UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended December 31, 2005
 
o
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 CORP.
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
85-0206668
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification No.)
   
4840 East Jasmine St. Suite 105
85205
Mesa, Arizona
(Zip Code)
(Address of Principal Executive Offices)
  

(480) 654-9646
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o 
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
The number of shares of the issuer’s common equity outstanding as of February 1, 2006 was 48,106,594 shares of common stock, par value $.001.


INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED DECEMBER 31, 2005

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION

   
Page
Item 1.
  
     
 
3
 
4
 
5
 
6
     
Item 2.
12
     
Item 3.
21
     
Item 4.
21
     
PART II
OTHER INFORMATION
     
Item 1.
22
     
Item 1A.
22
     
Item 2.
22
     
Item 3.
22
     
Item 4.
22
     
Item 5.
22
     
Item 6.
22
     
Signatures
23
 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
  
YP CORP. AND SUBSIDIARIES
  
CONSOLIDATED BALANCE SHEET
  
           
           
   
December 31,
  
September 30,
  
   
2005
  
2005
  
   
(unaudited)
      
           
Assets
          
Cash and equivalents
  
$
9,038,570
  
$
8,119,298
  
Restricted cash
    
500,000
   
500,000
 
Accounts receivable, net
    
5,653,323
   
5,338,533
 
Prepaid expenses and other current assets
    
627,650
   
602,103
 
Deferred tax asset
    
396,336
   
381,887
 
Total current assets
    
16,215,879
   
14,941,821
 
Accounts receivable, long term portion, net
   
616,358
   
873,299
 
Customer acquisition costs, net
   
3,554,345
   
2,337,650
 
Property and equipment, net
    
311,656
   
396,862
 
Deposits and other assets
    
101,002
   
62,029
 
Intangible assets, net
    
5,836,602
   
6,108,823
 
Deferred tax asset, long term
    
91,820
   
376,708
 
Total assets
  
$
26,727,662
  
$
25,097,192
  
 
              
Liabilities and Stockholders' Equity
              
 
              
Accounts payable
  
$
889,362
  
$
655,526
  
Accrued liabilities
    
1,403,219
   
803,268
 
Income taxes payable
    
114,059
   
108,855
 
Total current liabilities
    
2,406,640
   
1,567,649
 
Total liabilities
    
2,406,640
   
1,567,649
 
Commitments and contingencies
    
-
   
-
 
Series E convertible preferred stock, $.001 par value, 200,000 shares authorized, 127,840 issued and outstanding, liquidation preference $38,202
    
10,866
   
10,866
 
Common stock, $.001 par value, 100,000,000 shares authorized, 48,164,594 and 48,837,694 issued and outstanding
   
48,165
   
48,838
 
Treasury stock
    
(2,261,766
)
  
(2,171,740
)
Paid in capital
    
11,075,081
   
11,044,400
 
Deferred stock compensation
    
(2,831,069
)
  
(3,247,535
)
Retained earnings
    
18,279,745
   
17,844,714
 
Total stockholders' equity
    
24,321,022
   
23,529,543
 
 
              
Total liabilities and stockholders' equity
  
$
26,727,662
  
$
25,097,192
  
               
See accompanying notes to consolidated financial statements.


3
 
YP CORP. AND SUBSIDIARIES
  
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
  
           
           
   
Three Months ended December 31,
 
   
2005
  
2004
  
           
Net revenues
  
$
7,626,776
  
$
6,190,155
  
Cost of services
    
1,116,346
   
1,134,584
 
Gross profit
    
6,510,430
   
5,055,571
 
               
Operating expenses:
              
General and administrative expenses
    
3,758,849
   
3,320,296
 
Sales and marketing expenses
    
1,533,791
   
1,610,493
 
Depreciation and amortization
    
397,004
   
360,242
 
Total operating expenses
    
5,689,644
   
5,291,031
 
Operating income (loss)
    
820,786
   
(235,460
)
Other income (expense):
              
Interest expense and other financing costs
    
-
   
(4,163
)
Interest income
    
39,636
   
85,112
 
Other income (expense)
    
(188,545
)
  
86,365
 
Total other income (expense)
    
(148,909
)
  
167,314
 
 
              
Income (loss) before income taxes and cumulative effect of accounting change
    
671,877
   
(68,146
)
Income tax benefit (provision)
   
(236,846
)
  
17,370
 
Income (loss) before cumulative effect of accounting change
    
435,031
   
(50,776
)
Cumulative effect of accounting change (net of income taxes of $53,764 in 2004)
    
-
   
99,848
 
Net income
 
$
435,031
  
$
49,072
  
 
              
