Edgar Filing: YP NET INC

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

FORM 10-KSB

(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.NET, INC.
(Name of Small Business Issuer in its Charter)

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

4840 EAST JASMINE STREET, SUITE 85205
105, MESA, ARIZONA
(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)

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 [X].

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

Portions of the Proxy Statement for the Registrant's 2004 Annual Meeting of
Shareholders to be held on April 2, 2004 are incorporated by reference in Part
III of this Form 10-KSB.

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:

- 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. 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 265 QuickSite customers during fiscal 2003.
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,
or $5 more per month than the IAP alone. This pricing will save the Advertiser
approximately 40% 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. 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:

- 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 call is free of charge to both the User and
the Internet Advertising customer;
- 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.

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. 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. 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.

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.

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(TM) 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.

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.

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 depart, 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.

Extensible Record. While some of our competitors merge data from multiple
sources, we not believe that any of them have acquired data from all of the
major data providers in the North American market. 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. We believe 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.

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 increases 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.

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. A unique record is one that exists only
in a single providers data set. The number of unique records vary 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 provides 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 an agreement with SurfNet Media Group, Inc.
(SurfNet"), a digital media distribution technology company. SurfNet is a public
reporting company. The agreement provides us 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 those customers that actually pay us as opposed to activated
customers. 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.

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 a
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 have 119 full time and four part- time team members
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 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 both
our corporate office and our customer service call center.

In October 2003, our wholly owned subsidiary, Telco, signed a three-year lease
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
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.

ITEM 3. LEGAL PROCEEDINGS

We are party to certain legal proceedings and other various claims and lawsuits
in the normal course of our business, which, in the opinion of management, are
not material to our business or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

In July 2003, a proposal to approve our 2003 Stock Plan was submitted to a group
of shareholders constituting approximately 65% of our outstanding capital stock
entitled to vote. By written consent in lieu of a meeting, as provided for
under Nevada corporate law and our bylaws, these shareholders approved the
adoption of the 2003 Stock Plan. In connection with the submission of the
proposal to the shareholders, we filed an Information Statement with the
Securities and Exchange Commission and delivered a copy to all shareholders of
the Company in accordance with the Exchange Act of 1934, as amended and the
rules and regulations promulgated thereunder. No other matters were submitted to
the stockholders.

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 attorney's 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. All such shares were issued in reliance on the exemptions
from registration afforded by Section 4(2) and Regulation D of the Securities
Act of 1933, as amended.

Date Recipient Total Shares Value

June 16, 2003 Peter Strojnik 261,750 $183,225
May 1, 2002 Dwight Flickenger 176,896 22,996
May 1, 2002 Kevin Flickenger 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.

Overview

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.

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.

Mr. Tullo has been exonerated by the fact that, 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.
In contrast to the dismissal of claims against Mr. Tullo, New Horizon has
obtained judgments against the other members of American Business Funding's
former management.

The previous case, in which Mr. Tullo was involved concerning certain investors
of American Business Funding Corp., was dismissed in July 2003 for failure to
produce evidence.

Additionally, all prior cases involving Mr. Tullo and relating to the foregoing
matters have been dismissed as to 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")

In December 2003, we entered into an agreement with the M&M's to terminate the
revolving loan agreement previously provided to them.

As part of the original acquisition of Telco 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 the 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.

Our new agreement with the M&Ms, which is memorialized in a Third Amendment to
the original Stock Purchase Agreement, cancels the revolving lines of credit
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&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 31st, 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.

Future Outlook

We intend to pursue the following growth strategies and initiatives in fiscal
2004:

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. However, we
expect to incur significant costs relating to our branding prior to such
benefits being realized which we expect to fund from our internal cash flow.

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,
IncThrough these efforts, we acquired an immaterial number of QuickSite
customers during fiscal 2003. 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 may test market this product at $16.95 per month
in fiscal 2004. We will, however, begin to charge 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,
or at least $5 more per month than the IAP alone. This pricing will save the
Advertiser approximately 40% 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.

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 were $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 $3,345,489 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 $4,855,369 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 $2,891,631 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, we 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. As of this filing, we have not remitted any amounts to
YP Charities but plan to contribute $100,000 during fiscal 2004. At this time,
the Board of Directors of YP Charities is identical to the Board of Directors
of the Company.

