesses, including residential and commercial builders, multi-state
mail order, and document-preparation companies, and also was the creator of the
Yellow-Page.Net concept. Mr. Crane is a former member of the Young
Entrepreneur's Organization.

In connection with a former business of Mr. Crane, State Recording Services,
Inc., which provided homestead declaration document preparation and filing
services, Mr. Crane and that business were subject to injunctive actions brought
by the state of Florida as a result of complaints relating to the presentation
of solicitation mailers. Mr. Crane voluntarily entered into a consent order with
the State of Florida that required him to supply a copy of the mailer to be
printed within 14 days prior to its mailing, as well as the payment of civil
penalties, restitution, and attorneys' fees if he were to violate the order in
the future. The order was violated due to an error in type size made by a
printing company hired by Mr. Crane's business. The printing company has
admitted its responsibility for this error. Despite the printing company's
admission, Mr. Crane was subject to a judgment, dated February 1998, in the
amount of approximately $1.4 million, plus accrued interest. However, because of
the printing company's admission, the State of Florida took no action on this
matter, which was finally vacated in June 2003.

Because Mr. Crane had been an employee of Telco Billing, Inc. prior to its
acquisition by the Company, Mr. Crane was named in an action filed by the United
States Federal Trade Commission ("FTC") against the Company in June 2000
concerning actions taken by prior management of the Company. None of the
Company's current management was either present for or involved with the actions
that were the basis for the FTC's complaint. The actions of the prior management
involved the presentation of direct mail solicitations. Mr. Crane has been
included in the Stipulated Preliminary Order entered into by the FTC and the
Company and approved by the FTC. The Stipulated Final Judgment and Order for
Permanent Injunction and Other Equitable Relief by and between the FTC, Mr.
Crane, Telco Billing, the Company and others (the "Order") places certain
restrictions on the way mail solicitations will appear. The U.S. District Court
has approved the Order and the matter is closed with no findings of wrong doing
on the part of Mr. Crane, the Company, or its officers and directors.

DANIEL L. COURY, SR. Mr. Coury has served as a director of YP.Net since February
2000. For the last twelve years, Mr. Coury has served as President and Chairman
of Mesa Cold Storage, Ltd., which owns and operates the largest cold storage
facilities in Arizona. Between 1990 and the present, Mr. Coury has developed an
additional 4.6

million cubic feet of modern, state of the art cold storage facilities in Mesa
and Tolleson, Arizona. Before Mr. Coury purchased Mesa Cold Storage, he had
experience in international trade, real estate development, real estate
exchanges and serving as a consultant to the family businesses, which include
five General Motors dealerships, numerous commercial and residential
developments and mortuary services.

PETER BERGMANN. Mr. Bergmann has served as a director of the Company since May
2002. Since January 1999, Mr. Bergmann has served as the President of Perfect
Timing Media, Inc., a television development and production company, which he
founded. From 1994 to 1999, Mr. Bergmann was a member of the faculty at
Fairleigh Dickinson University, where he inaugurated the electronic Filmmaking
and Digital Video Design program, which is a distinctive program in video and
computer-generated graphics technologies offering students an opportunity to
study commerce and art. In 1988, Mr. Bergmann joined Major Arts, Inc., a
division of Paramount Communications, Inc., as the head of its television
division where he was responsible for developing projects for television
production. In 1987, Mr. Bergmann served as the President of Odyssey
Entertainment, Inc. where he engineered the purchase of Coast Productions, Inc.,
which subsequently became Odyssey Filmmakers, Inc. From 1984 through 1987, Mr.
Bergmann served as President of The Film Company, where he had directorial and
production responsibilities for theatrical releases and projects for television.
During the 14 years prior to 1984, Mr. Bergmann was employed in various
capacities by the American Broadcasting Company. These positions included line
producer, division head, and assistant to the President, Executive Vice
President and Special Assistant to the Chairman of the Board. Mr. Bergmann
received his PhD from New York University.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

Our management consists of the following personnel, in addition to Angelo Tullo,
our Chief Executive Officer and President and DeVal Johnson, our Secretary, both
of whom are named above as Directors.

