Edgar Filing: YP NET INC

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

____________________

FORM 10-QSB/A #2
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(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, 2002

[ ] 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

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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
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The number of shares of the issuer's common equity outstanding as of JUNE
30, 2002 was 43,813,680 shares of common stock, par value $.001.

Transitional Small Business Disclosure Format (check one):

Yes No X
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YP.NET, INC.
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED JUNE 30, 2002

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Comparative Balance Sheets
as of June 30, 2002 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations
for the Three-Month Periods and the Nine-Month Periods
Ended June 30, 2002 and June 30, 2001 . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended June 30, 2002 and
June 30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to the Consolidated Financial Statements. . . . . . . .7-11

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . 12-17

PART II
OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . .. . . . . . . . . . . . 17
Item 5. Other Information. . . . . . . . . . . . .. . . . . . . . . . . 17-18
Item 6. Exhibits and Reports on Form 8-K . . .. . . . . . . . . . . . 18

SIGNATURES

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2002

ASSETS:

CURRENT ASSETS
Cash $ 321,469
Accounts receivable 3,528,538
Customer acquisition costs 1,207,772
Prepaid expenses and other assets 227,880
Deferred income taxes 744,398
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Total current assets 6,030,057

PROPERTY AND EQUIPMENT, net 353,751

DEPOSITS 28,287

INTELLECTUAL PROPERTY- URL 3,657,592

NOTES RECEIVABLE - affiliates 289,862

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TOTAL ASSETS $10,359,549
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 95,835
Notes payable and accrued interest- current portion 342,666
Income taxes payable 2,523,645
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Total current liabilities 2,962,146

NOTES PAYABLE - long term portion 119,586

DEFERRED INCOME TAXES 120,868

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Total liabilities 3,202,600
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STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 50,000,000 shares authorized,
43,563,680 issued and outstanding 43,564
Paid in capital 4,289,381
Treasury stock at cost (171,422)
Retained earnings 2,995,426
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Total stockholders' equity 7,156,949
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,359,549
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See the accompanying notes to these unaudited financial statements

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD AND NINE-MONTH PERIOD ENDED JUNE 30, 2002 AND
JUNE 30, 2001

Three Months Nine Months Three Months Nine Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2002 2002 2001 2001
---------------- ---------------- ---------------- ----------------

NET REVENUES $ 3,416,953 $ 9,249,792 $ 3,466,635 $ 13,098,596
---------------- ---------------- ---------------- ----------------

OPERATING EXPENSES:
Cost of services 1,168,396 3,086,075 1,918,532 7,811,691
General and administrative expenses 1,186,777 3,075,448 667,216 2,188,773
Sales and marketing expenses 16,330 155,663 14,623 50,095
Depreciation and amortization 156,487 456,587 151,536 456,251
---------------- ---------------- ---------------- ----------------
Total operating expenses 2,527,990 6,773,773 2,751,907 10,506,810
---------------- ---------------- ---------------- ----------------

OPERATING INCOME 888,963 2,476,019 714,728 2,591,786
---------------- ---------------- ---------------- ----------------

OTHER (INCOME) AND EXPENSES
Interest (income) expense 33,808 70,802 (96,418) (364,880)
Other Income (392,482) (398,052) 57 121
---------------- ---------------- ---------------- ----------------

Total other (income)expense (358,674) (327,250) (96,361) (364,759)
---------------- ---------------- ---------------- ----------------

INCOME BEFORE INCOME TAXES 1,247,637 2,803,269 618,367 2,227,027

INCOME TAX PROVISION (BENEFIT) 448,895 1,077,182 189,515 705,345
---------------- ---------------- ---------------- ----------------

NET INCOME $ 798,742 $ 1,726,087 $ 428,852 $ 1,521,682
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NET INCOME PER SHARE:
Basic $ 0.02 $ 0.04 $ 0.01 $ 0.04
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Diluted $ 0.02 $ 0.04 $ 0.01 $ 0.04
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 43,810,933 43,812,299 40,615,464 40,362,083
================ ================ ================ ================

Diluted 43,810,933 43,812,299 40,615,464 40,362,083
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See the accompanying notes to these unaudited financial statements

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 2002 AND JUNE 30, 2001

NINE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
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Net income $ 1,726,087 $ 1,521,682
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 456,609 456,113
Loss on disposal of equipment 7,715 -
Non-cash income recognized on recapture of common stock (267,675) -
Receivable of legal settlement (126,466) -
Allowance on related party notes receivable 131,690 -
Deferred income taxes (226,572) -
Officers & consultants paid common stock - 59,700
Common stock surrendered - (494,310)
Changes in assets and liabilities:
Trade and other accounts receivable (658,429) 624,805
Customer acquisition costs (1,014,528) (71,320)
Prepaid and other current assets (81,245) 98,053
Other assets (5,000) (26,777)
Accounts payable (219,069) 15,508
Accrued liabilities (76,234) (328,201)
Income taxes payable 1,301,327 705,345
Deferred revenue -
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Net cash provided by operating activities 948,210 2,560,598
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CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made to affiliates and related parties (458,987) -
Repayment of advances to affiliates and related parties 153,750 -
Purchases of intellectual property (49,719) -
Purchases of equipment (118,979) (15,138)
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Net cash (used in) investing activities (473,935) (15,138)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on notes payable (836,653) (2,713,986)
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Net cash (used)/provided by financing activities (836,653) (2,713,986)
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(DECREASE)/INCREASE IN CASH (362,378) (168,526)