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.

OUR GROSS MARGINS MAY DECLINE OVER TIME. We expect that gross margins may be
adversely affected because we have determined that profit margins from the
electronic Yellow Pages offerings that we have profited from in the past have
fluctuated. We have experienced a decrease in revenue from the LEC from the
effects of the Competitive Local Exchange Carriers (CLEC) that are participating
in providing local telephone services to customers. 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. 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 continue to look for profitable

Internet opportunities; however there are no assurances that we will be
successful, and presently we have no acquisitions in progress.

WE ARE DEPENDANT UPON KEY PERSONNEL. Our performance is substantially dependant
on the performance of our executive officers and other key employees and 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 employees could have a material
adverse effect on our business, results of operations or financial condition.
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.

OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT. Since our growth rate may slow,
operating results for a particular quarter are difficult to predict: We expect
that in the future, our net sales may grow at a slower rate on a
quarter-to-quarter basis than experienced in previous periods. This may be a
direct cause of a lower response rate, changes to our direct marketing pieces
or regulatory matters discussed below. As a consequence, operating results for
a particular quarter are extremely difficult to predict. Our ability to meet
financial expectations could also be hampered if we are unable to correct the
billing/dilution through the billing aggregators and CLEC markets seen recently
or if direct mailing solicitations are not completed on a timely basis each
month or if the timing whereby monthly billings are submitted to billing
aggregators varies from month to month.

WE ARE SUBJECT TO A STRICT REGULATORY ENVIRONMENT. Existing laws and regulations
and any future regulation may 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.

OUR QUARTERLY RESULTS OF OPERATIONS COULD FLUCTUATE DUE TO FACTORS OUTSIDE OF
OUR CONTROL, WHICH MAY CAUSE FLUCTUATIONS AND A CORRESPONDING DECREASE TO THE
PRICE OF OUR SECURITIES. Our quarterly operating results may fluctuate for
reasons that are not within our control, including:

- demand for our services, which may depend on a number of factors
including economic conditions, customer response rates to our direct
marketing, customer refunds/cancellations and our ability to continue
to bill customers 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 as well as our ability to
execute the mailing of our monthly direct mail solicitations; and

- the actions of our competitors; and

- the timing of billing and receipt of amounts from LEC's may vary, 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 fluctuation of our quarterly operating results, as well as other factors,
could cause the market price of our securities to fluctuate and decrease. Some
of these factors include:

- the announcement of new customers or strategic alliances or the loss
of significant customers or strategic alliances;

- announcements by our competitors;

- sales or purchases of Company 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; 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 ADVERTISER SIGN-UP'S AND BILL OUR ADVERTISERS
MONTHLY IS DEPENDENT UPON OUR CHECK PROCESSING SERVICE PROVIDERS AND BILLING
AGGREGATORS, RESPECTIVELY. The Company currently uses three check processing
companies to provide us with Advertiser information at the point of sign-up for
our IAP. One of these processors has indicated that it will be outsourcing this
function in the future. 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 experienced a disruption in their operations or ceased to do
business with us.

We also are dependent upon our billing aggregators to efficiently bill and
collect monies from the LEC's relating to the LEC's billing and collection of
our monthly charges from Advertisers. We currently have agreements with two
billing aggregators and are currently in the process of negotiating an agreement
with an additional billing aggregator. Any disruption in our billing aggregators
ability to perform these functions could adversely affect our financial
condition and results of operations

WE FACE INTENSE COMPETITION, INCLUDING FROM COMPANIES WITH GREATER RESOURCES.
This Competitive Pressure Could Lead To Continued Decreases In Our Revenues,
Which Would Adversely Affect Our Operating Results. Several companies currently
market yellow-page services that directly compete with our services and
products, including Yahoo and Microsoft. For several reasons, we may not compete
effectively with existing and potential competitors. These reasons may include:

- Some competitors have greater financial resources and are in better
financial condition than us.

- Some competitors have more extensive marketing and customer service
and support capabilities.

- Some competitors may supply a broader range of services, enabling them
to serve more or all of their customers' needs. This could limit sales
for us and strengthen existing relationships that competitors have
with customers, including our current and potential customers.