NAME AGE POSITION
---------------- -------- --------

David J. Iannini 44 Chief Financial Officer
John Raven 39 Chief Technology Officer

DAVID J. IANNINI. Mr. Iannini has served as our Chief Financial Officer since
August 2002. Mr. Iannini was employed as Treasurer and Vice President of
Corporate Development of Viad Corp, a publicly held company, from July 1999 to
June 2002. Viad Corp. is a diversified service business with operating companies
involved in the financial services, convention, travel and other businesses. Mr.
Iannini was an investment banker from August 1986 to July 1999, primarily with
Salomon Brothers, Inc. Mr. Iannini received his Masters in Business
Administration, Summa Cum Laude, from the Anderson Graduate School of Management
at U.C.L.A. Prior to his graduate studies, he worked with a Big Five accounting
firm and is a certified public accountant. Mr. Iannini received his Bachelors of
Science degree, Magna Cum Laude, in Accounting from Boston College in 1981.

JOHN RAVEN. Mr. Raven was appointed Chief Technology Officer for YP.Net, Inc. in
September 2003. Mr. Raven has over ten years experience in the technology arena
and 16 years of overall leadership experience working with companies such as
Perot Systems (PER) where he worked in 2003 and managed 640 staff members,
Read-Rite Corp (RDRT) where he worked from 2000 to 2003, as well as Cap Gemini
Ernst & Young (CAPMF) where he worked from 2000 to 2002. Mr. Raven also served
as Director of Information Technology at Viacom's ENG Network division where he
worked from 1996 to 1999. Mr. Raven has experience in software engineering, data
and process architecture, systems development, and database management systems.
At NASA's Jet Propulsion Laboratory, where he worked from 1993 to 1996, Mr.
Raven was a team member and information systems engineer for the historic 1997
mission to Mars conducted with the Pathfinder space vehicle and the Sojourner
surface rover. Mr. Raven received his Bachelors of Science in Computer Science
from the California Institute of Technology in 1991. His certifications include
Cisco Internetwork Engineer, Project Management from the

Project Management Institute, Certified Project Manager from Perot Management
Methodology Institute, Microsoft Certified System Engineer, and Certified Novel
Engineer.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers, directors, and persons who own more than ten percent of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Executive officers, directors, and greater than ten percent stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file. Based solely on our review of the copies of such forms received by it
during the year ended September 30, 2003, we believe that, during such year our
executive officers, directors and ten percent stockholders complied with all
such filing requirements except that Mr. Bergmann filed a late Form 4 relating
to the purchase of 1,000 shares of the Company's common stock and the receipt of
150,000 shares of restricted stock pursuant to the 2003 Stock Plan and Mr. Coury
filed a late Form 4 relating to the receipt of 150,000 shares of restricted
stock pursuant to the 2003 Stock Plan. The required filings were eventually
filed to reflect these transactions.

CODE OF ETHICS

We have not yet adopted a corporate code of ethics due to the substantial number
of other items we are currently addressing in an effort to fully comply with the
provisions imposed by Sarbanes-Oxley. Our board of directors is considering,
over the next year, establishing a code of ethics to deter wrongdoing and
promote honest and ethical conduct; provide full, fair, accurate, timely and
understandable disclosure in public reports; comply with applicable laws; ensure
prompt internal reporting of code violations; and provide accountability for
adherence to the code.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of
our common stock as of February 1, 2004, with respect to (i) each person known
to the Company to be the beneficial owner of more than 5% of the Company's
common stock; (ii) each Named Executive Officer; (iii) each director of the
Company; and (iv) all Named Executive Officers and directors of the Company as a
group. The information as to beneficial ownership was furnished to us by or on
behalf of the persons named. Unless otherwise indicated, the business address of
each person listed is 4840 East Jasmine Street, Suite 105, Mesa, Arizona 85205.

