Edgar Filing: YP NET INC

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

____________________
AMENDMENT NO. 1
TO
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 March 31, 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 May 6,
2003 was 42,680,722 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 MARCH 31, 2003

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Balance Sheet
as of March 31, 2003 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations
for the Three and Six Month Periods
Ended March 31, 2003 and March 31, 2002 . . . . . . . . . 5
Consolidated Statements of Cash Flows
for the Six Month Periods Ended March 31, 2003 and
March 31, 2002 . . . . . . . . . . . . . . . . . . . . . . 6
Notes to the Consolidated Financial Statements . . . . . . . 8-14

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . .15-22

Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 23

PART II
OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 24

SIGNATURES

CERTIFICATIONS

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2003

ASSETS:

CURRENT ASSETS
Cash and equivalents $ 839,062
Accounts receivable, net of allowance for doubtful accounts of $2,531,937 5,663,712
Prepaid expenses and other current assets 267,544
------------
Total current assets 6,770,318

ACCOUNTS RECEIVABLE, long term portion, net of allowance
for doubtful accounts of $259,423 605,307

CUSTOMER ACQUISITION COSTS, net of accumulated amortization of $1,124,052 2,636,887

PROPERTY AND EQUIPMENT, net 632,207

DEPOSITS AND OTHER ASSETS 98,631

INTELLECTUAL PROPERTY- URL, net of accumulated amortization of $1,667,586 3,398,864

ADVANCES TO AFFILIATES 743,194
------------
TOTAL ASSETS $14,885,408
============

LIABILITIES AND STOCKHOLDERS' EQUITY:

CURRENT LIABILITIES:
Accounts payable $ 344,080
Accrued liabilities 78,184
Due to Affiliates 14,017
Deferred income taxes 238,932
Income taxes payable 2,059,516
------------
Total current liabilities 2,734,729

NOTES PAYABLE - long term portion 115,868

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

Total liabilities 2,859,980
------------

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, 50,000,000 shares authorized,
48,999,340 issued 48,999
Paid in capital 4,745,981
Treasury stock at cost (331,818)
Retained earnings 7,562,134
------------
Total stockholders' equity 12,025,428
------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,885,408
============

See the accompanying notes to these unaudited financial statements

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002

Three Months Six Months Three Months Six Months
Ended March 31, Ended March 31, Ended March 31 Ended March 31,
2003 2003 2002 2002
------------------ ------------------ ----------------- ------------------

NET REVENUES $ 6,849,044 $ 12,590,499 $ 2,839,438 $ 5,832,839
------------------ ------------------ ----------------- ------------------

OPERATING EXPENSES:
Cost of services 1,848,966 3,671,116 733,402 1,917,679
General and administrative expenses 1,666,108 3,042,186 1,030,889 1,888,671
Sales and marketing expenses 862,939 1,495,374 85,454 139,333
Depreciation and amortization 159,306 298,238 151,721 300,100
------------------ ------------------ ----------------- ------------------
Total operating expenses 4,537,319 8,506,914 2,001,466 4,245,783
------------------ ------------------ ----------------- ------------------

OPERATING INCOME 2,311,725 4,083,585 837,973 1,587,055
------------------ ------------------ ----------------- ------------------

OTHER (INCOME) AND EXPENSES
Interest (income) expense (12,069) (12,789) - (5,570)
Other (income) expense (180,980) (229,886) 9,584 36,994
------------------ ------------------ ----------------- ------------------

Total other (income)expense (193,049) (242,675) 9,584 31,424
------------------ ------------------ ----------------- ------------------

INCOME BEFORE INCOME TAXES 2,504,774 4,326,260 828,390 1,555,631

INCOME TAX PROVISION (BENEFIT) 999,853 1,728,447 208,102 628,287
------------------ ------------------ ----------------- ------------------

NET INCOME $ 1,504,921 $ 2,597,813 $ 620,288 $ 927,344
================== ================== ================= ==================

NET INCOME PER SHARE:
Basic $ 0.03 $ 0.06 $ 0.01 $ 0.02
================== ================== ================= ==================

Diluted $ 0.03 $ 0.06 $ 0.01 $ 0.02
================== ================== ================= ==================

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 43,271,333 42,011,711 43,813,680 43,813,680
================== ================== ================= ==================

Diluted 43,271,333 42,011,711 43,813,680 43,813,680
================== ================== ================= ==================

See the accompanying notes to these unaudited financial statements

YP.NET, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002

SIX MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
------------------ ------------------