Net income (loss) per common share:
              
Basic:
              
Income (loss) applicable to common stock before cumulative effect of accounting change
  
$
0.01
  
$
(0.00
)
Cumulative effect of accounting change
  
$
-
  
$
-
  
Net income applicable to common stock
  
$
0.01
  
$
0.00
  
 
              
Diluted:
              
Income (loss) applicable to common stock before cumulative effect of accounting change
  
$
0.01
  
$
(0.00
)
Cumulative effect of accounting change
  
$
-
  
$
0.00
  
Net income applicable to common stock
  
$
0.01
  
$
0.00
  
 
              
Weighted average common shares outstanding:
              
Basic
    
44,885,425
   
46,572,106
 
Diluted
    
45,143,006
   
46,572,106
 
 
              
See accompanying notes to consolidated financial statements.
 
4

YP CORP. AND SUBSIDIARIES
  
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
  
           
           
   
Three Months Ended December 31,
 
   
2005
  
2004
  
CASH FLOWS FROM OPERATING ACTIVITIES:
          
Net income
 
$
435,031
  
$
49,072
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation and amortization
   
397,004
   
360,242
 
Amortization of deferred stock compensation
   
446,474
   
201,164
 
Issuance of common stock as compensation for services
   
-
   
119,500
 
Cumulative effect of accounting change
    
-
   
(99,848
)
Deferred income taxes
   
270,439
   
(165,301
)
Provision for uncollectible accounts
   
339,446
   
(156,301
)
Changes in assets and liabilities:
              
Accounts receivable
   
(397,295
)
  
2,231,013
 
Customer acquisition costs
    
(1,216,695
)
  
976,200
 
Prepaid and other current assets
    
(25,547
)
  
(282,410
)
Intellectual property
    
(39,577
)
  
-
 
Deposits and other assets
    
(38,973
)
  
(46,799
)
Accounts payable
    
233,836
   
(515,879
)
Accrued liabilities
    
599,951
   
(151,150
)
Income taxes payable
    
5,204
   
147,931
 
Advances to affiliates (accrued interest)
    
-
   
(79,066
)
               
Net cash provided by operating activities
    
1,009,298
   
2,588,368
 
               
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchases of equipment
    
-
   
(8,732
)
               
Net cash used for investing activities
    
-
   
(8,732
)
               
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Series E preferred stock dividends
    
-
   
(481
)
Repurchases of common stock
    
(90,026
)
  
-
 
               
Net cash used for financing activities
    
(90,026
)
  
(481
)
               
               
INCREASE IN CASH AND CASH EQUIVALENTS
    
919,272
   
2,579,155
 
               
CASH AND CASH EQUIVALENTS, beginning of period
    
8,119,298
   
3,576,529
 
               
               
CASH AND CASH EQUIVALENTS, end of period
  
$
9,038,570
  
$
6,155,684
  
               
See accompanying notes to consolidated financial statements


5

YP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

1.
ORGANIZATION AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of YP Corp., a Nevada Corporation, and its wholly owned subsidiaries (collectively the “Company”). The Company is an Internet-based provider of yellow page directories and advertising space on or through www.YP.com, www.YP.net and www.Yellow-Page.net. No material or information contained on these websites is a part of the notes or the quarterly report to which notes are attached. All material intercompany accounts and transactions have been eliminated.
 
The accompanying unaudited financial statements as of December 31, 2005 and for the three months ended December 31, 2005 and 2004, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of September 30, 2005 and for the year then ended included in the Company’s annual report on Form 10-K for the year ended September 30, 2005.
 
All amounts, except share and per share amounts, are rounded to the nearest thousand dollars.
 
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates and assumptions have been used by management in conjunction with establishing allowances for customer refunds, non-paying customers, dilution and fees, analyzing the recoverability of the carrying amount of intangible assets, estimating amortization periods for direct response advertising costs, estimating forfeitures of restricted stock and evaluating the recoverability of deferred tax assets. Actual results could differ from these estimates. Certain prior period amounts have been revised to conform to the current period presentation. These changes had no impact on previously reported net income or stockholders’ equity.
 
2.
ACCOUNTING CHANGES 

Effective October 1, 2004, the Company changed its method of accounting for forfeitures of restricted stock granted to employees, executives and consultants. Prior to this date, the Company recognized forfeitures as they occurred. Upon occurrence, the Company reversed the previously recognized expense associated with such grant. Effective October 1, 2004, the Company changed to an expense recognition method that is based on an estimate of the number of shares for which the service is expected to be rendered. The Company believes that this is a preferable method as it provides less volatility in expense recognition.