CASH, BEGINNING OF PERIOD 683,847 219,613
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CASH, END OF PERIOD $ 321,469 $ 51,087
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See the accompanying notes to these unaudited financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD AND NINE-MONTH PERIOD ENDED JUNE 30, 2002 AND JUNE
30, 2001

1. Basis of Presentation

The accompanying unaudited financial statements represent the consolidated
financial position of YP.Net, Inc. ("the Company" or "YP.Net") for the three and
nine-month periods ended June 30, 2002, and June 30, 2001, which includes
results of operations of the Company and Telco Billing, Inc. ("Telco"), its
wholly owned subsidiary, and statement of cash flows for the three and
nine-month periods ended June 30, 2002 and June 30, 2001. 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.
The results for the three and nine-month periods ended June 30, 2002, and June
30, 2001, may not necessarily be indicative of the results for the entire fiscal
year. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the years ended September 30, 2001, and 2000, and Form
10-QSB for quarter ended December 31, 2001, and March 31, 2002 including
specifically the financial statements and notes to such financial statements
contained therein.

2. Summary of Significant Accounting Policies

The accounting policies followed by the Company, and the methods of applying
those policies, which affect the determination of its financial position,
results of operations and cash flows are summarized below:

Cash and Cash Equivalents
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Cash and cash equivalents include all short-term liquid investments that are
readily convertible to known amounts of cash and have original maturities of six
months or less. At times cash deposits may exceed government insured limits.

Principles of Consolidation
---------------------------

The consolidated financial statements include the Company and its wholly owned
subsidiary, Telco. All intercompany accounts in consolidation have been
eliminated.

Revenue Recognition
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The Company's revenue is generated by customer subscription of directory and
advertising services. Revenue is recognized monthly for services subscribed in
that specific month. The Company utilizes outside billing companies to transmit
billing data that is forwarded to Local Exchange Carriers ("LECs"). Monthly
subscription fees are included on the telephone bills of the LEC customers. The
Company recognizes revenue based on net billings accepted by the LECs. Net

billings result from gross submittals reduced by billing records rejected by the
LEC's and adjusted for resubmittals. Revenue is reported gross of fees charged
by the billing company and the LEC's.

Fair Value of Financial Instruments
-----------------------------------

The carrying amounts for investments in marketable securities, trade accounts
receivable, trade accounts payable, accrued liabilities and notes payable,
approximate their fair value due to the short maturity of these instruments.
The Company has determined that the recorded amounts approximate fair value.

Net Earnings Per Share
----------------------

Net earnings per share are calculated using the weighted average number of
shares of common stock outstanding during the year. The Company has adopted the
provisions of Statement of Financial Accounting Standards 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.
This may affect the reported amounts of assets and liabilities and disclosure of
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.

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.

3. Intangible Asset

In connection with the Company's acquisition of Telco, the Company is required
to provide payment of licensing fees for the use of the Internet domain name or
Universal Resource Locator ("URL") Yellow-Page.Net. The URL is recorded at its
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cost net of accumulated amortization. The Company's management believes that
the Company's business is dependent on its ability to utilize this URL given the
recognition of the "yellow page" term. The Company's management believes that
the current revenue and cash flow generated using the URL Yellow-Page.Net
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substantiates the net book value of the asset. The Company will periodically
analyze the net book value of this asset and determine if impairment has
incurred. The URL is amortized on an accelerated basis over the twenty-year
term of the licensing agreement.

4. Notes Payable and Line of Credit

Notes payables are recorded and interest is accrued in accordance with the
individual terms of each note. Notes payable at June 30, 2002, were as follows:

Note 1: The Company entered into a loan agreement with Mr. Joseph Van Sickle in
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connection with the acquisition of Telco pursuant to which Mr. Van Sickle lent
$2,000,000 to the Company. As of June 30, 2002, this note had an outstanding
balance of $327,932 plus accrued interest of $14,734. In June 2002, Mr. Van
Sickle filed suit against the Company alleging that the Company defaulted on its
obligations under the loan agreement. The Company responded to this claim and is
currently negotiating with Mr. Van Sickle concerning a resolution of the claim.
Mr. Van Sickle is a less than one percent (1%) shareholder of the Company and
Mr. Van Sickle is not a member of management and currently has no position on
the Board of Directors of the Company.

Note 2: The Company entered into an agreement with Matthew & Markson, Ltd., an
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Antigua corporation ("M&M"), in connection with the acquisition of Telco for the
license of the URL Yellow-Page.Net. The Company agreed to pay M&M $5,000,000 to
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license URL Yellow-Page.Net. At June 30, 2002, the M&M note payable had an
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outstanding balance of $119,586. M&M is not a member of management and
currently has no position on the Board of Directors for the Company. M&M owns
approximately 27% of the Company's issued and outstanding stock.