- Some competitors may be able to better adapt to changing market
conditions and customer demand; and

- Other competitors not currently involved in the Internet-based
yellow-page advertising business may enter the market or develop
technology that reduces the need for our services.

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

STOCK PRICES OF TECHNOLOGY COMPANIES HAVE DECLINED PRECIPITOUSLY OVER THE LAST
SEVERAL YEARS 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 six months and
could continue to be volatile in response to factors including the following,
some 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;

- 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. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock.

TERRORIST ATTACKS AND THREATS OR ACTUAL WAR MAY NEGATIVELY IMPACT ALL ASPECTS OF
OUR OPERATIONS, REVENUES, COSTS AND STOCK PRICE. Recent terrorist attacks in the
United States, as well as future events occurring in response or connection to
them, including, without limitation, future terrorist attacks against United
States targets, rumors or threats of war, actual conflicts involving the United
States or its allies or military or trade disruptions impacting our domestic or
foreign suppliers of parts, components and subassemblies, may impact our
operations, including, among other things, causing delays or losses in the
delivery of supplies to us and decreased sales of our products. More generally,
any of these events could cause consumer confidence and spending to decrease or
result in increased volatility in the United States and worldwide financial
markets and economy. They also could result in economic recession in the United
States or abroad. Any of these occurrences could have a significant impact on
our operating results, revenues and costs.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

YP.NET, INC.

TABLE OF CONTENTS
--------------------------------------------------------------------------

PAGE

INDEPENDENT AUDITORS' REPORT A-2

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheet at September 30, 2003 A-3

Consolidated Statements of Operations for the years ended
September 30, 2003 and September 30, 2002 A-4

Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2003 and September 30, 2002 A-5

Consolidated Statements of Cash Flows for the
years ended September 30, 2003 and September 30, 2002 A-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A-9

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.

/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

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

COMMON STOCK PREFERRED E TREASURY PAID-IN DEFERRED
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.

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." The proforma effect of the fair value method is discussed in
Note 15.

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.

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
$115,868 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 (Benefit) 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 100,006
Book/tax differences in customer acquisition costs 1,135,134
----------
Total deferred income tax liability 1,235,140
----------

Net income tax asset $1,372,773
==========

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 $3,300,000 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
Income Shares Share Income Shares Per 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 and accrued a
total of approximately $1,925,000 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
$589,000 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, $274,750 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

From time to time, the Company issues stock options to executives, key
employees and members of the Board of Directors. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," and continues
to account for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". 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.

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 a
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.

* * * * * *

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

Not Applicable.

ITEM 8A. CONTROLS AND PROCEDURES

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

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

Based on their review and evaluation as of a date within 90 days of the filing
of this Form 10-KSB, and subject to the inherent limitations all as described
above, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effective. They are not aware of any significant changes in our disclosure
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

PART III

Certain information required by Part III is omitted from this Annual Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its 2004 Annual Meeting of Shareholders to be held on April 2, 2004, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "2004
Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Annual Report, and certain information included in the 2004
Proxy Statement is incorporated herein by reference.

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

Information regarding directors and executive officers of the Company and the
disclosure required by Item 405 of Regulation S-B concerning Section 16(a)
Beneficial Ownership Reporting Compliance is set forth under the captions
"Election of Directors," "Executive Officers and Compensation" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the 2004 Proxy Statement
incorporated by reference into this Form 10-KSB, which will be filed with the
Commission within 120 days after the end of the Company's fiscal year covered by
this Annual Report.

Code Of Ethics

We have not yet adopted a corporate code of ethics. 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 10. EXECUTIVE COMPENSATION

Information regarding director and executive compensation is set forth under the
captions "Election of Directors" and "Executive Officers and Compensation" in
the 2004 Proxy Statement, which information is incorporated in this Form 10-KSB
by reference.

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

Information regarding security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Principal
Stockholders and Management" in the 2004 Proxy Statement, which information is
incorporated in this Form 10-KSB by reference.

Equity Compensation Plan Information

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

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

Equity compensation plans 2,048,000 [2] N/A 952,000
approved by
security holders [1]
------------------------- --------------------- --------------------- ------------------------
Equity compensation plans 0 N/A 0
not approved by
security holders
------------------------- --------------------- --------------------- ------------------------
Total 2,048,000 N/A 952,000
-------------------------------------------------------------------------------------------------

(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 2003 Plan.