Additionally, while both methods of accounting for forfeitures are acceptable under current guidance, the implementation of FAS 123R (effective during the Company’s first quarter of fiscal 2006) will no longer permit companies to recognize forfeitures as they occur. See Note 8. As this new guidance will require the Company to change its method of accounting for restricted stock forfeitures, the Company has decided to adopt such change as of the beginning of its fiscal year. The Company did not adopt the provisions of FAS 123R prior to its effective date. Rather, the Company changed its accounting for forfeitures under the allowed options prescribed in FAS 123.

The impact of this change for periods prior to October 1, 2004 was an increase to income of $100,000 (less than $0.01 per share), net of taxes of $54,000, and has been reflected as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the three months ended December 31, 2004. Because stock grants are now recorded net of estimated forfeitures, the cumulative effect of this change also reduced Additional Paid in Capital and Deferred Compensation by $1,013,000 and $1,166,000, respectively, at October 1, 2004.

6

YP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

3.
BALANCE SHEET INFORMATION

Balance sheet information is as follows:

 
   
December 31, 2005
  
   
Current
  
Long-Term
  
Total
  
Gross accounts receivable
  
$
7,136,000
  
$
694,000
  
$
7,830,000
  
Allowance for doubtful accounts
    
(1,483,000
)
  
(78,000
)
  
(1,561,000
)
Net
  
$
5,653,000
  
$
616,000
  
$
6,269,000
  
                     
   
September 30, 2005
   
Current
  
Long-Term
  
Total
  
Gross accounts receivable
  
$
6,451,000
  
$
982,000
  
$
7,433,000
  
Allowance for doubtful accounts
    
(1,112,000
)
  
(109,000
)
  
(1,221,000
)
Net
  
$
5,339,000
  
$
873,000
  
$
6,212,000
  

Components of allowance for doubtful accounts are as follows:
          
   
December 31, 2005
    
September 30, 2005
  
Allowance for dilution and fees on amounts due from billing aggregators
  
$
1,103,000
        
$
923,000
  
Allowance for customer refunds
    
458,000
         
298,000
 
Other allowances
    
-
         
-
 
   
$
1,561,000
        
$
1,221,000
  

Customer acquisition costs:
  
December 31, 2005
    
September 30, 2005
  
Customer acquisition costs
    
5,758,000
         
3,622,000
 
Less: Accumulated amortization
    
(2,203,000
)
        
(1,284,000
)
Customer acquisition costs, net
    
3,555,000
       
$
2,338,000
  

Property and equipment:
  
December 31, 2005
    
September 30, 2005
  
Leasehold improvements
  
$
439,000
        
$
439,000
  
Furnishings and fixtures
    
295,000
         
295,000
 
Office and computer equipment
    
1,040,000
         
1,040,000
 
Total
    
1,774,000
         
1,774,000
 
Less: Accumulated depreciation
    
(1,462,000
)
        
(1,377,000
)
Property and equipment, net
  
$
312,000
        
$
397,000
  

Intangible assets:
  
December 31, 2005
    
September 30, 2005
  
Domain name
  
$
5,510,000
        
$
5,510,000
  
Non-compete agreements
    
3,465,000
         
3,465,000
 
Website development
    
820,000
         
781,000
 
Software licenses
    
53,000
         
53,000
 
Total
    
9,848,000
         
9,809,000
 
Less: Accumulated amortization
    
(4,011,000
)
        
(3,700,000
)
Intangible assets, net
  
$
5,837,000
        
$
6,109,000
  

Accrued liabilities:
  
December 31, 2005
      
September 30, 2005
  
Litigation accrual
    
500,000
         
328,000
 
Severance accrual
    
338,000
         
-
 
Deferred revenue
    
333,000
         
291,000
 
Accrued expenses - other
    
232,000
         
184,000
 
Accrued liabilities
  
$
1,403,000
        
$
803,000
  
 
7

4.
COMMITMENTS AND CONTINGENCIES

At December 31, 2005, future minimum annual lease payments under operating lease agreements for fiscal years ended September 30 are as follows:

Fiscal_2006
  
$
277,000
  
Fiscal_2007
 
  
28,000
 
Fiscal_2008
    
8,000
 
Thereafter
    
-
 
Total
  
$
313,000
  

Commitments to Investment Banking Firm

On October 8, 2004, pursuant to the terms of a Letter Agreement with Jefferies & Company, Inc., the Company issued a total of 925,000 shares of common stock to Jefferies. These shares were issued in lieu of cash fees for Jefferies’ investment banking services. These shares were not issued under the Company’s 2003 Stock Plan. Of the total shares issued to Jefferies, 100,000 shares were issued without restrictions on transfer other than those imposed by Rule 144 under the Securities Act of 1933, as amended. The remaining 825,000 shares were granted pursuant to a Restricted Stock Agreement. Accordingly, these shares remain subject to restrictions on transfer and sale, which lapse in accordance with a vesting schedule depending on the achievement of certain performance goals, none of which were achieved as of December 31, 2005.