Shares Percentage of
Name Beneficially Owned Shares Outstanding (1)
--------------------------------------- ------------------ ----------------------

Angelo Tullo (2) 4,325,000 8.9%
Gregory B. Crane (3) 1,277,500 2.6%
DeVal Johnson (4) 1,329,000 2.7%
David J. Iannini (5) 600,000 1.2%
John Raven 100,000 *
Daniel L. Coury, Sr. 200,000 *
Peter Bergmann 201,000 *
Mathew and Markson Ltd. (6) (7) 10,575,062 21.8%
Morris & Miller Ltd. (6) 10,350,000 21.3%
Sunbelt Financial Concepts, Inc. (8)(9) 4,325,000 8.9%

All executive officers and
directors as a group
(7 persons). 7,982,500 16%

* Represents less than one percent (1%) of our issued and outstanding common stock.
________________

(1) Based on approximately 48,860,802 shares outstanding as of February 1,
2004. This amount includes 2,000,000 shares issued and held as collateral
for obligations of the Company under two promissory notes. Upon timely
payment of the notes, the shares will be returned to the Company for
cancellation.

(2) Of the number shown, 3,875,000 shares are owned by Sunbelt Financial
Concepts, Inc., which are also shown separately in this table. While Mr.
Tullo is the President of Sunbelt, he has no ownership interest in Sunbelt.
Mr. Tullo does, however, have dispositive power over the shares of Common
Stock owned by Sunbelt. Mr. Tullo disclaims beneficial ownership of the
shares owned by Sunbelt except to the extent of any proportionate interest
therein.

(3) Of the number shown, 1,000,000 shares are owned by Advertising Management
and Consulting Services, Inc. ("AMCS"). While Mr. Crane is the President of
AMCS, he has no ownership interest in AMCS. As President of AMCS, however,
he shares dispositive power over the stock owned by AMCS. Mr. Crane
disclaims beneficial ownership of the shares owned by AMCS except to the
extent of any proportionate interest therein.

(4) Of the number shown, 1,004,000 shares are owned by Advanced Internet
Marketing, Inc. ("AIM") Mr. Johnson is President of AIM and his minor
children are the beneficiaries of the trust that owns AIM. Mr. Johnson
disclaims beneficial ownership of the shares owned by AIM except to the
extent of any proportionate interest therein.

(5) Of the number shown, 250,000 shares are owned by Mar & Associates ("Mar").

(6) Address is Woods Centre, Friar's Road, P.O. Box 1407, St. John's, Antigua,
West Indies.

(7) The number of shares held by Mathew and Markson, Ltd. includes 2,000,000
shares issued as collateral for a debt owed by the Company. Mathew and
Markson has voting control of these shares. These shares will be returned
to the Company and cancelled upon timely payment of the debt. Ilse Cooper,
is the control person for both Mathew and Markson and Morris & Miller.

(8) Of the number shown, 3,875,000 are owned by Sunbelt and 450,000 shares are
owned directly by Mr. Tullo. Of the 450,000 shares owned directly by Mr.
Tullo, 150,000 shares were granted as restricted stock under our 2003 Stock
Plan. Hickory Management is the owner of Sunbelt and J.C. McDaniel, Esq. is
the control person.

(9) Address is 4710 E. Falcon Drive, #204A, Mesa, Arizona, 85215.

EQUITY COMPENSATION PLAN INFORMATION

We maintain the 2003 Stock Plan pursuant to which we may grant equity awards to
eligible persons. The following table gives information about equity awards
under the Company's Plan.

