Edgar Filing: YP NET INC

U.S. Securities and Exchange Commission
Washington, D.C. 20549

____________________

FORM 10-QSB
____________________

(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2003

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act

For the transition period from _____________ to _______________
____________________

Commission File Number 0-24217
____________________

YP.NET, INC.
(Exact name of small business issuer as specified in its charter)

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

4840 East Jasmine St. Suite 105
Mesa, Arizona 85205
(Address of principal executive offices)

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

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
----------- ------------

The number of shares of the issuer's common equity outstanding as of August
11, 2003 was 42,930,722 shares of common stock, par value $.001.

Transitional Small Business Disclosure Format (check one):

Yes No X
----------- ------------

YP.NET, INC.
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED June 30, 2003

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
PAGE

Item 1. Financial Statements

Consolidated Balance Sheet
as of June 30, 2003 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations
for the Three and Nine Month Periods
Ended June 30, 2003 and June 30, 2002 . . . . . . . . . . 4
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended June 30, 2003 and
June 30, 2002 . . . . . . . . . . . . . . . . . . . . . . 5

Notes to the Consolidated Financial Statements . . . . . . . . 7

Item 2. Management's Discussion and Analysis . . . . . . . . . . . . . . . . 14

Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 25

PART II
OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 26

Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 27

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 27

SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2003

ASSETS:
CURRENT ASSETS

Cash and equivalents $ 2,429,261
Accounts receivable, net of allowance for doubtful accounts of $2,636,512 5,896,866
Prepaid expenses and other current assets 213,709
------------
Total current assets 8,539,836

ACCOUNTS RECEIVABLE, long term portion, net of allowance
for doubtful accounts of $352,519 822,543

CUSTOMER ACQUISITION COSTS, net of accumulated amortization of $1,953,457 2,953,432

PROPERTY AND EQUIPMENT, net 624,418

DEPOSITS AND OTHER ASSETS 86,217

INTELLECTUAL PROPERTY- URL, net of accumulated amortization of $1,757,956 3,308,494

ADVANCES TO AFFILIATES 1,372,444
------------
TOTAL ASSETS $17,707,384
============

LIABILITIES AND STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable $ 325,536
Accrued liabilities 440,263
Due to Affiliates 115,084
Deferred income taxes 365,550
Income taxes payable 2,608,937
------------
Total current liabilities 3,855,370

NOTES PAYABLE - long term portion 115,868

DEFERRED INCOME TAXES 9,383
------------

Total liabilities 3,980,621
------------

STOCKHOLDERS' EQUITY:
Series E convertible preferred stock, $.001 par value, 200,000 shares authorized,
131,840 issued and outstanding, liquidation preference $39,552 132
Common stock, $.001 par value, 100,000,000 shares authorized,
49,249,340 issued , 42,930,722 outstanding 49,249
Paid in capital 4,770,731
Treasury stock at cost (331,818)
Retained earnings 9,238,469
------------
Total stockholders' equity 13,726,763
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,707,384
============

See the accompanying notes to these unaudited financial statements

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2002

Three Months Nine Months Three Months Nine Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2003 2002 2002
---------------- ---------------- ---------------- ----------------

NET REVENUES $ 8,013,845 $ 20,604,344 $ 3,416,953 $ 9,249,792
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
Cost of services 2,061,229 5,732,345 1,168,396 3,086,075
General and administrative expenses 2,561,499 5,603,685 1,186,777 3,075,448
Sales and marketing expenses 1,069,576 2,564,950 16,330 155,663
Depreciation and amortization 166,523 464,761 156,487 456,587
---------------- ---------------- ---------------- ----------------
Total operating expenses 5,858,827 14,365,741 2,527,990 6,773,773
---------------- ---------------- ---------------- ----------------

OPERATING INCOME 2,155,018 6,238,603 888,963 2,476,019
---------------- ---------------- ---------------- ----------------

OTHER (INCOME) AND EXPENSES
Interest (income) expense (27,994) (40,783) 33,808 70,802
Other (income) expense (169,857) (399,652) (392,482) (398,052)
---------------- ---------------- ---------------- ----------------

Total other (income)expense (197,851) (440,435) (358,674) (327,250)
---------------- ---------------- ---------------- ----------------

INCOME BEFORE INCOME TAXES 2,352,869 6,679,038 1,247,637 2,803,269

INCOME TAX PROVISION (BENEFIT) 676,039 2,404,486 448,895 1,077,182
---------------- ---------------- ---------------- ----------------

NET INCOME $ 1,676,830 $ 4,274,552 $ 798,742 $ 1,726,087
================ ================ ================ ================

NET INCOME PER SHARE:
Basic $ 0.04 $ 0.10 $ 0.02 $ 0.04
================ ================ ================ ================
Diluted $ 0.04 $ 0.10 $ 0.02 $ 0.04
================ ================ ================ ================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 43,430,722 42,481,237 43,810,933 43,812,299
================ ================ ================ ================
Diluted 43,438,588 42,481,237 43,810,933 43,812,299
================ ================ ================ ================

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2002

NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
---------------- -----------------