In accordance with the provisions of EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Nonemployee, because the Company has a right to receive future services in exchange for unvested, forfeitable equity instruments, the 825,000 shares are treated as unissued for accounting purposes until such time that the performance goals are achieved.
 
Termination Agreements with Related Parties
 
Prior to fiscal 2004, the Company entered into Executive Consulting Agreements with four entities, each of which was controlled by one of the Company’s four executive officers. These agreements called for fees to be paid for the services provided by these individuals as officers of the Company, as well as their respective staffs. During fiscal 2004, the Company terminated the Executive Consulting Agreements with the entities controlled by its former CEO, former Executive Vice President of Marketing, and former CFO. In fiscal 2005, the Company terminated the remaining Executive Consulting Agreement with the entity controlled by a former Executive Vice President. These termination agreements provided for cash payments totaling $2,145,000 in exchange for consulting services and non-compete agreements. Approximately $1,643,000 of the settlement payments described above has been allocated to non-compete agreements. The values attributed to the non-compete agreements are being amortized on a straight line basis over the six-year life of the non-compete agreements. The remaining $502,000 was allocated to the consulting service portion of the termination agreements, which were originally expected to be rendered over a two-year period, In the fourth quarter of fiscal 2005, however, the Company concluded all matters with respect to these parties, made all remaining payments owed under the termination agreements, and expensed the remaining unamortized amount of $212,000 attributed to the consulting services. All amounts related to these agreements were paid by September 30, 2005.

During the fourth quarter of fiscal 2005, the Company entered into a separation agreement with its Chief Operating Officer. Under the agreement, the Company made a cash payment of $80,000. No further amounts are owed under this agreement.

8

YP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

On November 3, 2005, the Company entered into a Separation Agreement with its Chief Executive Officer. Under the terms of the agreement, the Company is required to make a cash payment of $337,500 in the second quarter of fiscal 2006. The agreement also provides for the continued vesting of 700,000 shares of the Chief Executive Officers’ restricted stock awards that were granted in fiscal 2004 and 2005. The entire amount owed under the agreement has been accrued as of December 31, 2005.

Litigation

The Company is party to certain legal proceedings incidental to the conduct of its business. Management believes that the outcome of pending legal proceedings will not, either individually or in the aggregate, have a material adverse effect on its business, financial position, results of operations, cash flows or liquidity.

During the third fiscal quarter of 2005, the Company recorded an accrual of $328,000 relating to a legal dispute with a former service provider. Based upon recent developments in this matter, YP Corp has increased the accrual by an additional $172,000 which has been reported in Other Income(Expense). The Company continues to pursue all legal means in defending itself in this matter

5.
NET INCOME (LOSS) PER SHARE
 
Net income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the year. Preferred stock dividends are subtracted from net income to determine the amount available to common stockholders.

The following table presents the computation of basic and diluted income (loss) per share: 

9

YP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

   
Three Months Ended December 31,
  
   
2005
  
2004
  
   
 
  
 
  
Income (loss) before cumulative effect of accounting change
  
$
435,000
  
$
(51,000
)
Less: preferred stock dividends
    
-
   
-
 
Income (loss) applicable to common stock before cumulative effect of accounting change
    
435,000
   
(51,000
)
Cumulative effect of accounting change
    
-
   
100,000
 
Net income applicable to common stock
 
$
435,000
  
$
49,000
  
               
               
Basic weighted average common shares outstanding
    
44,885,425
   
46,572,106
 
Add incremental shares for:
              
Unvested restricted stock
    
223,918
   
-
 
Series E convertible preferred stock
    
33,663
   
-
 
               
Diluted weighted average common shares outstanding
    
45,143,006
   
46,572,106
 
               
Net income per share:
              
Basic:
              
Income (loss) applicable to common stock before cumulative effect of accounting change
  
$
0.01
  
$
(0.00
)
Cumulative effect of accounting change
  
$
-
  
$
-
  
Net income applicable to common stock
  
$
0.01
  
$
0.00
  
               
Diluted:
              
Income (loss) applicable to common stock before cumulative effect of accounting change
  