Net income $ 2,597,813 $ 927,344
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 298,239 300,099
Income recognized on forgiveness of debt (45,362) -
Deferred income taxes 155,175 (226,573)
Officers & consultants paid common stock 453,750 -
Common stock surrendered (160,979) -
Changes in assets and liabilities:
Trade and other accounts receivable (2,283,431) (346,037)
Customer acquisition costs (1,218,660) (646,428)
Prepaid and other current assets (113,628) (153,272)
Other assets 52,096 -
Receivable from affiliate (110,121) -
Accounts payable 148,684 242,277
Accrued liabilities (105,603) (36,454)
Due to affiliates 14,017 -
Income taxes payable 1,573,273 854,860
Deferred revenue - -
------------------ ------------------
Net cash provided by operating activities 1,255,263 915,816
------------------ ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made to affiliates and related parties (400,000) (62,857)
Acquisition Costs WPI - (60,492)
Purchases of intellectual property (6,761) (14,078)
Purchases of equipment (469,548) (69,459)
------------------ ------------------
Net cash (used in) investing activities (876,309) (206,886)
------------------ ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 147,000 -
Principal repayments on notes payable (454,000) (1,051,743)
------------------ ------------------
Net cash (used)/provided by financing activities (307,000) (1,051,743)
------------------ ------------------

INCREASE IN CASH 71,954 (342,813)

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

CASH, END OF PERIOD $ 839,062 $ 341,034
================== ==================

See the accompanying notes to these unaudited financial statements

Six month Six month
period ended period ended
March 31, 2003 March 31, 2002
--------------- ---------------

Interest Paid $ 9,545 $ 61,414

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 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 six
month periods ended March 31, 2003, and March 31, 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 six month
periods ended March 31, 2003 and March 31, 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

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 and www.YP.Net .

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 (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. 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 (ie. 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.

The Company uses 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.

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 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.

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 March 31, 2003, cash deposits exceeded
those insured limits by $ 634,000

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 $1,358,902 and $2,342,712 during the three and six
months ended March 31, 2003 respectively. The Company amortized $640,996
and $1,124,049, respectively, of total capitalized costs during the three
and six months ended March 31, 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 $221,941 and $377,322 for
the three and six months ended March 31, 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. Refunds are estimated based upon historical
experience and are recorded as a reduction in revenue .

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

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

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

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

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 March 31, 2003. The
URL is amortized on an accelerated basis over the twenty-year term of the
licensing agreement. Amortization expense on the URL was $93,032 and
$186,440 for the three and six months ended March 31, 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 six months ended March 31, is summarized as
follows:

Three
Months Six Months
Ended Ended
March,31 March 31,
--------- -----------
2003 2003
--------- -----------

Current Provision $ 888,889 $ 1,576,233
Deferred (Benefit) Provision 110,964 152,214
--------- -----------

Net income tax provision $ 999,853 $ 1,728,447
========= ===========

At March 31, 2003, deferred income tax assets related to differences in
book and tax bases of accounts receivable, direct marketing costs and
intangible assets.

At March 31, 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. The Company authorized
200,000, $0.001 par value shares. The shares carry a $0.30 per share
liquidation preference and accrue dividends at the rate of 5% per annum on
the liquidation preference per share, payable quarterly from legally
available funds. If such funds are not available, dividends shall continue
to accumulate until they can be paid from legally available funds. Holders
of the preferred shares shall be entitled, after two years from issuance,
to convert them into common shares on a one-to-one basis together with
payment of $0.45 per converted share.

During the year ended September 30, 2002, pursuant to an existing tender
offer, holders of 131,840 shares of the Company's common stock exchanged
said shares for an equal number of the Series E Convertible Preferred
shares, at the then $0.085 market value of the common stock. As of March
31, 2003, the liquidation preference value of the outstanding Series E
Convertible Preferred Stock was $39,552, and dividends totaling $1,483 had
been accrued associated with said shares.