Net income $ 4,274,552 $ 1,726,087
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 464,762 456,609
Loss on disposal of equipment 7,715
Non-cash income recognized on recapture of common stock (267,675)
Receivable on legal settlement (126,466)
Allowance on related party notes receivable 131,690
Income recognized on forgiveness of debt (45,362)
Deferred income taxes 281,793 (226,572)
Officers & consultants paid common stock 478,750
Common stock surrendered (160,979)
Changes in assets and liabilities:
Trade and other accounts receivable (2,644,116) (658,429)
Customer acquisition costs (1,535,205) (1,014,528)
Prepaid and other current assets (149,498) (81,245)
Other assets 64,508 (5,000)
Receivable from affiliate (139,371)
Accounts payable 130,140 (219,069)
Accrued liabilities 256,074 (76,234)
Due to affiliates 115,084
Income taxes payable 2,122,694 1,301,327
---------------- -----------------
Net cash provided by operating activities 3,513,826 948,210
---------------- -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made to affiliates and related parties (1,000,000) (458,987)
Repayment of advances to affiliates and related parties - 153,750
Purchases of intellectual property (6,761) (49,719)
Purchases of equipment (537,912) (118,979)
---------------- -----------------
Net cash (used in) investing activities (1,544,673) (473,935)
---------------- -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 278,167
Principal repayments on notes payable (585,167) (836,653)
---------------- -----------------
Net cash (used)/provided by financing activities (307,000) (836,653)
---------------- -----------------

INCREASE IN CASH 1,662,153 (362,378)

CASH, BEGINNING OF PERIOD 767,108 683,847
---------------- -----------------

CASH, END OF PERIOD $ 2,429,261 $ 321,469
================ =================

SUPPLEMENTAL CASH FLOW INFORMATION:

Nine month Nine month
period ended period ended
June 30, 2003 June 30, 2002
-------------- --------------

Interest Paid $ 10,857 $ 61,414

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2002

1. Basis of Presentation

The accompanying unaudited financial statements represent the consolidated
financial position of YP.Net, Inc. ("the Company") for the three and nine month
periods ended June 30, 2003, and June 30, 2002, which includes results of
operations of the Company and Telco Billing, Inc. ("Telco"), its wholly owned
subsidiary, and statement of cash flows for the nine month periods ended June
30, 2003 and June 30, 2002. These statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments to these unaudited
financial statements necessary for a fair presentation of the results for the
interim period presented have been made.

2. Company Organization and Operations

The Company's "yellow page" database lists approximately 18 million businesses
throughout the United States. Our website enables internet users to search
through these "yellow page" listings and is used by businesses and consumers
attempting to locate a business and/or service provider in response to a user's
specific search criteria.

As our primary source of revenue, we offer "preferred" listings to businesses
for a monthly fee. The "preferred" listing provides a business with a priority
placement listing over non-paying listings and is displayed in a bigger and
bolder font at the beginning of, or in the first section of the user's search
results - thus featuring our paying customers more prominently to user's of our
website. In addition, our paying customers get a Mini-Webpage which includes a
40-word description of their business, their hours of operation and other useful
information, a

direct link to the paying customers website, (if they have one and it is
provided by the advertiser), map, driving directions to the paying customers
location and more. We market for advertisers of our "preferred" listing service,
under the name "Yellow-Page.Net, exclusively to businesses through a direct mail
solicitation program. The solicitation includes a promotional incentive (i.e.
generally a $3.50 check) which, if cashed by the business, automatically signs
the business up for the Preferred Listing service for an initial twelve month
period with automatic renewals thereafter. This easy subscription process
provides a written confirmation (ie. the check) of the subscription by the newly
subscribing business, which is verified by an independent third party (i.e the
paying customers depositing bank). To additionally insure the intention of
sign-up, the Company then mails a written confirmation card to the newly
subscribing business generally within 30 days from activation. The Company also
provides a 120-day cancellation period whereby the subscribing business may
cancel and receive a full refund of any amounts paid to the Company.

Each paying customer is billed monthly for that month's service, the vast
majority of such monthly billings appear on the subscribing business's local
phone bill. Management believes this ability to bill the paying customer
through the paying customers phone bill is a significant competitive advantage
for the Company as few independent (not owned by a telephone company) yellow
page companies are authorized to bill directly on the phone bill for services
rendered.

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 entity. 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 business focus.

From August through March 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.

3. 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 June 30, 2003, cash deposits exceeded
those insured limits by $ 2,200,000.

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 $1,145,950 and $3,488,662 during the three and nine
months ended June 30, 2003 respectively. The Company amortized $829,405 and
$1,953,457 , respectively, of total capitalized costs during the three and
nine months ended June 30, 2003.

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 $240,171 and $617,494 for
the three and nine months ended June 30, 2003, respectively.

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

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.

Financial Instruments: Financial instruments consist primarily of cash,
---------------------
accounts receivable, 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 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.

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.

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."

4. 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 to determine if such
customers fit the criteria to bill them on the telephone bill and are then
accepted as Net Accepted billings. 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.

5. INTELLECTUAL PROPERTY

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, 2002 or the three months ended June 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 $90,369 and
$276,808 for the three and nine months ended June 30, 2003, respectively.

6. 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 year ended September 30, 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. That valuation allowance was eliminated and
recognized as a benefit in the year ended September 30, 2002. Due to these
changes, the Company recognized an income tax benefit of $1,614,716 for the
year ended September 30, 2002. At September 30, 2002 the Company has
utilized all of its federal and state net operating losses.

Income taxes for three and nine months ended June 30, is summarized as
follows:

Three
Months Nine Months
Ended Ended
2003 2003
-------- ------------

Current Provision $546,461 $ 2,122,694
Deferred (Benefit) Provision 129,578 281,792
------------------------
Net income tax provision $676,039 $ 2,404,486
========================

At June 30, 2003, deferred income tax assets related to differences in book
and tax bases of accounts receivable, direct marketing costs and intangible
assets.

At June 30, 2003 deferred tax liabilities were comprised of differences in
book and tax bases of customer acquisition costs and property and equipment
respectively.

7. STOCKHOLDERS' EQUITY

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

During the year ended September 30, 2002, the Company created a new
series of equity, the Series E Convertible Preferred Stock, $0.001 par
value per share, and authorized 200,000, 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 those 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 June 30, 2003, the liquidation preference value of the outstanding
Series E Convertible Preferred Stock was $39,552, and dividends totaling
$1,978 had been accrued associated with those shares.