(a) (b) (c)
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
-------------
Plan category warrants and rights warrants and rights column (a))
-------------------- ------------------------ ---------------------- ------------------------

Equity
compensation plans
approved by
security holders (1) 2,269,000 (2) N/A 731,000

Equity
compensation plans
not approved by
security holders 0 N/A 0

Total 2,269,000 N/A 731,000

1 The 2003 Stock Plan was approved by written consent of a majority of the
Company's stockholders on July 21, 2003.

2 This number represents the number of shares of restricted stock granted to
eligible persons under the Plan.

Our 2003 Stock Plan

During the year ended September 30, 2002, our stockholders approved the 2002
Employees, Officers & Directors Stock Option Plan (the "2002 Plan"), which was
intended to replace our 1998 Stock Option Plan (the "1998 Plan"). The 2002 Plan
was never implemented, however, and no options, shares or any other securities
were issued or granted under the 2002 Plan. There were 3,000,000 shares of our
common stock authorized under the 2002 Plan,

which were to come from our authorized but unissued common stock. On June 30,
2003 and July 21, 2003, respectively, our Board of Directors and a majority of
our stockholders terminated both the 1998 Plan and the 2002 Plan and approved
our 2003 Stock Plan. The 3,000,000 shares of common stock previously allocated
to the 2002 Plan were re-allocated to the 2003 Plan.

In December, 2003, our Board of Directors approved, subject to stockholder
approval, an amendment to the Plan to increase the aggregate number of shares
available thereunder by 2,000,000 shares in order to have an adequate number of
shares available for future grants. As of February 1, 2004, a total of 2,259,000
shares of restricted stock had been issued under the Plan and were no longer
available for grant, and a total of 741,000 shares remained available for
additional grants, prior to giving effect to the proposed increase. The Board of
Directors believes that it is in the Company's best interests to be able to
continue to create equity incentives to assist in attracting, retaining, and
motivating the key executives, service providers and consultants.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AGREEMENTS WITH EXECUTIVE OFFICERS

We have entered into the following Executive Consulting Agreements with entities
controlled or owned by Messrs. Tullo, Crane, Johnson and Iannini. Each of these
agreements is dated as of September 20, 2002 and has a five year term, with the
exception of the agreement entered into with Mar & Associates, Inc., the entity
controlled by Mr. Iannini, which was dated as of May 1, 2003 and has a term of
55 months.

These agreements are not personal service contracts to the respective executive
officers. The amounts paid to these entities support multiple personnel employed
by the consulting entities, as well as costs associated with the provision of
the specified services. The individuals deployed by the consulting entities
include skilled support staff with many years of experience working as a team,
both within their own entities, as well as between entities. The Named Executive
Officers and their respective consulting entities provide a wealth of experience
in turnaround and restructuring situations, as well as solid track records of
operating successful companies. Our Board of Directors believes that these
arrangements are beneficial to the Company and in the best interests of our
stockholders given the breadth of support and depth of knowledge and expertise
that each consulting entity brings to bear through its respective support teams.

Sunbelt Financial Concepts, Inc.

Mr. Tullo, our Chief Executive Officer, is the President of Sunbelt Financial
Concepts, Inc. ("Sunbelt"). The Sunbelt agreement provides that Mr. Tullo,
through Sunbelt, will provide us with the services of Chief Executive Officer,
Chairman and President among other administrative services and personnel.
Pursuant to the Sunbelt agreement, Sunbelt originally received $32,000 per month
during the first year of the agreement with a 10% annual increase in each
succeeding year, as well as Board of Director fees, an annual bonus, and fees
and reimbursements for certain ancillary items. The Sunbelt agreement also
awarded Sunbelt 4,000,000 shares of the Company's common stock, grossed-up for
taxes, subject to achieving certain performance goals for the Company in fiscal
2003, which were achieved.

As part of the Sunbelt agreement, a Flex Compensation program was instituted.
This program provides Sunbelt with the ability to be paid up to $220,000
annually (increased by 10% on each anniversary date of the agreement) as
additional compensation, subject to sufficient cash on hand at the Company. The
taxes on the Flex Compensation, bonus and stock that is not issued under our
2003 Stock Plan are paid by the Company. In addition, the agreement contains a
Due on Sale clause whereby, if there is a change of control of the Company, as
defined, Sunbelt will receive the greater of 30% of the amounts due under the
agreement or 12 months' worth of fees.