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

During the three months ended March 31, 2003, the Company reacquired
500,000 shares of its common stock in connection with a settlement with an
attorney formerly on retainer to the Company. The Company had issued these
shares to the attorney as consideration for services. The portion of the
settlement which includes the return of the shares is recorded at the
market value of the shares at the

settlement date. The Company recognized an expense on this settlement of
approximately $90,000. At March 31, 2003, there were 6,318,618 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 six months ended
March 31, 2003, respectively. Preferred stock dividends are subtracted from
the net income to determine the amount available to common shareholders.
There were $494 and $989 preferred stock dividends in the three and six
months ended March 31, 2003, respectively. Warrants to purchase 500,000
shares of common stock were excluded from the calculation for the three
months ended March 31, 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 were
131,840 shares of Series E Convertible Preferred Stock issued during the
year ended September 30, 2002, which are considered anti-dilutive due to
the cash payment required by the holders of the securities at the time of
conversion. The following presents the computation of basic and diluted
loss per share from continuing operations for the three and six months
ended March 31,:

2003 2003
---------- ----------
Three Six
Months Months
Ended Ended
March 31, March 31,
2003 2003
----------- ---------- ------ ----------- ---------- ------
Per Per
Income Shares Share Income Shares share
----------- ---------- ------ ----------- ---------- ------

Net Income $1,504,921 $2,597,813
Preferred stock dividends (494) (989)

Income available to common
Stockholders $1,504,427 $2,596,824
=========== ===========
BASIC EARNINGS PER SHARE:

Income available to common
stockholders $1,504,427 43,271,333 $ 0.03 $2,596,824 42,011,711 $ 0.06
=========== ====== ========== ======
Effect of dilutive securities

DILUTED EARNINGS PER SHARE $1,504,427 43,271,333 $ 0.03 $2,596,824 42,011,71 $ 0.06
=========== ====== ========== ======

9. RELATED PARTY TRANSACTIONS

During the three and six months ended March 31, 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 Six
Months Months
Ended Ended
March 31, March 31,
2003 2003
Entity Amount Amount
------ ---------- ----------

Simple.Net, Inc. ("SN") $ 80,523 136,626
Commercial Finance Services d/b/a/ HR Management ("CFS") 162,579 528,630
Business Executive Services, Inc. 62,242 110,242
Advertising Management Specialists, Inc. 209,837 306,235
Advanced Internet Marketing 71,901 162,331
DLC Consulting 30,000 60,000
Sunbelt 232,520 604,851
---------- ----------
$ 849,602 $1,908,915
========== ==========

These entities provide consulting, employee leasing and marketing services
to the Company. The above amounts represent payments made to these entities
during the period. CFS sold the payroll processing portion of its business
during the quarter ended March 31, 2003 and the Company no longer does its
payroll processing business with CFS.

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 $276,155 for the six months ended March 31, 2003.

During the six months ended March 31, 2003, the Company advanced $400,000
to entities ($200,000 to Mathew & Markson and $200,000 to Morris & Miller)
that are significant shareholders of the Company. In accordance with the
instructions that the Company received from said shareholders, the Company
has made payments ($100,000 in the first quarter of Fiscal 2003) to third
parties (including related parties) on behalf of the stockholders and
applied those payments as a reduction to the note payable The balance due
from each of these entities was $447,415 from Mathew & Markson and $206,074
from Morris & Miller at March 31, 2003.

During the three month period ended March 31, 2003, the Company's board of
directors 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 inThe Board action includes any other officers and
directors that may potentially become involved in this civil action.
Through March 31, 2003, the Company has paid approximately $151,000 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.

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

This Quarterly Report contains certain forward-looking statements, including
those regarding the Company and its subsidiaries' 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.

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 and www.YP.Net .

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 (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 March 31,,
2003 we have approximately 279,071 "preferred" listing advertisers who have
subscribed for this enhanced advertising service. This represents less than 2%
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 (ie. 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 (ie. 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.

Recently, the Company has 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.

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.

The Company uses 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.

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 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.

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.

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 customer count from approximately 86,000
at March 31, 2002 to 279,071 at March 31, 2003.

BRANDING-The Company also plans to further embark upon a substantial campaign to
brand its product using the YP.Net 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 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

During the quarter ended March 31, 2003 and prior to this filing, the Company
entered into several contracts relating to its business. The Company 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 $20,000up-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.

In addition, the Company also 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 also recently 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 and is renewable unless either
party terminates the agreement. The 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.

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.

During the quarter ended March 31, 2003 and prior to this filing, the Company's
unsecured trade acceptance facility with AcTrade Financial Technologies, Ltd.
was verbally increased to $250,000 from $150,000. Such financings are conducted
through the Company's wholly-owned subsidiary, Telco Billing, Inc., and in
conjunction with the Company's vendors. Also, the Company signed an unsecured
credit facility of $250,000 with Bank of the Southwest on May 2, 2003. The
facility is for one year and interest on borrowings, if any, will be at an
interest rate of 0.5% above the Prime Rate, as defined.