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

At June 30, 2003, there were 6,319,000 shares of stock held in
treasury.

8. NET INCOME PER SHARE

Net income per share is calculated using the weighted average number
of shares of common stock outstanding during the three and nine months
ended June 30, 2003, respectively. Preferred stock dividends are subtracted
from the net income to determine the amount available to common
shareholders. There were $494 and $1,482 preferred stock dividends in the
three and nine months ended June 30, 2003, respectively. Warrants to
purchase 500,000 shares of common stock were excluded from the calculation
for the three months ended June 30, 2003. The exercise price of those
warrants was greater than the trading value of the common stock and
therefore inclusion of such would be anti-dilutive. Also excluded from the
calculation for the nine months ended June 30, 2003 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.
However, the Series E Convertible Preferred Stock was dilutive in the
calculation for the three months ended June 30, 2003.The following presents
the computation of

basic and diluted loss per share from continuing operations for the three
and nine months ended June 30,:

Three Months Nine Months
Ended June Ended
30, 2003 June 30,
2003
Per Per
Income Shares Share Income Shares share
------------ ---------- ------ ------------- ---------- ----------

Net Income $ 1,676,830 $ 4,274,552
Preferred stock dividends (494) (1,482)
------------ -------------

Income available to common
Stockholders $ 1,676,336 $ 4,273,070
============ =============
Basic Earnings Per Share:

Income available to common stockholders $ 1,676,336 43,430,722 $ 0.04 $ 4,273,070 42,481,237 $ 0.10
============ ====== ============= ==========

Effect of dilutive securities 7,866

Diluted Earnings Per Share $ 1,676,830 43,438,588 $ 0.04 $ 4,273,070 42,481,237 $ 0.10
============ ====== ============= ==========

9. RELATED PARTY TRANSACTIONS

During the three and nine months ended June 30, 2003, the Company conducted
transactions with entities affiliated with the Company because of
commonality in members in management or direct or indirect control of the
affiliate by a member or members of the Company's management. The following
summarizes those transactions:

Three Months Nine Months
Ended Ended
-------------- --------------
June 30, 2003 June 30, 2003
-------------- --------------
Entity Amount Amount
------------ -------------- --------------

Simple.Net, Inc. ("SN") $ 57,763 $ 194,389
Commercial Finance Services d/b/a/ HR Management ("CFS") - 528,630
Business Executive Services, Inc. 62,737 172,979
Advertising Management Specialists, Inc. 102,901 409,136
Advanced Internet Marketing 59,570 221,901
DLC Consulting 30,000 90,000
Sunbelt 125,964 730,815
MAR & Associates 52,000 52,000
------------------------------
$ 490,935 $ 2,890,785
==============================

These entities provide consulting, employee leasing, marketing and
management services to the Company. The above amounts represent payments
made to these entities during the period.

In addition to these transactions, the Company also provides customer and
technical support to Simple.net for a fee. These fees are included in other
income and amounted to $442,690 in the nine months ended June 30, 2003.

During the three and nine month periods ended June 30, 2003, the Company
loaned $600,000 and $1,000,000, respectively to two entities that are
significant shareholders of the Company. Prior to this period and in
accordance with the instructions that the Company received from said
shareholders, the Company has made payments to third parties (including
related parties) on behalf of the stockholders and applied those payments
as an increase in Advances to Affiliates. The total balance due from
these entities was $1,280,000 at June 30, 2003.

During the nine month period ended June 30, 2003, the Company's board of
directors resolved to pay for the costs of defending a civil action filed
against the CEO and Chairman. The action involves a business in which the
CEO was formerly involved. The Board action includes any officers and
directors that may potentially become involved in this civil action.
Through June 30, 2003, the Company has paid approximately $344,976 on
behalf of its CEO relative to this matter. This civil action remains
unresolved. At this time, the Company cannot estimate what additional costs
may be incurred to continue covering the costs related this matter.

10. Line of Credit

The Company entered into an agreement with Bank of the Southwest for a
$250,000 unsecured bank line of credit facility on May 2, 2003. The note
requires monthly payments of all accrued interest. All principal and unpaid
accrued interest are due on May 2, 2004. Interest accrues at prime rate
plus 0.5%,or 4.25% at June 30, 2003.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

This Quarterly Report contains certain forward-looking statements, including
those regarding the Company's and its subsidiary's expectations, intentions,
strategies and beliefs pertaining to future performance. All statements
contained herein are based upon information available to the Company's
management as of the date hereof, and actual results may vary based upon future
events, both within and without management's control.

General

YP.Net, Inc., a Nevada corporation (the "Company," "we," "us," or "our"), is in
the business of providing Internet-based yellow page advertising space on or
through www.Yellow-Page.Net, www.YP.Net, and www.YP.com. Any information
------------------- ----------
contained on the foregoing web sites or any other websites referenced in this
Report are not a part of this Report. Our common stock trades on the
Over-the-Counter Bulletin Board under the symbol "YPNT" and is included as a
component of the Dow Jones Internet Services Index.

As our primary source of revenue, we offer "preferred" listings to businesses
for a monthly fee (generally $17.95). The "preferred" listing provides a
business with a priority placement listing over non-paying listings and is
displayed in a bigger and bolder font at the beginning of, or in the first
section of the user's search results - thus featuring our paying customers more
prominently to user's of our website. In addition, our paying customers get a
Mini-Webpage(TM) which includes a 40-word description of their business, their
hours of operation and other useful information, a direct link to the paying
customers website, (if they have one and it is provided by the advertiser), map,
driving directions to the paying customers location and more.