Our 2003 Stock Plan

During the year ended September 30, 2002, our shareholders approved the 2002
Employees, Officers & Directors Stock Option Plan (the "2002 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 shareholders
terminated 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.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions of
management is set forth under the caption "Certain Relationships and Related
Transactions" in the 2004 Proxy Statement, which information is incorporated in
this Form 10-KSB by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

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

3.1 Certificate of Restated Articles of Exhibit 3.1 to the Registrant's 000-24217 5/6/98
Incorporation of Renaissance Registration Statement on Form
International Group, Ltd. 10SB12G

3.2 Certificate of Amendment to the Exhibit 3.2 to the Registrant's 000-24217 9/19/00
Articles of Incorporation of Renaissance Annual Report on Form 10-KSB
International Group, Ltd. changing the for the fiscal year ended
name of the corporation to RIGL September 30, 1999
Corporation and increasing the
authorized shares of common stock, par
value $.001 per share

3.3 Restated Articles of Incorporation of Attached hereto
RIGL Corporation creating Series B
Convertible Preferred Stock

3.4 Certificate of Amendment to the Attached hereto
Articles of Incorporation of RIGL
Corporation changing the name of the
corporation to YP.Net, Inc.

Certificate of Amendment to the
Articles of Incorporation of YP.Net, Inc.
3.5 increasing the authorized shares of Exhibit 4.1(a) to the Registrant's 333-107721 8/7/03
capital stock, par value $.001 per share Registration Statement on Form
and creating the Series C and Series D S-8
Preferred Stock

3.6 Certificate of Designation creating the Exhibit 3.7 to Amendment No. 000-24217 7/8/03
Series E Convertible Preferred Stock 2 to the Registrant's Annual
Report on Form 10-KSB/A for
the fiscal year ended September
30, 2002

3.7 By-laws of Renaissance International Exhibit 3.2 to the Registrant's 000-24217 5/6/98
Group, Ltd. Registration Statement on Form
10SB12G

3.8 Amended By-laws Exhibit 3.6 to the Registrant's 000-24217 9/19/00
Annual Report on Form 10-KSB
for the fiscal year ended
September 30, 1999

10.1 YP.Net, Inc. 2003 Stock Plan Exhibit 99.1 to the Registrant's 333-107721 8/7/03
Registration Statement on Form
S-8

10.2 Standard Industrial/Commercial Multi- Exhibit 10.5 to the Registrant's 000-24217 9/19/00
Tenant Lease for Mesa facility between Annual Report on Form 10-KSB
the Registrant and Art Grandlich, d/b/a for the fiscal year ended
McKellips Corporate Square September 30, 1999

10.3 Amendment No. 1 to Standard Exhibit 10.14 to Amendment 000-24217 7/8/03
Industrial/Commercial Multi-Tenant No. 2 to the Registrant's Annual
Lease for Mesa facility between the Report on Form 10-KSB/A for
Registrant and Art Grandlich, d/b/a the fiscal year ended September
McKellips Corporate Square 30, 2002

10.4 Standard Industrial Lease for Nevada Attached hereto
facility between the Registrant and
Tomorrow 33 Convention, LP dated
August 13, 2003

10.5 Credit Facility between the Registrant Exhibit 10.27 to Amendment 000-24217 7/8/03
and Bank of the Southwest No. 1 to the Registrant's
Quarterly Report on Form 10-
QSB/A for the fiscal quarter
ended March 31, 2003

10.6 Trade Acceptance Draft Program Exhibit 10.35 to Amendment 000-24217 7/8/03
between the Registrant and Actrade No. 1 to the Registrant's
Capital, Inc., dated August 13, 2002 Quarterly Report on Form 10-
QSB/A for the fiscal quarter
ended March 31, 2003

10.7 Stock Purchase Agreement between the Exhibit A to the Registrant's 000-24217 3/29/1999
Registrant, Morris & Miller, Mathew Current Report on Form 8-K
and Markson and Telco Billing dated
March 16, 1999.