The Company signed a new service agreement with eBillit, Inc. ("eBillit",
formally Integretel), a current provider of billing aggregator services to the
Company. The agreement requires the Company to pay processing fees of 2.75% of
gross dollars deposited with eBillit per month plus other ancillary service
fees. This agreement is for three years and is renewable for successive one year
periods unless either party elects to terminate the agreement with no less than
90 days notice prior to the end of the then-current term.

RESULTS OF OPERATIONS

Revenue for the three month period ended March 31, 2003, was $6,849,044
compared to $2,839,438 for the three month period ended March 31, 2002 an
increase of over 140%. For the six month periods ended March 31, 2003 and 2002,
revenue increased to $12,590,499 from $5,832,839, an increase of over 115%. The
increase in revenue is primarily the result of an increase in preferred listing
customers. Preferred listing customers increased to 279,071 at March 31, 2003
compared to approximately 86,000 preferred listing customers at March 31, 2002,
an increase of over 220%. Compared to the 113,565 preferred listing customers at
September 30, 2002, the beginning of this fiscal year, the number of preferred
listing customer has grown by 145% thus far this fiscal yearThe increase in
preferred listing customers is the result of our direct mail solicitation
marketing efforts.

Cost of services for the three month periods ended March 31, 2003 and March
31, 2002 were $1,848,966 and $733,402, respectively, an increase of
approximately 150%. Cost of services for the six months ended March 31, 2003 and
2002 were $3,671,116 and $1,917,679, respectively, an increase of approximately
90%. 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 27% for the three months ended March
31, 2003 compared to approximately 26% for the same period in the prior fiscal
year. Cost of services as a percent of net revenue was essentially flat
comparing the three months ended March 31, 2003 with the comparable period in
2002 due the previously mentioned increased dilution and billing fees. These
increased costs were offset by the leveraging of our fixed cost infrastructure
over a larger customer base. For the six months ended March 31, 2003 and 2002,
Cost of services as a percent of net revenue was 29% and 33%, respectively. This
improvement is the result of the leveraging of our fixed infrastructure over a
larger customer base compared to previous years period offset by the
previously-mentioned increased costs relating to dilution and billing fee.

General and administrative expense for the three month periods ended March
31, 2003 and March 31, 2002 were $1,666,108 and $1,030,889, respectively, an
increase of approximately 62%. For the six months ended March 31, 2003 and 2002,
such expenses were 3,042,186 and 1,888,671, respectively, an increase of
approximately 61%. 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 March 31,
2003, the Company's Board of Directors 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
March 31, 2003, the Company has paid $150,930 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. As a percent of net revenue, general and
administrative expenses were 24% for the three months ended March 31, 2003
compared to 36% for the comparable period in 2002. For the six months ended
March 31, 2003, general and administrative expenses as a percent of net revenue
were 24% compared to 32% 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 March 31, 2003 and March 31, 2002
were $862,939 and $85,454, respectively, an increase of approximately 900%. For
the six months ended March 31, 2003 and 2002, sales and marketing expenses were
$1,495,374 and $139,333, respectively, an increase of almost 1000%. 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 3% for the three month periods ended March 31, 2003 and 2002, respectively.
For the six month periods ended March 31, 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
$93,032 and $101,250 for the three month periods ended March 31, 2003 and March
31, 2002, respectively. For the six months ended March 31, 2003 and 2002,
amortization expense on the URL were $186,440 and $202,500, 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
six month periods ended March 31, 2003 did not change significantly compared to
the comparable periods in 2002. 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
March 31, 2003 and March 31, 2002, were $12,069 and $-0-, respectively. For the
six month periods ended March 31, 2003 and 2002, interest income increased to
$12,789 from $5,570. 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 $180,980 and other expense of $9,584,
respectively, for the three month periods ended March 31, 2003 and March 31,
2002. The primary component of the increase in other income was an increase in
revenue 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 an expense of $90,000 resulting from a
settlement with an attorney formerly on retainer to the Company (See Footnote 7
to the Financial Statements). For the six months ended March 31, 2003, we
recorded other income of $229,886 compared to other expense of $36,994 for the
comparable period in 2002 as a result of the previously- mentioned items as well
as a gain on the settlement with a former consultant to the Company.