As of June 30, 2003, we had approximately 157,731 "preferred" listing
advertisers who have subscribed for this enhanced advertising service and are
also billed monthly on their telephone bill. The Company also bills directly to
certain customers via a monthly invoice. The amount and frequency of collections
on invoice billed customers is significantly less than for customers billed on
their telephone bill. The Company estimates that it has approximately 10,000
invoice bill customers that pay for the enhanced listing service on a regular
basis. The Company's total customer count represents less than 1% of the
estimated available market for preferred listings.

We market for advertisers of our "preferred" listing service ,under the name
"Yellow-Page.Net, exclusively to businesses through a direct mail solicitation
program. The solicitation includes a promotional incentive (i.e. generally a
$3.50 check), which, if cashed by the business, automatically signs the business
up for the Preferred Listing service for an initial twelve month period with
automatic renewals thereafter. This easy subscription process provides a written
confirmation (i.e. the check) of the subscription by the newly subscribing
business, which is verified by an independent third party (i.e. the paying
customers depositing bank). To additionally insure the intention of sign-up, the
Company then mails a written confirmation card to the newly subscribing business
generally within 30 days from activation. The Company also provides a 120-day
cancellation period whereby the subscribing business may cancel and receive a
full refund of any amounts paid to the Company.

In the second quarter of Fiscal 2003, we created an outbound calling department
whose function is to proactively obtain the 40-word description to be used in
the Mini-Webpage(TM), as well as other information from each newly subscribing
customer. This effort is expected to provide more information for potential
customers searching our website to help them choose to do business with one of
our Preferred Listing advertisers. As of August 11,2003, we have obtained
Mini-Webpage information on approximately 120,000 LEC and non-LEC customers.

The Company uses Dial Up Services Inc. (d/b/a Simple.Net, Inc. ("SN")), an
internet service provider beneficially owned by a director (DeVal Johnson) of
the Company, to provide internet dial-up and other services to its customers
(See Footnote 9 to the financial statements). SN charges the Company's customers
$2.50 per month for such internet access. The Company's monthly charge to its
customers includes this internet access service. The Company and SN share the
same building address but are located in different suite numbers.

We were originally incorporated as a New Mexico company in 1969. 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 entity which is a 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
business focus.

GROWTH INITIATIVES

PRIMARY GROWTH STRATEGIES

PREFERRED LISTINGS-We currently derive almost all of our revenue from selling
Preferred Listings for the search results on our website. A Preferred Listing is
displayed at the beginning of search results in response to a user's specific
search query. A Preferred Listing is enhanced on the display of search results
and includes a "Mini-Webpage(TM)" listing where the paying customer can use up
to 40 words to advertise; among other features. Our primary growth strategy is
to obtain a significantly greater number of Preferred Listings given the large,
estimated potential available market for such listings. As part of this
strategy, the Company has re-instituted its marketing program and plans to
regularly solicit its potential customer base of approximately 18 million
businesses through its direct mail solicitation program. As a result of such
program, the Company has increased its LEC-Billed (i.e. monthly telephone bill)
customer count from approximately 47,147 at June 30, 2002 to 157,731 at June 30,
2003.

BRANDING-The Company also plans to further embark upon a substantial campaign to
brand its product using the YP.Net, YP.com and Yellow-Page.Net names. The
Company seeks to become the "internet yellow pages of choice" to businesses and
consumers performing searches.

In addition to its cross marketing and cross placement agreement(s) with other
websites, the Company has signed a contract for advertising relating to Baca
Racing and National Hot Rod Association ("NHRA") events, which provides us with
advertising on the Baca Racing vehicles as well as public relations and
advertising as a sponsor of NHRA. The contract relating to Baca Racing and the
National Hot Rod Association primarily involves the payment by the Company of
approximately $20,000 as a one-time fee in an effort to gain additional exposure
for the Company and its services through this mode of advertising for an 18
month period. In addition, we are members of both the Yellow Pages Integrated
Media Association (YPIMA) and the Association of Directory Publishers (ADP). As
further described under "Strategic Alliances", these organizations are trade
associations for yellow page publishers that promote quality of published
content and advertising methods. The Company plans to take an even more active
role in the year ahead. In the future, the Company also plans to substantially
increase its advertising through print, media and fixed placement advertising in
select markets.

RECENT EVENTS

Contracts and Arrangements

During the quarter ended June 30, 2003 and prior to this filing, the Company
entered into several contracts relating to its business. In April, 2003,the
Company signed a contract with Switchboard Incorporated ("Switchboard") which
allows preferred listing customers of YP.Net to be included in the "Featured
Listing" section of Switchboard.com's internet "yellow pages." This agreement is
for one year initially.

This agreement involves a minimum monthly payment of $20,000 by the Company for
up to 250,000 directory advertisements hosted by Switchboard. The payment would
increase for additional directory advertisements exceeding 250,000 at the rate
of $.08 per directory advertisement per month. This agreement is renewable for
successive one year periods unless either party elects to terminate the
agreement with no less than 30 days notice prior to the end of the then-current
term.

In May, 2003, the Company signed an agreement with Pike Street Industries
whereby the Company's online "yellow pages" will be added to the list of online
"yellow page" sites on Pike Street Industries, Inc's websites. The cost of this
agreement is $20,000 per month. This agreement may be terminated by either party
at any time with 30 days notice.

The Company previously disclosed that it had signed a license agreement with
Palm, Inc. ("Palm") to become a provider of "yellow page" and "white page"
content on PDA ("personal data assistant") devices using the Palm operating
system. Such content will be provided by the Company to Palm through a hypertext
link from the Palm operating system to the Company's website. The cost of this
agreement was $20,000 up-front for two years. 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. The Company is 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 September 30, 2003.

The Company believes each of these agreements will increase the number of page
views for our customers and, in the case of the Switchboard agreement, also
provides Switchboard's customers the ability to also achieve additional page
views by being listed on the YP.Net-related websites.