10.8 Amendment No. 1 to Stock Purchase Exhibit 10.16 to Amendment 000-24217 7/8/03
Agreement between the Registrant, No. 2 to the Registrant's Annual
Morris & Miller, Mathew and Markson Report on Form 10-KSB/A for
and Telco Billing dated March 16, 1999. the fiscal year ended September
30, 2002

10.9 Amendment No. 2 to Stock Purchase Exhibit 10.17 to Amendment 000-24217 7/8/03
Agreement between the Registrant, No. 2 to the Registrant's Annual
Morris & Miller, Mathew and Markson Report on Form 10-KSB/A for
and Telco Billing dated September 12, the fiscal year ended September
2000. 30, 2002

10.10 Amendment No. 3 to Stock Purchase Attached hereto
Agreement between the Registrant,
Morris & Miller, Mathew and Markson
and Telco Billing dated December 22,
2003.

10.11 Exclusive Licensing Agreement Attached hereto
between the Registrant and Mathew and
Markson, Ltd. Dated September 21,
1998

10.12 Executive Consulting Agreement Exhibit 10.19 to Amendment 000-24217 7/8/03
between the Registrant and Sunbelt No. 2 to the Registrant's Annual
Financial Concepts, Inc. dated Report on Form 10-KSB/A for
September 20, 2002 the fiscal year ended September
30, 2002

10.13 Executive Consulting Agreement Exhibit 10.20 to Amendment 000-24217 7/8/03
between the Registrant and Advertising No. 2 to the Registrant's Annual
Management & Consulting Services, Report on Form 10-KSB/A for
Inc. dated September 20, 2002 the fiscal year ended September
30, 2002

10.14 Executive Consulting Agreement Exhibit 10.21 to Amendment 000-24217 7/8/03
between the Registrant and Advanced No. 2 to the Registrant's Annual
Internet Marketing, Inc. dated Report on Form 10-KSB/A for
September 20, 2002 the fiscal year ended September
30, 2002

10.15 Executive Consulting Agreement Exhibit 10.2 to the Registrant's 000-24217 8/13/2003
between the Registrant and Mar & Quarterly Report on Form 10-
Associates, Inc. dated May 1, 2003 QSB for the quarter ended June
30, 2003

10.16 Exclusive Domain Name Licensing Exhibit 10.1 to the Registrant's 000-24217 7/22/2003
Agreement between the Registrant and Current Report on Form 8-K
Onramp Access, Inc. dated July 8, 2003

10.17 Basic Listing Reseller Agreement Exhibit 10.1 to the Registrant's 000-24217 10/24/2003
between the Registrant and UDS Current Report on Form 8-K
Directory Corp., d/b/a go2 Directory
Systems dated September 1, 2003

10.18 Processing Agreement between the Exhibit 10.2 to the Registrant's 000-24217 10/24/2003
Registrant and Integrated Payment Current Report on Form 8-K
Systems Inc., d/b/a First Data dated
August 26, 2003

10.19 Master Database and Services Exhibit 10.11 to Amendment 000-24217 7/8/03
Agreement between the Registrant and No. 2 to the Registrant's Annual
InfoUSA, Inc. dated July 31, 2002 Report on Form 10-KSB/A for
the fiscal year ended September
30, 2002

10.20 Database Extract License Agreement Exhibit 10.12 to Amendment 000-24217 7/8/03
between the Registrant and Experian No. 2 to the Registrant's Annual
Information Solutions, Inc. dated Report on Form 10-KSB/A for
February 1, 2003 the fiscal year ended September
30, 2002

10.21 Mail Marketing Management Exhibit 10.22 to Amendment 000-24217 7/8/03
Agreement between the Registrant and No. 2 to the Registrant's Annual
Business Executive Service, Inc. dated Report on Form 10-KSB/A for
November 1, 2001 the fiscal year ended September
30, 2002

10.22 Master Services Agreement between the Exhibit 10.24 to Amendment 000-24217 7/8/03
Registrant and eBillit, Inc dated August No. 1 to the Registrant's
1, 2002 Quarterly Report on Form 10-
QSB/A for the fiscal quarter
ended March 31, 2003