In fiscal 2002, Sunbelt was paid approximately $240,000 in fees, $15,000 in Flex
compensation under the Flex Compensation program and $12,000 in director fees.

In fiscal 2003, Sunbelt was paid approximately $384,000 in fees, $220,000 in
Flex compensation under the Flex Compensation program, $8,000 in director fees
and $300,000 in common stock for services rendered by it through Mr. Tullo and
his support staff. The Company also reimbursed Sunbelt $100,844 for income taxes
pursuant to the agreement.

Sunbelt also was compensated approximately $410,054 in fiscal 2003 as reimbursed
legal fees in connection with certain legal matters involving Mr. Tullo, as more
fully described in our Annual Report accompanying this Proxy Statement.

We have has also entered into an agreement with Sunbelt, dated January 2002,
wherein we lease two vehicles in the Company's name for the benefit of Sunbelt.
Sunbelt pays the lease payments on the vehicles, which are $1,079 and $1,111
respectively. This agreement remains in effect until the conclusion of the
respective leases, which expire in January 2005 and February 2005 respectively.
This arrangement was structured in this manner in an effort to assist the
Company in establishing credit for future equipment purchases.

Advertising Management & Consulting Services, Inc.

Mr. Crane, our Executive Vice President of Marketing, Chief Operating Officer
and a director, is the President of Advertising Management & Consulting
Services, Inc. ("AMCS"). The AMCS agreement provides that Mr. Crane, through
AMCS, will provide the Company with the services of director and Executive Vice
President of Marketing, among other administrative services and personnel. Under
the AMCS agreement, we outsource the design and testing of our many direct mail
pieces to AMCS. As part of the AMCS agreement, AMCS originally received $32,000
per month with a 10% annual increase in each succeeding year, as well as Board
of Director fees, an annual bonus, and fees and reimbursements for certain
ancillary items. In addition, the AMCS agreement also awarded AMCS with
1,000,000 shares of the Company's common stock, grossed-up for taxes, subject to
achieving certain performance goals for the Company in fiscal 2003, which were
achieved.

As part of the agreement with AMCS, a Flex Compensation program was instituted.
This program provides AMCS with the ability to be paid up to $50,000 per year
(increased by 10% on each anniversary date of the agreement) as additional
compensation, subject to sufficient cash on hand at the Company. The taxes on
the Flex Compensation, bonus and stock that is not issued under our 2003 Stock
Plan are paid by the Company. In addition, the agreement contains a Due on Sale
clause whereby, if there is a change of control of the Company, as defined, AMCS
will receive the greater of 30% of the amounts due under the agreement or 12
months' worth of fees.

In fiscal 2002, AMCS was paid approximately $237,000 in fees, $35,000 as an
annual bonus, and $12,000 in director's fees. AMCS was also granted
approximately $75,000 in restricted stock in fiscal 2002 as additional
compensation.

In fiscal 2003, AMCS was paid approximately $384,000 in fees, $35,000 as an
annual bonus, $50,000 in Flex compensation under the Flex Compensation program,
$8,000 in directors fees and $75,000 in common stock for services rendered by it
through Mr. Crane and his support staff. AMCS was also granted approximately
$405,000 in restricted stock in fiscal 2003 as additional compensation.

Advanced Internet Marketing, Inc.