M&M, as the licensor to the Company of the Yellow-Page.net URL, made a claim
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against the Company during the year ended September 30, 2001asserting that the
Company owed M&M $2,000,000, as a fee for a loan extension given to the Company
in 1999. The Company entered into a settlement agreement with M&M resolving
this claim. The settlement agreement required the Company to pay M&M $550,000,
and issue 4,000,000 shares of the Company's common stock and warrants to
purchase an additional 500,000 shares of the Company's common stock. The value
of the common stock was determined on the basis of the quoted trading price of
the shares on the date of this settlement agreement. The stock has a two-year
restrictive stock legend. The outstanding balance owed to M&M was $119,586 as
of June 30, 2002. The Company accelerated payments to M&M on this note to
prepay principal at a more rapid rate than is required under the note agreement.

5. Common Stock

Transactions in the Company's common stock issued for the acquisition of assets,
products, or services are accounted for at fair value. Fair value is determined
based on the bid and ask price at the date of the transactions of the Company's
common stock, or the fair value of the asset, product, or service received.

6. 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. The provision for income taxes for interim periods is calculated on
the basis of the expected effective rate for the full year.

7. Advances to Affiliates

Officers' Loans
---------------

The Company has made loans to affiliates in the form of promissory notes to two
officers as part of their respective compensation packages. The board of
directors has approved the advance of these funds to the officers or companies
they control. The advances are subject to repayment by the officers and are
evidenced by the notes that are collateralized by the officers' common stock
valued at a floor price of $1.00 per share or current market price, whichever is
greater. Presently, the maximum loan amount under these notes is limited to
$200,000 to Sunbelt Financial Concepts, in the case of Angelo Tullo, and $70,000
to The Thompson Group P.C., in the case of Pamela J. Thompson, the Company's
former Chief Financial Officer. Advances are being amortized over a 12-month
period and carry an annual interest rate of 8%. The Board of Directors has not
made any decision whether to bonus as compensation these advances now or in the
future, but will review on a quarterly basis any recommendations made by the
Compensation Committee of the Board of Directors with respect to the treatment
of these amounts.

The Company has elected to provide in the financial statements a reserve based
on a 12-month amortization schedule to allow for the potential bonus' that may
be added to officer compensation and to insulate the Company from fluctuations
in the value of the collateral stock.

Ms. Pamela Thompson resigned as Chief Financial Officer of the Company effective
May 24, 2002. (See Item 1) The Company does not expect the loan made to the
Thompson Group, P.C. to be voluntarily repaid. Any loss the Company may incur
should be reduced by the value of the collateral stock and the reserve
established for that loan. The Company does not expect to voluntarily recover
any deficiency that may exist if the value of the collateral is not sufficient
to cover the full amount of the Thompson Group's liability to the Company. The
Company does not believe that the non-payment of the loan will have a materially
adverse affect on the Company.

Matthew & Markson, Ltd. Advance Agreement
-----------------------------------------

The Company has made advances to Matthew & Markson, Ltd. (M&M) that are also
collateralized by the Company's common stock owned by M&M. This loan agreement
resulted from a settlement reached in September 2000 with M&M whereby the "put"
agreement originated as part of the purchase of Telco billing was terminated.
The "put" agreement would have allowed M&M to "put" back to the Company up to 10
million shares of common stock at a price of $1.00 per share. Management
negotiated a loan agreement with M&M in exchange for the termination of "put"
agreement rights whereby M&M can borrow up to $10 million dollars from the
Company collateralized by M&M's YP.Net stock valued at a floor of $1.00 per
share or 80% of the last trade of the stock prior to the advance request,
whichever is greater. The interest rate charged on these advances is either an
8% annual rate or % higher than the Company's average borrowing cost from an
institutional lender, whichever is greater. Currently M&M is charged an
interest rate of 8% calculated as an annual rate as the Company has paid off its
institutional lender. There are restrictions in the loan agreement that allow
management to reject an advance request by M&M if the Company has insufficient
cash, cash reserves and anticipated cash receipts and or borrowing availability
to cover operating expenses over the next 30-day period. M& M is a 27%
shareholder of the Company.

The following schedule sets forth the balances of the Company's advances
made on behalf of it's officers and as part of the settlement with Matthew &
Markson, Ltd. as of June 30, 2002:

Sunbelt Financial Concepts $177,358
The Thompson Group PC 16,899* See Item 1, below
Matthew & Markson 227,296
Allowance for Advances (131,691)

Total Advances to Affiliates $289,862

8. Related Party Transactions

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

The Company has entered into mutual service agreements with Simple. Net ("SN").
Mr. DeVal Johnson, a director of YP.Net, Inc., is the beneficial owner of SN.
SN is a national internet service provider that has from time to time sold those
services to the Company at below market rate prices.