10.23 Co-branded Syndication Agreement Exhibit 10.30 to Amendment 000-24217 7/8/03
between the Registrant and Intelligenx, No. 2 to the Registrant's Annual
Inc dated November 1, 2000 Report on Form 10-KSB/A for
the fiscal year ended September
30, 2002

10.24 Colocation Agreement between the Exhibit 10.1 to the Registrant's 000-24217 8/13/2003
Registrant and XO Communications, Inc. Quarterly Report on Form 10-
dated June 10, 2003 QSB for the quarter ended June
30, 2002

10.25 Private Label Website and Cross Exhibit 10.1 to the Registrant's 000-24217 8/13/2003
Promotion Agreement between the Quarterly Report on Form 10-
Registrant and Community IQ, Inc., d/b/a QSB for the quarter ended June
Vista.com, dated September 18, 2001 30, 2003

10.26 Data Products License Agreement Exhibit 10.10 to Amendment 000-24217 7/8/03
between the Registrant and Acxiom No. 2 to the Registrant's Annual
Corporation dated March 30, 2001 Report on Form 10-KSB/A for
the fiscal year ended September
30, 2002

10.27 Billings and Related Services Agreement Exhibit 10.33 to Amendment 000-24217 7/8/03
between the Registrant and ACI No. 2 to the Registrant's Annual
Communications, Inc. dated September Report on Form 10-KSB/A for
1, 2001 the fiscal year ended September
30, 2002

10.28 License Agreement between the Exhibit 10.25 to Amendment 000-24217 7/8/03
Registrant and Palm, Inc. dated February No. 1 to the Registrant's
1, 2003 Quarterly Report on Form 10-
QSB/A for the fiscal quarter
ended March 31, 2003

10.29 Lease Agreement between the Registrant Attached hereto
and Inter-Tel Leasing dated May 17,
2002

10.30 Private Label Website and Cross Attached hereto
Promotion Agreement between the
Registrant and EZSitemaster, Inc., f/k/a
ClientCare, Inc. dated February 20, 2002

10.31 Letter of Intent Agreement between the Attached hereto
Registrant and SurfNet, Inc. dated
August 26, 2003

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

10.33 Service Agreement between the Attached hereto
Registrant and GlobalPOPs dated
December 5, 2003

21 Company Subsidiaries Attached hereto

23 Consent of Epstein, Weber and Conover Attached hereto
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 906 of the Sarbanes-Oxley Act
of 2002

(b) The Registrant filed the following Current Reports on Form 8-K during the
final three-month period covered by this Annual Report:

- On July 22, 2003, the Company filed a Current Report on Form 8-K to
report the execution of an Exclusive Domain Name License Agreement
whereby the Company obtained exclusive rights to the "YP.com" domain
name.

- On August 14, 2003, the Company filed a Current Report on Form 8-K
attaching a press release concerning the Company's earnings and
results of operations for the Company's third fiscal quarter ended
June 30, 2003.

- On October 14, 2003, the Company filed a Current Report on Form 8-K to
disclose an Investor Fact Sheet under Regulation FD.

- On October 24, 2003, the Company filed a Current Report on Form 8-K to
report the execution of an agreement with Integrated Payment Systems
Inc. for additional third-party verification services and the
execution of another agreement with UDS Directory Corp, d/b/a go2
Directory Systems to allow for the prominent display of certain
customers' advertisements on wireless and hand-held devices provided
by leading manufacturers.

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.

YP.NET, INC.

Dated: December 30, 2003 /s/ Angelo Tullo
--------------------------
Angelo Tullo, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)

Dated: December 30, 2003 /s/ David Iannini
--------------------------
Chief Financial Officer
(Principal Accounting Officer)

BOARD OF DIRECTORS

Dated: December 30, 2003 /s/ Angelo Tullo
--------------------------
Angelo Tullo

Dated: December 30, 2003 /s/ Gregory B. Crane
--------------------------
Gregory B. Crane

Dated: December 30, 2003 /s/ Daniel L. Coury, Sr.
--------------------------
Daniel L. Coury, Sr.

Dated: December 30, 2003 /s/ Peter Bergmann
--------------------------
Peter Bergmann

Dated: December 30, 2003 /s/ DeVal Johnson
--------------------------
DeVal Johnson