Mr. Johnson, our Executive Vice President of Corporate Image, is the President
of Advanced Internet Marketing, Inc. ("AIM"). The AIM agreement provides that
Mr. Johnson, through AIM, will provide the Company with the services of
director, Corporate Secretary and Executive Vice President of Corporate Image,
among other administrative and marketing services and personnel. In addition to
the services discussed above, under the AIM agreement, we also outsource the
design and some of the marketing of our website to AIM. All of these services
are included under the agreement and for the fees described below. As part of
the AIM agreement, AIM originally received $18,000 per month with a 10% annual
increase in each succeeding year, as well as Board of Director fees, an annual
bonus, and fees and reimbursements for certain ancillary items. In addition, the
agreement also awarded AIM with 1,000,000 shares of Company common stock,
grossed-up for taxes, subject to achieving certain performance goals for the
Company in fiscal 2003, which were achieved.

As part of the agreement, a Flex Compensation program was instituted. This
program provides AIM with the ability to be paid up to $30,000 annually
(increased by 10% on each anniversary date of the agreement) as additional
compensation, subject to sufficient cash on hand at the Company. The taxes on
the Flex Compensation, bonus and stock that is not issued under our 2003 Stock
Plan are paid by the Company. In addition, the agreement contains a Due on Sale
clause whereby, if there is a change of control of the Company, as defined, AIM
will receive the greater of 30% of the amounts due under the Agreement or 12
months' worth of fees.

In fiscal 2002, AIM was paid approximately $113,800 in fees, $20,000 as an
annual bonus, and $12,000 in director's fees. AIM was also granted approximately
$75,000 in restricted stock in fiscal 2002 as additional compensation.

In fiscal 2003, AIM was paid approximately $274,750 in fees, $35,000 as an
annual bonus, $30,000 in Flex compensation under the Flex Compensation program,
$8,000 in directors fees and $75,000 in common stock for services rendered by it
through Mr. Johnson and his support staff. AIM was also granted approximately
$405,000 in restricted stock in fiscal 2003 as additional compensation.

Mar & Associates, Inc.

Mr. Iannini, our Chief Financial Officer, is the President of Mar & Associates,
Inc. ("MAR"). The MAR Agreement provides that Mr. Iannini, through MAR, will
provide the Company with the services of Chief Financial Officer, among other
administrative services. As part of the MAR Agreement, MAR originally received
$17,500 per month with a 10% annual increase in each succeeding year, as well as
fees and reimbursements for certain ancillary items. In addition, the agreement
also awarded MAR with 250,000 shares of Company common stock, grossed-up for
taxes, subject to achieving certain performance goals for the Company by January
1, 2004, which were achieved.

As part of the agreement, a Flex Compensation program was instituted. This
program provides MAR with the ability to be paid up to $15,000 annually
(increased by 10% on each anniversary date of the agreement) as additional
compensation, subject to sufficient cash on hand at the Company. The taxes on
the Flex Compensation, bonus and stock that is not issued under our 2003 Stock
Plan are paid by the Company. In addition, the agreement contains a Due on Sale
clause whereby, if there is a change of control of the Company, as defined, then
MAR will receive the greater of 30% of the amounts due under the agreement or 12
months worth of fees.

The agreement also awards bonuses of $15,000 to MAR relating to performance in
fiscal 2003, $21,000 relating to performance for fiscal 2004, and 10% of annual
salary for each fiscal year thereafter for the term of the agreement.

In fiscal 2002, MAR was paid approximately $11,538 in fees. MAR was also granted
approximately $28,750 in restricted stock in fiscal 2003 as additional
compensation.

In fiscal 2003, MAR was paid approximately $199,808 in fees, $15,000 in annual
bonus, $15,000 in Flex compensation under the Flex Compensation program and
$28,750 in common stock for services rendered by Mr. Iannini. MAR was also
granted approximately $607,500 in restricted stock in fiscal 2003 as additional
compensation.

OTHER RELATED TRANSACTIONS

Revolving Loan Agreements with Mathew and Markson Ltd. and Morris & Miller, Ltd.

In December 2003, we entered into an agreement with Mathew and Markson, Ltd. and
Morris & Miller, Ltd. (the "M&Ms"), both Antiguan corporations and, currently,
our two largest stockholders, to terminate the revolving loan agreement
previously provided to them in connection with our original acquisition from
them of Telco Billing.