On May 1, 2002, the Company assigned its Level 3 contract to SN in exchange for
a new contract from SN that would provide dial-up services for the Company's
customers at a reduced rate of $2.50 per user, per month. The Company
determined that it did not have a sufficient amount of internet service dialup
customers to benefit from its Level 3 contract, while SN, as an internet service
provider, had a sufficient number of customers to support the base payment
structure agreed to in the Level 3 contract. As a result, during this period
the Company paid $19,218 to SN instead of the $50,000 that would have been paid
to Level 3 under the old arrangement. If the Company's internet dial-up
customers should increase, the Level 3 contract would be less expensive for us
than our agreement with SN. The Level 3 contract is not assignable without the
consent of Level 3, which the Company has not yet obtained. Consequently, the
Company is still liable to Level 3 under the terms of the contract. SN has
agreed to assume and perform the terms of the Level 3 contract. Since The
Company provides billing services to SN it would have the right of offset
against SN in the event that SN does not perform under the arrangement with
Level 3 that SN has agreed to accept assignment from the Company. The
assignment of the Level 3 contract to SN resulted in savings to the Company of
approximately $30,782. In addition, SN has contracts with other National
providers such as Broadwing Communications and through the Company's contract
with SN The Company has obtained access numbers under those contracts as well
for the benefit of the Company's customers.

By being able to provide Internet access to its customers the Company benefits
two ways. First it has an additional product to sell to its customers, which
enhances their retention. And second it has allowed the Company to bill
customers on their phone bill (LEC Bill) for both services and is especially
beneficial to the Company in areas where the Company can not LEC bill for the
Company's core product

SN pays a monthly fee to the Company to provide technical support and provide
quality customer service while utilizing the Company's own customer service
personnel as well as management and accounting services according to a pricing
formula based on a price per customers as follows:

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.

Previously the Company's staff performed the accounting functions for SN since
SN utilizes a compatible accounting and billing process. SN paid us $2,500 a
month for these accounting services. As of July 1, 2002, the Company no longer
provides accounting services to SN as this arrangement has been canceled.

Matthew & Markson and Morris & Miller have provided the primary financing for SN
in the principal amount of $1,025,000 and $610,000 respectively, in the form of
promissory notes; interest is being calculated at a rate of 15% for both notes.
Matthew & Markson is a 27% and Morris & Miller is a 22% of shareholder the
Company. Neither Matthew & Markson, nor Morris & Miller is a part of management
or on the Board of Directors of the Company or SN.

Commercial Finance Services d/b/a/ HR Management ("CFS")
--------------------------------------------------------

The Company has entered into an employee leasing arrangement with Commercial
Finance Services, Inc. d/b/a HR Management, Inc. (CFS). See the Company's Form
10-KSB for the fiscal year ended September 30, 2001. CFS provides factoring and
financing as well as the services of a professional employer organization
("PEO") for small to mid-sized companies. CFS does not provide any services to
the Company, other than those of a PEO through HR Management, Inc. The Company
pays CFS a monthly amount of approximately $128,000. This amount includes
employee wages, payroll taxes, employee benefits and a below market
administration fee of 2.5% per month. This arrangement allows the Company to
offer additional benefits to its employees by sharing those costs with other
clients of CFS. The Company pays CFS fees for payroll and benefit
administration of approximately $2,800 per month, which represents the cost of a
payroll clerk

Central Account Services, Inc. is the majority owner of CFS, holding over 85% of
the stock. Central Account Services, Inc. and is unrelated to the Company. Mr.
Joseph McDaniel, who owns 3% of CFS and also serves as counsel for the Company,
and Matthew & Markson which has provided funding to CFS in the principal amount
of $1,525,821, are the only related parties. Matthew & Markson is not a part of
management or on the Board of Directors of the Company or CFS.

Matthew Markson, Ltd.
---------------------

The Company has a note payable to Mathew Markson, Ltd. ("M&M"), which at the
beginning of the fiscal year had a principal balance of $550,000. The
outstanding balance on this note as of June 30, 2002, was $119,586 . In
accordance with instructions that the Company has received from M&M, the Company
has made payments to third parties on behalf of M&M, and applied those payments

as reductions to this note, thereby reducing the outstanding balance on our
books and records. Matthew & Markson is not a part of management or on the
Board of Directors of the Company.

Business Executive Services, Inc.
---------------------------------

Business Executive Services, Inc. ("BESI"), as the nominal rent sub-lessee,
leases portions of the Company's Mesa facility to other businesses associated
with other third parties (provides executive suites).

In addition to providing Executive Suites to a variety of companies, BESI's
personnel have expertise in the processing and managing of large direct mail
marketing campaigns. Because of this expertise, the Company has decided to
outsource its direct mail marketing services to BESI.

Pursuant to an agreement the Company has with BESI, BESI processes all of the
direct mail solicitation pieces, welcome letters and other communications with
customers and prospective customers.

We pay a base fee of $10,000.00 per month and then a monthly fee to BESI based
on a price of .015 cents per mail piece, based on the number of mail pieces
prepared and sent, and not less than a floor of $15,000 per month. The floor
amount is reviewed for possible adjustment quarterly.

Mr. Crane, a director of the Company, is employed by BESI and receives a salary
of approximately $2,000 per month from BESI and bonuses in an undetermined
amount. BESI has no related party ownership in the Company.