In July 2003, Overture/GoTo announced that it was being acquired by Yahoo! Inc.
The Company has a cross-placement and cross-linking agreement with Overture/Goto
which is on a month-to month basis. At this time, the Company is unable to
determine the impact, if any, of this acquisition on the the agreement between
the Company and Overture/Goto. Based upon preliminary discussions with
Overture/GoTo and Yahoo, Company management is not aware of any impending
changes to this arrangement.

On July 8, 2003, the Company, through its wholly-owned subsidiary Telco Billing,
Inc., signed an Exclusive Domain License agreement with Onramp Access, Inc.
("Onramp"). This agreement provides the Company the exclusive use of the
domain name www.yp.com. The Company paid $250,000 plus 100,000 shares of YP.Net
----------
common stock as consideration for this agreement. The term of the license
agreement is three years. According to the agreement, there are certain
circumstances whereby the Company would become the owner of the www.yp.com
----------
domain name:

- If the price of YP.Net common stock maintains an open and close price above
$3.00 per share for three consecutive trading days and all transfer
restrictions have lapsed or been removed;

- If OnRamp has sold all of its YP. Net shares;

- If the Company exercises its right to convert the license agreement into a
purchase and sale agreement whereby the Company can exercise its right to
call the outstanding YP.Net shares held by Onramp at a price that is the
higher of $3.00 per share or the average closing price of YP.Net stock for
the three days prior to the notice of the exercise of the call); or

- Onramp converts the license agreement to a purchase and sale agreement and
exercises its right to put the stock to the Company at $3.00 per share.
Onramp's put right exists only between June 1, 2006 and September 1, 2006.

In June, 2003, the Company signed a Co-location agreement with XO Communications
("XO"), whereby the Company will locate certain of its communications
interconnection equipment and cabling on the premises of XO and will also
interconnect with the XO telecommunications network. The purpose of this
agreement is to provide for the back-up, safety and security of the Company's
network and data. This agreement is for two years and is automatically renewed
under similar terms unless either party provides forty-five day advance notice
of its desire to terminate prior to expiration. The cost of this agreement is
$750 per month per location.

2003 Stock Plan

During the year ended September 30, 2002, the Company's 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 the Company's common stock authorized under the 2002 Plan,
which were to come from the Company's authorized but unissued common stock. On
June 30, 2003 and July 21, 2003, respectively, the Company's Board of Directors
and a majority of it shareholders terminated 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.
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.

RESULTS OF OPERATIONS

Revenue for the three month period ended June 30, 2003, was $8,013,845
compared to $3,416,953 for the three month period ended June 30, 2002, an
increase of over 134%. For the nine month periods ended June 30, 2003 and 2002,
revenue increased to $20,604,344 from $9,249,792, an increase of over 122%. The
increase in revenue is primarily the result of an increase in preferred listing
customers. LEC-billed (i.e. monthly telephone bill) preferred listing customers
increased to 157,731 at June 30, 2003 compared to approximately 47,147 preferred
listing customers at June 30, 2002, an increase of over 234%. Compared to the
56,432 preferred listing customers at September 30, 2002, the beginning of this
fiscal year, the number of preferred listing customer has grown by 179% thus far
this fiscal year. The increase in preferred listing customers is the result of
our direct mail solicitation marketing efforts. As previously mentioned, the
Company also has approximately 10,000 customers that it bills directly through
monthly invoice. The amount and frequency of collections on invoice billed
customers is significantly less than for customers billed on their telephone
bill. Therefore, revenue can be negatively impacted if the billing method used
to bill a preferred listing customer converts from telephone bill invoicing to
direct invoicing. Also, revenue can be negatively impacted by customer requests
for refunds and/or cancellations.

Cost of services for the three month periods ended June 30, 2003 and June
30, 2002 were $2,061,229 and $1,168,396, respectively, an increase of
approximately 76%. Cost of services for the nine months ended June 30, 2003 and
2002 were $5,732,345 and $3,086,075, respectively, an increase of approximately
86%. Cost of services is comprised of billing aggregator dilution expenses,
certain direct mailer marketing costs and the amortization of such costs,
allowances for bad debt and our billing costs including billing fees charged by
our billing aggregators. Dilution expenses include customer credits and any
other receivable write-downs. The primary reason our cost of services has
continued to increase is due primarily to the previously mentioned increase in
preferred listing customers as well as increased dilution and billing fees
resulting from our direct solicitation mailing efforts. Cost of services as a
percent of net revenue was approximately 26% for the three months ended June 30,
2003 compared to approximately 34% for the same period in the prior fiscal year.
Cost of services as a percent of net revenue was 28% for the nine months ended
June 30, 2003 compared to 33% in the comparable prior year period. These
increased costs were offset by the leveraging of our fixed cost infrastructure
over a larger customer base which resulted in the reduction in the cost of
services as a percent of net revenue.

General and administrative expense for the three month periods ended June
30, 2003 and June 30, 2002 were $2,561,499 and $1,186,777, respectively, an
increase of approximately 116%. For the nine months ended June 30, 2003 and
2002, such expenses were $5,603,685 and $3,075,448, respectively, an increase of
approximately 82%. General and administrative expenses increased due to an
increase in costs and employees relating to our growth in preferred listing
customers, our Quality Assurance and Outbound marketing initiatives as well as
an increase in certain officers compensation relating to employment contracts
with such officers. In addition, during the three month period ended June 30,
2003, the Company paid for the costs of defending a civil action filed against
its CEO and Chairman pursuant to a Board of Directors resolution. The action
involves a business in which the CEO was formerly involved. The Company, and at
least one officer, have received subpoenas in connection with this matter. The
Board believes that it is important and in the best interests of the Company and
its shareholders to 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 June 30, 2003,
the Company has paid $344,976 on behalf of its CEO relative to this matter. This
civil action remains unresolved. 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. (See Part II-Other Information Item 1. Legal Proceedings) As a percent of
net revenue, general and administrative expenses were 32% for the three months
ended June 30, 2003 compared to 35% for the comparable period in 2002. For the
nine months ended June 30, 2003, general and administrative expenses as a
percent of net revenue were 27% compared to 33% for the comparable period in
2002. The reduction in general and administrative expenses as a percent of net
revenue is the result of the leveraging our fixed cost infrastructure over a
larger customer base.