Net income before taxes for the three month periods ended March 31, 2003 and
March 31, 2002 were $2,504,774 and $828,390 , respectively, an increase of over
200%. For the six month periods ended March 31, 2003 and 2002, net income before
taxes were $4,326,260 and $1,555,631, respectively, an increase of approximately
178%.

Net income for the three month periods ended March 31, 2003 and March 31, 2002
were $1,504,921 , or $0.03per diluted share, and $620,288 , or $0.01 per diluted
share, respectively, an increase in net income of over 140%. For the six months
ended March 31, 2003 and 2002, net income was $2,597,813 or $0.06 per diluted
share and $927,344, or $0.02 per diluted share, respectively, an increase in net
income of 180%. In the three and six month periods ended March 31, 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

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities for the six -month period ended
March 31, 2003, was $1,255,263 compared to $915,816 for the six -month period
ended March 31, 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 $4,035,589 as of March 31, 2003 compared to
$2,376,087 as of March 31, 2002. The increase is due to primarily to increases
in accounts receivable of $2,448,346.

Cash used in investing activities was $876,309 for the six -month period
ended March 31, 2003. The primary components of cash used represents purchase of
computer equipment (relating to the previously-mentioned infrastructure
additions) and intellectual property of $476,309, as well as net advances to
affiliates of $400,000. Compared to the six -month period ended March 31, 2002,
where cash used of $206,886 consisted of significantly lower purchases of
computer equipment of $69,459 and lower net advances to affiliates of $62,857.

Cash used by financing activities was $307,000 for the six -month period
ended March 31, 2003, compared to $$1,051,743 for the six -month period ended
March 31, 2002. The cash used represents total payments made to reduce the
principal balances of our outstanding debt reduced by financing of $147,000
under the Company's trade acceptance draft program with AcTrade Financial
Technoligies, Ltd.

We have repaid almost all 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 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 will
make significant requests for funding under this commitment, as such advances
would adversely affect our liquidity since the M&M's are our largest
shareholders.

On September 20, 2002, the Company 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
March 31, 2003, all amounts had been drawn except $18,841 remaining for Sunbelt

During the quarter ended March 31, 2003 and prior to this filing, the Company's
unsecured trade acceptance facility with AcTrade Financial Technologies, Ltd.
was increased to $250,000 from $150,000. Such financings are conducted through
the Company's wholly-owned subsidiary, Telco Billing, Inc., and in conjunction
with the Company's vendors. Also, the Company signed an unsecured credit
facility of $250,000 with Bank of the Southwest on May 2, 2003. 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.

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. Set forth below and elsewhere in
this Form 10-QSB are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in the Annual Report.

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.

DEPENDENCE ON 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 During the three month period ended
March 31, 2003, the Company's Board of Directors 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 March 31, 2003, the Company has paid $150,930 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.

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. Additionally, in response to customer demand, we
continue to attempt develop new products to reduce our attrition rates.

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.

Item 3 - Controls and Procedures
-------------------------

As required by Rule 13a-14 under the Exchange Act, within 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried on under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Principal Accounting Officer. Based upon that evaluation, our Chief
Executive Officer and Principal Accounting Officer concluded that our controls
and procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out this
evaluation.

Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Principal Accounting Officer as appropriate, to allow
timely decisions regarding disclosures.

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 7 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 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.
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.

ITEM 2. CHANGES IN SECURITIES

During the six-months ended March 31, 2003, the Company issued an aggregate
of approximately 6,050,000 shares in consideration of executive service
agreements and compensation to an employee.

The Company issued the following shares:

- 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
- 50,000 shares (value of $3,750) to David J. Iannini,the Company's CFO, for
services rendered as such

The restricted shares were issued based upon the average bid and ask prices at
the time of issuance ($0.075) 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

EXHIBITS

10.24 eBillit, Inc. Master Services Agreement
10.25 Palm, Inc. License Agreement
10.26 Pike Street Industries, Inc. Agreement
10.27 Bank of the Southwest Promissory Note
10.28 Switchboard Incorporated Services Agreement
10.35 Actrade TAD Agreement

REPORTS ON FORM 8-K None

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

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

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Angelo Tullo, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of YP.Net, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: May 14, 2003 By: /s/ ANGELO TULLO
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Angelo Tullo
Chairman, President and Chief Executive
Officer

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, David Iannini, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of YP.Net, Inc.;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

Dated: May 14, 2003 By: /s/ DAVID IANNINI
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David Iannini
Chief Financial Officer