Advertising Management &Consulting Services , Inc.
-------------------------------------------------

Advertising Management & Consulting Services, Inc. ("AMCS"), is a marketing and
advertising company that rents executive suites from BESI. AMCS' staff is
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. The Company out sources the design and testing
of its many direct mail pieces to AMCS for a fee of $20,000 per month. AMCS is
also responsible for the new products that have been added to our website and is
working on new mass- market products to offer our customers. Mr. Crane, a
Director of the Company, is also the President of AMCS.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

YP.Net, Inc., a Nevada corporation ("we," "our," "us" or the "Company") is
in the business of providing to subscribers an Internet-based yellow page
listing services on our Yellow-Page.Net and YP.Net Web sites. After acquiring
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Telco Billing ("Telco") in June 1999, we changed our primary business focus to
become an Internet-based yellow page listing service. Our websites serve as a
search engine for yellow page listings in the United States and Canada. We
charge our customers a monthly fee (currently $17.95) for a "preferred" listing
of their businesses on searches conducted by Internet consumers on our websites.

We were originally incorporated in 1969 as Nuclear Medicine of New Mexico,
Inc., a New Mexico Corporation, and were subsequently reincorporated 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.
("RIGL"). 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.

We currently derive virtually all of our revenues from selling to
subscribers preferred listings for the search results on our websites. A
preferred listing is displayed at the beginning of search results in response to
a user's specific questions. A preferred listing is enhanced on the display of
search results and includes a "mini-Web-page" listing where the preferred lister
can use up to 40 words to advertise and provide additional information regarding
its business. A preferred listing customer can also link its own web page to
the search results. We are developing banner advertisements and outside
marketing efforts as an additional source of revenue. We are also attempting to
develop additional revenue sources and expand services to our customers through
logo advertisements on our direct mailer.

We have experienced continued increases in competition in the Internet
yellow page market, and continue to seek joint venture and investment
acquisition opportunities to potentially mitigate the effects of competition in
the electronic yellow page markets.

We utilize direct mailings as our primary marketing program and the
resultant customers from this program are the principal source of our revenue.

Our Customer Counts generally increase when the Company markets in this fashion.
For example our customer counts increased from 114,409 in December 1999 to
129,457 by March 31st, 2000, and to 143,292 as of June 2000.

The Company voluntarily ceased its marketing activities while it negotiated
a resolution of the suit with the Federal Trade Commission. This matter has been
resolved with no findings of wrong doing on the part of the Company or its
officers. During these periods of little or no marketing (some tests were done
from November 2001 to February 2002) the Customer counts declined.

As of September 30th 2000 the customer count declined to 130,592, and as of
December 31, 2000 the customer count was 123,408, as of March 2001 the customer
count was 103,187, as of June 30th 2001 it was 99,862, as of September 30th,
2001 it was 91,348, as of December 31, 2001 it was 88,799 customers and finally
as of March 31st 2002 we had 86,000 customers.

In February 2002 after resolution of the matter with the Federal Trade
Commission and after conducting tests using the guidelines that had been agreed
to the Company resumed its direct mail marketing.

Consequently, for the first time since June of 2000 the Company's customer
counts actually increased to 112,330 customers for the period ended June 30th,
2002. In July 2002, we mailed one million solicitations to potential new
customers and we expect to continue mailing one million mailers per month in the
next quarter

Additionally our customer counts declined as we monitored our collection
percentage of our direct-billed customers. These are customers that are directly
invoiced through regular mail instead of being billed through the use of a Local
Exchange Carrier ("LEC"). Because of this low collection percentage, we have
initiated a contact campaign to determine if these customers are still in
business and if they want to continue to advertise on our websites. This
resulted in customer cancellations exceeding our acquisitions of new customers.
Some of this decline may be mitigated by the acquisition of new paying
customers. However, for the three-month period ended June 30, 2002, our
collection percentages have increased due to our contact program, and we expect
that to continue as more customers are contacted.

The increase in our customer count for the three-month period ending June
30, 2002, is a direct result of reinstituting our direct mail marketing program
and continued efforts to increase customer satisfaction. We have contacted many
of our customers in order to update each customer's account information. Our
updated information has led to increased collections on outstanding invoices.

RESULTS OF OPERATIONS

Internet yellow page services business is currently our sole source of
revenue. Revenue for the three and nine-month periods ended June 30, 2002, was
$3,416,953 and $9,249,792, respectively, compared to $3,466,635 and $11,932,345
for the three and nine-month periods ended June 30, 2001, respectively. The
decline in revenue Is due substantially to the suspension of our direct mail
marketing from June 2000 to October 2001. As this is the sole source of new
subscribers, the Company experienced its normal attrition of subscribers without
replacing them with new subscribers. The Company intends to implement new
processes to reduce the attrition of subscribers and also intends to increase
its marketing efforts During the 3-month period ended June 30 2002 we
experienced an increase in paying customers of 26,330 above the prior 3 month
period ended March 31, 2002. In November 2001, we resumed our direct mail
marketing campaign that was voluntarily suspended in June 2000 while we
negotiated a settlement with the FTC. Our increased marketing resulted in an
increase in customers and revenues. With the continuation and expansion of our
marketing program we hope to see an increase in our revenue and customer base in
the future. Management has budgeted funds to mail one million mailers per month
during the next quarter.