Sales and marketing expenses are primarily the costs associated with our
marketing relating to our direct mail solicitations. Sales and marketing
expenses for the three month periods ended June 30, 2003 and June 30, 2002 were
$1,069,576 and $16,330, respectively, an increase of approximately 6400%. For
the nine months ended June 30, 2003 and 2002, sales and marketing expenses were
$2,564,950 and $155,663, respectively, an increase of almost 1500%. The primary
reason for the increase in sales and marketing is due to the Company fully
re-instituting its marketing solicitation program and the implementation of new
market strategies and modification of direct mail marketing pieces. Such
marketing has resulted in the increase in preferred listing customers cited
previously. We capitalize certain direct marketing expenses and amortize those
costs over an 18 month period based on the customer attrition rates analyzed by
the Company. As a percent of net revenues, sales and marketing expenses were 13%
and 0.4% for the three month periods ended June 30, 2003 and 2002, respectively.
For the nine month periods ended June 30, 2003 and 2002, sales and marketing
expenses as a percent of net revenue were 12% and 2%, respectively. The increase
in sales and marketing expenses as a percent of net revenue results from the
full re-institution of our marketing program.

Depreciation and amortization primarily relates to the amortization of the
Company's intellectual property and depreciation of equipment. Regarding the
Company's intellectual property, the cost of our Yellow-Page.Net URL license was
capitalized at $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
$88,088 and $107,500 for the three month periods ended June 30, 2003 and June
30, 2002, respectively. For the nine months ended June 30, 2003 and 2002,
amortization expense on the URL were $210,195 and $322,500, respectively. Annual
amortization expense in future years related to the URL is anticipated to be
approximately $200,000-$300,000. Depreciation and amortization for the three and
nine month periods ended June 30, 2003 increased slightly compared to the
comparable periods in 2002 due to additional purchases of equipment. However,
with the significant equipment purchases relating to the Company's previously-
mentioned infrastructure additions, depreciation expense is expected to increase
in future periods.

Interest income , net of interest expense for the three month periods ended
June 30, 2003 was $27,994. This compares to interest expense, net of interest
income of $33,808 for the three months ended June 30, 2002. For the nine month
periods ended June 30, 2003 and 2002, interest income, net of interest expense
was $40,783 compared to interest expense, net of interest income of $70,802. The
increase in the interest income portion results from the Company's increased
cash position resulting from the Company's increased profitability. The decrease
in the interest expense portion was a result of the payment of a substantial
portion of our debt in Fiscal 2002.

We recorded other income of $169,857 and other income of 392,482
respectively, for the three month periods ended June 30, 2003 and June 30, 2002.
The primary components of other income in the current year period is revenue of
$166,536 received from Simple.Net, a related party (See Footnote 9 to the
Financial Statements) for customer and technical services provided by the
Company to Simple.net. The primary components of other income in the prior year
period was $195,772 recorded as a gain on the settlement with a former
consultant to the Company and $200,000 received as a settlement from a former
billing aggregator. For the nine months ended June 30, 2003, we recorded other
income of $399,652 compared to other income of $398,052 for the comparable
period in 2002. The primary components of other income in the current period
were revenue of $442,691 received from Simple.Net, a related party (See Footnote
9 to the Financial Statements) for customer and technical services provided by
the Company to Simple.net offset by a $90,000 loss on a settlement with a former
consultant to the Company. The primary components for the prior year period were
$195,772 recorded as a gain on the settlement with a former consultant to the
Company and $200,000 received as a settlement from a former billing aggregator.

Net income before taxes for the three month periods ended June 30, 2003 and
June 30, 2002 were $2,352,869 and $1,247,637 , respectively, an increase of over
88%. For the nine month periods ended June 30, 2003 and 2002, net income before
taxes were $6,679,038 and $2,803,269, respectively, an increase of approximately
138%.

Net income for the three month periods ended June 30, 2003 and June 30, 2002
were $1,676,830 , or $0.04 per diluted share, and $798,742 , or $0.02 per
diluted share, respectively, an increase in net income of over 109%. For the
nine months ended June 30, 2003 and 2002, net income was $4,274,552 or $0.10 per
diluted share and $1,726,087, or $0.04 per diluted share, respectively, an
increase in net income of 148%. In the three and nine month periods ended June
30, 2003 compared to the comparable periods in 2002, net income increased due to
the increase in preferred listing customers cited above with a less than
corresponding increase in the expenses to service such customers due to nature
of certain fixed infrastructure expenses which do not necessarily increase as
revenues increase offset by costs incurred relating to the previously cited
infrastructure additions. Net income as a percent of net revenues for the three
months ended June 30, 2003 was 21% compared to 23% for the comparable prior
period. For the nine months ended June 30, 2003, net income as a percent of net
revenue was 21% compared to 19% for the comparable prior period.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the nine-month period ended
June 30, 2003, was $3,513,826 compared to $948,210 for the nine -month period
ended June 30, 2002. The increase in cash generated from operations is
primarily due to a significant increase in net income and corresponding income
tax payable resulting from an increase in preferred listing customers offset by
an increase in the accounts receivable balance from such growth and funds
expended for mailings related to the Company's marketing efforts.