Messrs. Crane and Johnson were employees of and primarily involved in the
start-up of Telco Billing. Mr. Crane negotiated the acquisition of Telco Billing
by the Company on behalf of the M&Ms and continues to serve as a liaison for the
Company to the M&Ms.

As part of the original acquisition of Telco Billing from the M&Ms, we provided
them with the right to "put" back to us, under certain circumstances, the shares
of Company common stock that they received in exchange for the shares of Telco
Billing. We subsequently entered into a new arrangement with the M&Ms, whereby
their "put" rights were terminated in exchange for the establishment of the
revolving lines of credit. Under these lines of credit, we agreed to lend up to
$10,000,000 to each of the M&Ms, collateralized by the Company stock held by the
M&Ms and subject to certain limitations. All advances made under these lines of
credit carried an interest rate at least 0.25 points higher than the Company's
average cost of borrowing but in no event lower than eight percent. No more than
$1 million could be advanced at any point in time and no advances could be made
unless, after such advance, the Company had at least 30 days operating cash
reserves or if the Company was in an uncured default with any of its lenders. At
September 30, 2003, the Company had advanced an aggregate $2,126,204 to the M&Ms
under this agreement. The M&Ms have been making interest payments on the
advances but, as allowed under the agreement, have not made any principal
repayments.

Under our new agreement with the M&Ms, dated December 22, 2003 and memorialized
in a Third Amendment to the original Stock Purchase Agreement, the revolving
lines of credit are terminated effective April 9, 2004, upon the payment of the
following final specific advances to each of the M&Ms:

Morris & Miller, Ltd.

$275,000 on January 30, 2004
$300,000 on February 27, 2004
$500,000 on March 31, 2004
Sufficient funds to pay 3 years' interest on April 9, 2004

Mathew and Markson, Ltd.

$50,000 on January 30, 2004
$100,000 on February 27, 2004
$75,000 on March 31, 2004

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

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

As part of this new agreement, we have also agreed to pay a quarterly dividend
of not less than $.01 per share to all holders of our Common Stock beginning
April 30, 2004 for the period ended March 31, 2004.

Sale of URL and Lease Arrangements

In connection with the original acquisition of our wholly owned subsidiary,
Telco Billing, from Morris & Miller, Ltd. and Mathew and Markson Ltd., both
Antiguan corporations (the "M&Ms") and, currently, our largest stockholders, the
Company agreed to pay Mathew and Markson $5,000,000 as a discounted accelerated
royalty payment for a 20-year license of the URL "Yellow-Page.Net," which
triggered the sale of this URL. The consideration was rendered under the terms
of an Exclusive Licensing Agreement dated September 21, 1998, between Telco
Billing and Mathew and Markson. The payment was originally to be paid in full
upon the acquisition of Telco Billing. However, the Company was unable to pay
the entire consideration in cash. As a result, the Company instead negotiated to
pay the $5,000,000 due in cash at closing with a $3,000,000 down payment and
also executed a $2,000,000 promissory note (the "Note") to Mathew and Markson,
which was due on August 15, 1999. In addition, as a result of our failure to pay
the entire $5,000,000 in cash at the original closing, we agreed to a $2,000,000
extension fee.

On August 15, 1999, we defaulted on the payment of the Note. To extend this
payment obligation to November 15, 1999, we agreed to provide, for the benefit
of Mathew and Markson, $250,000 in tenant improvements for approximately
one-half of our Mesa facility. The premises were leased to Mathew and Markson
for $1.00 per year throughout the term of the five-year lease. The annual fair
rental value of the lease premises is $4,500 per month. Business Executive
Services, Inc. purchased this lease from Mathew and Markson for a one-time
payment of $75,000.