Cost of services for the three and nine-month periods ended June 30, 2002,
was $1,168,396 and $3,086,075, respectively, compared to $1,918,532 and
$6,645,440, respectively, for the three and nine month periods ended June 30,
2001. Cost of services is comprised of dilution expenses, direct mailer
marketing costs, allowances for bad debt and our billing costs. Dilution
expenses include customer credits and any other receivable write-downs. The
primary reason our cost of services has continued to decline as of June 30,
2002, compared to June 30, 2001, is that we have implemented new filtering
procedures that assure the proper filtering of our customer base to the correct
LEC for billing. Further, our customer contact program has allowed the Company
to obtain current information on its customers who have moved or changed the
names of their businesses further reducing dilution. Further reductions in
manpower and improvements in efficiencies have reduced our cost of services.

Selling expenses, primarily the costs associated with general advertising
and market testing of other revenue sources, for the three and nine-month
periods ended June 30, 2002, were $16,330 and $155,663, respectively, compared
to $14,623 and $50,095, respectively, for the three and nine-month periods ended
June 30, 2001. The primary reason for the increase in marketing is due to the
implementation of new market strategies and modification of direct mail
marketing pieces, as well as the increase in the number of pieces mailed. We
capitalize certain direct marketing expenses and amortizes those costs over an
18 month period based on the customer attrition rates analyzed by the Company.

General and administrative expense for the three and nine-month periods
ended June 30, 2002, was $1,186,777 and $3,075,448, respectively, compared to
$667,216 and $2,188,773, respectively, for the three and nine-month periods
ended June 30, 2001. Administrative expenses increased due to an increase in
legal fees related to the preferred share conversion offering and fees resulting
from a suit against our former Chief Financial Officer. See Item 1, Legal
Proceedings, below. . Additionally, we wrote off certain legal expenses
associated with the prospective acquisition of Western Promotions, Inc. that was
not completed due to unfavorable results of our due diligence investigation. We
have also experienced an increase in corporate costs for directors and officers
liability insurance due to the increase in the policy amount from $2.5 million
to $5.0 million and an increase in rates. Additionally, board of director
compensation has increased with additional duties assigned to the directors to
assist us in implementing an employee stock option plan, and managing
litigation.

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 $108,756 and $324,211
for the three and nine-month periods ended June 30, 2002, respectively, compared
to $118,803 and $304,715 for the three and nine-month periods ended June 30,
2001. Annual amortization expense in future years related to the URL is
anticipated to be approximately $430,000.

Interest expense net of interest income for the three and nine-month
periods ended June 30, 2002, was $33,808 and $70,802, respectively, compared to
$-96,361 and $-364,759 for the three and nine-month periods ended June 30, 2001.
The decrease in interest expense was a result of the reduction of our debt from
our acquisition of Telco and our URL Yellow-Page.Net license.
-----------------------

We recorded other income of $392,482 and $398,052, respectively, for the
three and nine-month periods ended June 30, 2002. The primary components of
other income result from two transactions. During the three month period ended
June 30, 2002, we reached a settlement with an entity that previously provided
billing services to us. We claimed that the billing company improperly withheld
receipts from our customers that were due to us. The Company entered into a
settlement and was paid $200,000 to resolve this claim. Additionally, during
the three month period ended June 30, 2002, the Company settled a dispute with a
former consultant. By court order the consulting agreement was rescinded and
250,000 shares of the Company's common stock granted to this consultant under
this consulting agreement during the year ended September 30, 2000 were
returned. The Company recorded a gain of $267,675 for that settlement, which
represents the value of the shares when issued, and recorded a corresponding
expense at the time of issuance.

Net income before taxes for the three and nine-month periods ended June 30,
2002, was $1,247,637 and $2,803,269, respectively, compared to $618,367 and
$2,227,027 for the same three and nine-month periods in 2001. Net income for
the three and six-month periods ended June 30, 2002, was $798,743, or $.02 per
diluted share, and $1,726,087, or $.04 per diluted share, respectively, compared
to $428,852, or $.01 per diluted share, and $1,521,682, or $.04 per diluted
share for the three and nine-month periods ended June 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the nine-month period ended
June 30, 2002, was $948,210 compared to $2,560,598 for the nine-month period
ended June 30, 2001. The decrease in cash generated from operations is
primarily due to a significantly greater increase in the accounts receivable
balance and funds expended for mailings related to the Company's marketing
efforts. The increase in the accounts receivable balance for the three month
period ended June 30, 2002, related to difficulties with collections due to
billing problems with the Company's primary billing service provider. We
believe that those problems have been largely resolved and that cash receipts
from accounts receivable will increase and that the reduction in collections was
a temporary situation that has been corrected. Revenue was generated primarily
from providing electronic yellow page preferred listing advertising from Telco
Billing, Inc., our wholly owned subsidiary. Revenues increased during the three
month period ended June 30, 2002, to $3,416,953 from $2,839,438 for the
three-month period March 31, 2002, although our revenue for the three and
nine-month period ended June 30, 2002, was still lower than revenue for the
three and nine-month period ended June 30, 2001. While our customer base is
lower than reported during the same period in 2001, it has increased for the
three-month period ended June 30, 2002, compared to the three-month period ended
March 31, 2002. We believe this is indicative of the positive results of the
direct mail marketing program.