We had working capital of $4,684,466 as of June 30, 2003 compared to
$1,115,741 as of June 30, 2002. The increase is due primarily to increases in
cash of $2,107,792 and accounts receivable of $2,368,328 offset by increases in
deferred income taxes of $365,550 and accrued liabilities of $440,263.

Cash used in investing activities was $1,544,673 for the nine -month period
ended June 30, 2003. The primary components of cash used represents purchase of
computer equipment (relating to the previously-mentioned infrastructure
additions) and intellectual property of $544,673, as well as net advances to
affiliates of $1,000,000. Compared to the nine -month period ended June 30,
2002, where cash used of $473,935 consisted of significantly lower purchases of
computer equipment of $118,979 and lower net advances to affiliates of $458,987
offset by repayments of advances to affiliates and related parties of $153,750.

Cash used by financing activities was $307,000 for the nine -month period
ended June 30, 2003, compared to $836,653 for the nine -month period ended
June 30, 2002. The cash used represents total payments made to reduce the
principal balances of our outstanding debt reduced by financing of $278,167
under the Company's trade acceptance draft program with AcTrade Financial
Technoligies, Ltd.

We have repaid almost all of our debt. However, we have a commitment to
provide up to $10,000,000 in loans to each of Morris & Miller, Ltd. and Matthew
& Markson, Ltd. (the "M&M's") Those funding commitments are contingent upon the
Company having sufficient cash flow for its operations. Any amounts advanced to
the M&M's are to be repaid to the Company and can be offset against amounts owed
to the M&M's. We do not believe that the M&M's, as our largest shareholders,
will make significant requests for funding under this commitment, as such
advances would adversely affect our liquidity. During the three months ended
June 30, 2003, the Company made $600,000 of advances under these commitments.
The balance due from the M&M's under this commitment was $1,280,000 at June 30,
2003.

The Company previously entered into Executive Consulting Agreements
with Sunbelt Financial Concepts Inc. ("Sunbelt"), Advertising Management and
Consulting Services, Inc. ("AMCS") and Advanced Internet Marketing Inc. ("AIM")
relating to the employment of three executive managers and their respective
staffs. As part of these agreements, a Flex Compensation program was instituted.
Under these agreements, each of Sunbelt, AMCS and AIM may annually draw up to
$220,000, $50,000 and $30,000 respectively subject to sufficient cash on hand at
the Company. The amounts are increased by 10% annually and also contain a Due on
Sale Clause, whereby if there is a change of control of the Company, as defined,
then the respective agreements allows each to receive the greater of 30% of the
amounts due under the respective agreements or 12 months worth of fees. As of
August , 2003, all amounts had been drawn under the agreements.

On May 1, 2003, the Company also entered into a similar Executive Consulting
Agreement with Mar & Associates, Inc. ("MAR"). David Iannini, the Company's
Chief Financial Officer, is the President of MAR, and MAR is wholly-owned by a
family trust, of which Mr. Iannini is trustee. Similar to the agreements
describe immediately above, the MAR agreement provides that Mr. Iannini, through
MAR, will provide the Company with the services of Chief Financial Officer,
among other administrative services and personnel. As part of the MAR agreement,
MAR will receive $17,500 per month with a 10% annual increase in each succeeding
year, and fees and reimbursements for certain ancillary items. In addition, the
agreement also awarded MAR with 250,000 shares of Company common stock,
grossed-up for taxes, subject to achieving certain performance goals for the
Company in Fiscal 2003. If such goals are not achieved, then part of the award
is forfeited on a pro rata basis. The agreement also awarded bonuses of $15,000
to MAR relating to performance in Fiscal 2003, $21,000 relating to performance
for Fiscal 2004 and 10% of annual salary for each fiscal year thereafter for the
term of the Agreement, which is December 31, 2007 unless otherwise extended by
the parties. As part of the agreement, a Flex Compensation program was
instituted which allows MAR to draw up to $15,000 (increased by 10% on each
anniversary date of this Agreement) as additional compensation, subject to
sufficient cash on hand at the Company. In addition, the Agreement contains a
Due on Sale clause whereby if there is a change of control of the Company, as
defined, then MAR will receive the greater of 30% of the amounts due under the
Agreement or 12 months worth of fees. As of this filing, MAR had drawn the
entire $15,000 under its Flex compensation agreement.

Our Chief Executive Officer is involved in personal litigation, which may divert
his attention from the management of the Company. The Company's Board of
Directors has resolved 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 June 30, 2003,
the Company has paid $344,976 on behalf of its CEO relative to this matter. This
civil action remains unresolved. 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. Recently, the parties have engaged in preliminary settlement discussions,
some of which have included the possible payment of cash or equity by the
Company. There can be no assurance that the Company may not be named a defendant
in this action in the future.

During the quarter ended June 30, 2003, the Company 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. On July 2, 2003, the Company drew $100,000 of funds
under this credit facility and repaid this borrowing on August 2, 2003.

We believe that cash and cash equivalents on hand, anticipated future cash
receipts generated from operations and the availability of funds under our
existing line of credit will be sufficient to service our remaining debt and
meet our obligations as they become due over the next twelve months.

CERTAIN RISK FACTORS AFFECTING THE COMPANY'S 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 Chief Executive
Officer is involved in personal litigation, which may divert his attention from
the management of the Company. The Company's Board of Directors has resolved 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 June 30, 2003, the Company has paid $344,976 on behalf of
its CEO relative to this matter. This civil action remains unresolved. 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.

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 the projected changes to our direct marketing
pieces or regulatory matters discussed below. See "MARKETING," above. As a
consequence, operating results for a particular quarter are extremely difficult
to predict. Our ability to meet financial expectations could 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. Additionally, in
response to customer demand, we continue to attempt develop new products to
reduce our attrition rates.