At the due date of the extension (November 15, 1999), we still had not paid the
Note. Therefore, on November 15, 1999, we further extended the payment of the
Note to January 15, 2000 by paying an extension fee of $200,000. On January 15,
2000, we again defaulted on the extension and the Note was renegotiated to a
demand note with monthly installments of $100,000 per month. Under the terms of
the renegotiated Note, the payments may have been suspended if we had did not
have certain cash reserves or were otherwise in default under other obligations.
The renegotiated Note was secured by 2,000,000 shares of our common stock held
in escrow, to be returned for cancellation upon payment of the Note. The Note
has been paid in full but the collateral shares are still held by Mathew and
Markson to secure payment of the penalty fee discussed below.

In July 2001, we were informed by Mathew and Markson that an additional
$2,000,000 penalty fee was due on the original acquisition agreement as a result
of the Company's failure to pay the entire $5,000,000 due in cash at the
original closing. On September 25, 2001, in settlement thereof, we agreed to pay
Mathew and Markson $550,000 and issued to Mathew and Markson 4,000,000 shares of
our common stock valued at $0.09. The $550,000 is to be paid over a 36-month
period at an annual interest rate of 10.5%. The balance as of September 30, 2002
was $115,868 due and payable September 25, 2004.

Simple.Net.

We previously used Dial-Up Services, Inc., d/b/a Simple.Net, Inc., an Internet
service provider beneficially owned by DeVal Johnson, our Executive Vice
President of Corporate Image and a director, to provide Internet dial up

services and other services to our customers. These services included customer
service support for Simple.Net's customers and technology support and billing
assistance. At the time our agreement with Simple.Net was entered into, this was
beneficial to us because we did not have sufficient dial-up customers to avoid a
minimum fee to the backbone providers, which are companies that own the cable
and copper wire cables necessary to provide the service. As our customer base
has grown, we are now able to economically enter into our own wholesale contract
and in fact have done so with GlobalPOPs, Inc., an unrelated third party.

On December 29, 2003, we entered into a separation agreement with Simple.Net,
which becomes effective January 31, 2004. Under this agreement, Simple.Net will
no longer provide any services to us. Although the Separation Agreement provides
for a 30-day extension until March 2, 2004, neither Simple.Net nor we believe
that this time period will be needed.

RELATED PARTY TRANSACTION POLICY.

Our general policy requires adherence to Nevada corporate law regarding
transactions between the Company and a director, officer or affiliate of the
Company. Transactions in which such persons have a financial interest are not
void or voidable if the interest is disclosed and approved by disinterested
directors or stockholders or if the transaction is otherwise fair to the
Company. It is the policy of the Company that transactions with related parties
are conducted on terms no less favorable to the Company than if they were
conducted with unaffiliated third parties. During the fiscal year ended
September 30, 2003, there have been no related party transactions except as
shown above.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibits are either attached hereto or incorporated herein by
reference as indicated:

Date
----
Exhibit Previously
----------
Number Description Previously Filed as Exhibit File Number Filed
------- --------------------------------------- --------------------------- ----------- --------

10.1 Agreement with Switchboard Exhibit 10.28 to Amendment 000-24217 7/8/2003
No. 1 to the Registrant's
Quarterly Report on Form 10-
QSB/A for the period ended
March 31, 2003

10.2 Agreement with Pike Industries (a/k/a Exhibit 10.26 to Amendment 000-24217 7/8/2003
Yellow.com) No. 1 to the Registrant's
Quarterly Report on Form 10-
QSB/A for the period ended
March 31, 2003

10.3 Solicitation Partnership Agreement Attached hereto
between the Registrant and CHG Allied,
Inc. dated August 4, 2003,

23 Consent of Epstein, Weber and Attached hereto
Conover P.L.C.

31 Certification pursuant to SEC Release Attached hereto
No. 33-8238, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act
of 2002

32 Certification pursuant to 18 U.S.C. Attached hereto
Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act
of 2002

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 23, 2004 /s/ Peter J. Bergmann
-----------------------
Peter Bergmann, Chairman of the Board and
Chief Executive Officer