The primary reason for the decline in revenue and the decline in our
customer base is that we ceased marketing efforts from the period of June 26,
2000 until October of 2001 in order to negotiate a final settlement with the
Federal Trade Commission regarding our direct mailer program, and have written
off many non-paying customers that were previously counted as revenue as their
collectability was offset by a large reserve. Since October 2001, we have
increased our marketing efforts and have implemented procedures to refilter and
direct customers to the correct LEC. This has increased our collection
percentages. Although our overall customer base and gross revenues declined for
the first six months of our fiscal year, we experienced an increase of our
customer base for the three month period ended June 30, 2002. Our customer base
is now 112,330, compared to 86,000 as of March 31, 2002.

Our billing for the month of February had been delayed through
miscommunication with our main billing aggregator, IGT. Consequently we suffered
a lower cash collection percentage in the month of May and a larger cash
collection in the month of June 2002.

We anticipate that it will be obligated to pay federal and state income
taxes for prior periods before the close of the fiscal year ending September 30,
2002. The final amount of tax due is not yet determined, however. The amount
of taxes payable of $2,523,645 included in the accompanying balance sheet at
June 30, 2002, is an estimate based on initial calculations. However, we are
reevaluating its ability to use certain net operating loss carryforwards from
the operations of RIGL. If it is determined that we have that ability, the
income tax obligation will be reduced. To meet this obligation and all others
anticipated by management, management is negotiating with Amerifund Capital,
LLC, for a 3 million dollars standby funding agreement secured by the accounts
receivable of our wholly owned subsidiary Telco Billing, Inc.

We had working capital of $3,067,911 as of June 30, 2002 compared to
$1,680,074 as of June 30, 2001. The increase is due to increases in accounts
receivable of $658,000 and capitalized direct marketing costs of $1,014,528.

The direct marketing costs will not result in cash but we anticipate future
revenue and cash flow from customers obtained through these marketing efforts.

Cash used in investing activities was $473,935 for the nine-month period
ended June 30, 2002. The cash used represents purchase of computer equipment of
$118,979, net advances to affiliates of $305,237 and purchases of software
licenses of $49,719, compared to the nine-month period ended June 30, 2001,
where cash used of $15,138 represented the purchase of computer equipment.

Cash used by financing activities was $836,653 for the nine-month period
ended June 30, 2002, compared to $2,713,986 for the nine-month period ended June
30, 2001. The cash used represents total payments made to reduce the principal
balances of our outstanding notes payable to M & M and Mr. Joseph Van Sickle as
well as loan advances to M&M and the Officers as part of agreements with them.

We have repaid a significant amount of our debt. We believe that we will
continue to generate adequate cash flow from our operations to service our
remaining debt. We have a commitment to provide up to $10,000,000 in loans to
each of the M&M's (Morris & Miller, Ltd. and Matthew & Markson, Ltd.). Those
funding commitments are contingent upon our cash flow. 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. See Footnote 7 to the financial statements. We do not believe that
the M&M's will make requests for funding under this commitment, if such advances
would adversely affect our liquidity since the M&M's are our largest
shareholders.

We are currently reviewing our loans and extensions of credit made to our
officers and directors and other affiliated entities in order to comply with the
recent enactment of the Sarbanes-Oxley Act of 2002, which, among other things,
generally prohibits (except in extraordinary circumstances) loans to officers
and directors going forward from the date of its enactment.

CERTAIN RISK FACTORS

There are numerous factors that affect our business and the results of our
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of our business activities, the level
of demand for our services, the level and intensity of competition in the
electronic yellow page industry and the pricing pressures that may result, our
ability to develop new services based on new or evolving technology and the
market's acceptance of those new services, our ability to timely and effectively
manage periodic product transitions, the services, customer and geographic sales
mix of any particular period, and our ability to continue to improve our
infrastructure (including personnel and technology systems) to keep pace with
the growth in our overall business activities. Our operations can be adversely
affected if we are unable to increase our customer base and revenue through our
direct marketing efforts. We are also subject to intense competition from other
providers of Internet "yellow page" type services, Yahoo and Microsoft, as well
as competition from large telephone companies. In addition, our Chief Executive
Officer is involved in personal litigation, which may divert his attention from
the management of the Company. See the Company's Form 10-QSB filed with the
Securities and Exchange Commission for the period ended March 31, 2002.

PREFERRED SHARED TENDER OFFER PENDING

There are currently 43,813,630 issued and outstanding shares of our Common
Stock. We filed with the Securities and Exchange Commission a Schedule TO,
pursuant to which the Company is making a preferred stock tender offer pursuant
to Rule 13e-4, adopted under the Securities Exchange Act of 1934. We offered to
the holders of its common stock, par value $.001 (the "Common Stock"), to
exchange up to 10,000,000 shares of Common Stock for an equal amount of shares
of Series E Preferred Stock. We paid all charges and expenses of Continental
Stock Transfer & Trust Company, as Tendering Agent, in connection with the offer
The offer terminated at 5:00 P.M., New York City time, on May 31, 2002. As a
result of the offer, 113,000 shares of Common Stock were exchanged for an equal
number of shares of Series E Preferred Stock.