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 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 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.

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 continued reductions in our revenue for any
reason, our margins will 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 couple of 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 3 - Controls and Procedures
-------------------------

The Company's management, including its Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of
the end of the period covered by this Quarterly Report (the "Evaluation Date").
Based on such evaluation, the Company's management has concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
such that material information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified by the Securities and
Exchange Commission's rules and forms relating to the Company. The Company's
management has also concluded that the Company's disclosure controls and
procedures are designed to accumulate and communicate the information required
to be disclosed by the Company to the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. No significant changes were made
in the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to ordinary routine litigation in the course of our
operations. We have also been subject to certain state and federal regulatory
proceedings. See Footnote 9 to the Company's financial statements included
herein.

The Company's Chairman and Chief Executive Officer, Mr. Tullo, is a party
defendant in an adversary proceeding ancillary to the Bankruptcy proceedings
under Chapter 11 of American Business Funding, Inc. ("ABF"). See United States
Bankruptcy Court for the District of Arizona, Case #00-01782-ECF-RJH, and Case
#00-00151-RJH American Business Funding Corporation (ABF) v. Tullo, et. al. The
suit alleges that all of the former officers of ABF, including Mr. Tullo, and
others and entities that may have been controlled by them, made fraudulent
conveyances and breached their fiduciary duty to certain shareholders of ABF.

Mr. Tullo has answered the complaints against him and has denied all the
allegations and has been vigorously contesting the plaintiffs' claims. Mr. Tullo
and his legal counsel have provided the following information:

Mr. Tullo alleges that he discovered a scheme of financial improprieties by
his partners and some employees, including misappropriation of funds from ABF.
Further that after Mr. Tullo left his former partners and those appointed by
them continued to raise funds without disclosure and to pay old obligations with
this new money. Mr. Tullo states that it was through his intervention, by
contacting many of the creditors, meeting with the Arizona Attorney General's
Office, and moving for and obtaining the appointment of a Receiver, and later a
court appointed examiner, that the activities stopped. Upon the appointment of
the receiver, the directors appointed by Mr. Tullo's former partners authorized
ABF to file for protection under the United States Bankruptcy Code and initiated
the suit referenced above.

There are several other suits related to ABF and its bankruptcy
proceedings. In all of the cases not filed by the control persons of ABF, Mr.
Tullo is not named as a defendant. The only findings of fact and conclusions of
law that have been rendered in this series of cases is against one of the
directors installed by Mr. Tullo's former partners, and that was by the Arizona
Corporation Commission, docket number S-03443A-01-0000 Decision number 64079. In
addition, the suit filed by the American Support Foundation which is controlled
by the individuals appointed by Mr. Tullo's former partners has been dismissed
in Mr. Tullo's favor.

The Company has conducted a limited investigation of these matters, but is
not in a position to confirm or deny the truth of the various and conflicting
allegations. The litigation does not presently name the Company as a defendant.
The litigation could adversely affect the Company if the litigation diverts Mr.
Tullo's attention from his duties as an officer and director of the Company.
Recently, the parties have engaged in preliminary settlement discussions, some
of which have included the possible payment of cash or equity by the Company.
There can be no assurance that the Company may not be named a defendant in this
action in the future. Closing arguments in this case were concluded in July,
2003 and a decision is expected on or before September 30, 2003. Any decision
may be subject to appeal.

The Company has agreed to pay all of Mr. Tullo's legal expenses in connection
with the foregoing action. To date, such expenses have aggregated $344,976.

ITEM 2. CHANGES IN SECURITIES

During the nine months ended June 30, 2003, the Company issued the
following unregistered securities and on the following terms:

- 4,000,000 shares (value of $300,000) to Sunbelt Financial Concepts, Inc.
("Sunbelt"), for services provided to the Company. Angelo Tullo, the
Company's CEO and Chairman, is President of Sunbelt;

- 1,000,000 shares (value of $75,000) to Advertising Management and
Consulting Services, Inc. ("AMCS") for services rendered to the Company.
Greg Crane, Company's Vice President of Marketing and a Director, is
President of AMCS;

- 1,000,000 shares (value of $75,000) to Advanced Internet
Marketing,Inc.("AIM") for services rendered to the Company. DeVal Johnson,
the Company's Secretary and Director is President of AIM; and

- In December , 2003, the Company issued 50,000 shares (value of $3,750) to
David J. Iannini, the Company's CFO. In addition, 250,000 shares (value of
$25,000) were issued to Mar & Associates, Inc., an entity owned by a family
trust, of which Mr. Iannini is the sole trustee. These shares were issued
in consideration of services rendered to the Company through December 31,
2002.

The restricted shares were issued based upon the average bid and ask prices at
the time of issuance and were issued in reliance on the exemption from
registration provided by Section 4 (2) of the Securities Act.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(b) (a) See Exhibit Index The Registrant filed the following Current
Reports on Form 8-K during the three-month period covered by this
report and ending June 30, 2003:

- On May 30, 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 second fiscal quarter endied
March 31, 2003.

- 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.

Items 3-5 are not applicable and have been omitted.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.

YP.NET, INC.

Dated: August 14th, 2003 /s/ Angelo Tullo
-------------------
Chairman, President, Chief Executive Officer
--------------------------------------------

/s/ David J. Iannini
-----------------------
Chief Financial Officer
-------------------------

EXHIBIT INDEX

Exhibit No. Exhibit
------------- -------------------------------------------

10.1 Colocation Agreement between the Registrant and XO
Communications, Inc. dated June 10_, 2003
10.2 Executive Consulting Agreement between the Registrant and Mar &
Associates, Inc. dated May 1, 2003
10.3 Private Label Agreement-Vista.com
31.1 Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 1350 of Chapter 63 of
Title18 of the United States Code

____________