Series E Preferred Stock is entitled to receive dividends at a rate of 5%
per annum based upon the stated liquidation preference of $.30 per share ($0.015
per share per annum). From and after two years from the initial issuance of the
Series E Preferred Stock until three years thereafter, preferred shareholders
shall have the right to convert all or portions of their Series E Preferred
Stock into shares of our Common Stock, at a rate of one for one, together with
the payment by the holder of $0.45 per converted share.

Upon the sale of substantially all of the stock or assets of the Company in
a non-public transaction or dissolution, liquidation, or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Series E
Preferred Stock are entitled to receive out of the assets of the Company, before
any distribution or payment is made upon the Common Stock or any other series of
Preferred Stock, an amount in cash equal to $.30 per share, plus any accrued but
unpaid dividends. The holders of the Series E Preferred Stock have no voting
rights, except as required by law.

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. We recently settled a complaint filed against us by the Federal
Trade Commission. See our Form 10-KSB for the year ended September 30, 2001,
for a description of this matter.

We are named as defendant in material legal proceedings filed by Mr. Van
Sickle wherein he alleges that we have defaulted on payment obligations under a
$2,000,000 promissory note to Mr. Van Sickle. We have denied the allegations and
are attempting to resolve this matter through a settlement.

On May 24, 2002, after being confronted about certain irregularities Pamela
Thompson, CPA, resigned as our Chief Financial Officer, Secretary and Treasurer.
The Company has initiated a search for a new Chief Financial Officer.

On May 29, 2002, we filed suit against Ms. Thompson and related parties in
the Superior Court of Arizona alleging, among other things, that Ms. Thompson
and certain other parties removed Company property without authorization and
misappropriated Company funds. In this complaint, we also requested a temporary
restraining order be issued against Ms. Thompson and others enjoining them from
using certain of the Company's property, including trade secrets and proprietary
information. Ms. Thompson responded to the Company's request for a temporary
restraining order alleging the Company's allegations are unsubstantiated On July
10, 2002, the Superior Court of Arizona for Maricopa County issued a Temporary
Restraining Order against Ms. Thompson and certain related parties enjoining
them from disclosing or disseminating the Company's trade secrets, financial
information or other confidential information, using the Company's computer
equipment and disclosing any Company proprietary information for any purpose, or
interfering with any of the contractual obligations or contracts of the Company.
The Company is also seeking punitive and compensatory damages as well as
Attorney's fees.

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 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 Tullo's former partners, and that was by the Arizona
Corporation Commission, docket number S-03443A-01-0000 Decision number 64079.

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.
There can be no assurance that the Company may not be named a defendant in this
action in the future.

ITEM 5. OTHER INFORMATION

The Company's Chairman, President and Chief Executive Officer, Mr. Angelo
Tullo, is involved in certain legal proceedings that are not adverse to the
Company. In February 2000, American Business Funding Corp. ("ABF") filed for
protection under Chapter 11 of the Bankruptcy Code in the Federal District Court
of Arizona. Mr. Tullo had previously been a director, officer and shareholder of
American Business Funding prior to the time of its bankruptcy filing. Mr. Tullo
discovered a scheme of improprieties relating to the falsification of ABF's
books and records designed to obfuscate that improper payments were being made
to Mr. Tullo's partners in ABF, rather than to the vendors listed in the
Company's book and records..

See the Company's Form 10-QSB filed with the Securities and Exchange
Commission for the three-month period ended March 31, 2002, whereby this
reference is incorporated herein.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

REPORTS ON FORM 8-K

May 17, 2002, Peter Bergmann appointed to the Board of Directors and Harold
Roberts resigned.

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, 2002 /s/ Angelo Tullo
------------------
Chairman, President, Chief Executive Officer
--------------------------------------------

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the YP.Net, Inc., a Nevada corporation (the
"Company"), Quarterly Report on Form 10-Q for the three month period ended June
30, 2002, as filed with the Securities and Exchange Commission on the date
hereof, I, Angelo Tullo, Chief Executive Officer and Acting Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

To the best of the undersigned's knowledge, based upon a review of the
Company's Form 10-Q for the three month period ended June 30, 2002:

1. The Company's Quarterly Report on Form 10-Q for the three month
period ended June 30, 2002, fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

2. The information contained in the Company's Form 10-Q for the
three month period ended June 30, 2002, fairly presents, in all
material respects, the financial condition and results of
operations of the Company.

/s/ Angelo Tullo, CEO
--------------------------------------
Angelo Tullo, Chief Executive Officer
Acting Chief Financial Officer

STATE OF ARIZONA )
)
County of Maricopa )

The foregoing was acknowledged before me this 13th day of August,
2002, by Angelo Tullo, Chief Executive Officer and Acting Chief Financial
Officer of YP.Net, Inc., a Nevada corporation, on behalf of such corporation.

/s/ Margaret Molter
--------------------------------------
Notary Public
My Commission Expires: 09/22/2003