$
0.01
  
$
(0.00
)
Cumulative effect of accounting change
  
$
-
  
$
0.00
  
Net income applicable to common stock
  
$
0.01
  
$
0.00
  

The following potentially dilutive securities were excluded from the calculation of net income per share because the effects are antidilutive:

   
Three Months Ended December 31,
  
   
2005
  
2004
  
           
Warrants to purchase shares of common stock
    
500,000
   
500,000
 
Series E convertible preferred stock
    
-
   
128,340
 
Shares of non-vested restricted stock
    
2,837,364
   
2,965,400
 
     
3,337,364
   
3,593,740
 


6.
RELATED PARTY TRANSACTIONS 
 
The Company’s related party transactions occurring during fiscal 2005 and the first quarter of fiscal 2006 consisted exclusively of payments under termination agreements with former executives as described in Note 4.
 
7.
CONCENTRATION OF CREDIT RISK

10

YP CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

The Company maintains cash balances at major nationwide institutions in Arizona and Nevada. Accounts are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 2005, the Company had bank balances exceeding those insured limits by approximately $6,808,000.
 
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily trade accounts receivable. The trade accounts receivable are due primarily from business customers over widespread geographical locations within the Local Exchange Carrier (“LEC”) billing areas across the United States. The Company historically has experienced significant dilution and customer credits due to billing difficulties and uncollectible trade accounts receivable. The Company estimates and provides an allowance for uncollectible accounts receivable. The handling and processing of cash receipts pertaining to trade accounts receivable is maintained primarily by two third-party billing companies. The net receivable due from a single billing services provider at December 31, 2005 was 3,191,000, net of an allowance for doubtful accounts of $715,000. The net receivable from that billing services provider at December 31 2005, represents approximately 51% of the Company’s total net accounts receivable at December 31, 2005.
 
8.
RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”). Under this new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and to recognize the expense over the service period. This new standard also changes the way in which companies account for forfeitures of share-based compensation instruments. SFAS 123R will be effective for fiscal years beginning after June 15, 2005 and allows for several alternative transition methods. In light of this upcoming change, the Company decided to change its method of accounting for forfeitures of restricted stock, under current GAAP rules effective October 1, 2004. See Note 2. The Company has adopted the provisions of SFAS 123R in the first quarter of fiscal 2006 on a prospective basis. This adoption did not have a material effect on its financial condition or results of operations.

9.
SUBSEQUENT EVENTS

On January 19, 2006, the Company entered into a Separation Agreement & General Release with Chris Broquist, its Chief Financial Officer, pursuant to which Mr. Broquist and the Company have agreed to terminate their employment relationship effective February 28, 2006. Pursuant to the terms of the Separation Agreement & General Release, among other items, Mr. Broquist will receive a severance package consisting of six months of compensation and health benefits and the continued vesting of his restricted stock and Mr. Broquist has agreed not to compete with the Company or solicit any of the employees of the Company for a period of two years.

At a meeting of the Board of Directors of the Company, held on January 8, 2006, John T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from the Board of Directors of the Company and the respective committees of the Board of Directors on which they were serving. Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse were elected to the Board of Directors of the Company. In addition, Daniel L. Coury, Sr., a current member of the Board of Directors, was elected Chairman of the Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit Committee of the Board of Directors.

*  *  *

11

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

For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the three months ended December 31, 2005, this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”) should be read in conjunction with the Consolidated Financial Statements, including the related notes, appearing in Item 1 of this Quarterly Report, as well as the Company’s Annual Report on Form 10-K for the year ended September 30, 2005.
 
Forward-Looking Statements
 
This portion of this Annual Report on Form 10-Q, includes statements that constitute “forward-looking statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “expects,” or “anticipates,” and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Annual Report include, but are not limited to our (i) our expectation to continue to expand our telemarketing campaigns in the future; (ii) our expectation that any future changes in billing practices with our remaining LECs will not have a material adverse impact on our net revenues; (iii) our belief that cost of services will continue to be directly correlated to our usage of LEC billing channel; (iv) our belief that sales and marketing expenses will increase if we continue to our strategy of significant mailing and telemarketing activities; and (v) the belief that our existing cash on hand will provide us with sufficient liquidity to meet our operating needs for the next twelve months.

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

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

This section presents a discussion of recent developments and summary information regarding our industry and operating trends only. For further information regarding the events summarized herein, you should read this MD&A in its entirety.
 
Business and Company Overview

We use a business model similar to print Yellow Pages publishers. We publish basic directory listings on the Internet free of charge. Our basic listings contain the business name, address, and telephone number for almost 17 million U.S. businesses. We strive to maintain a listing for almost every business in America in this format.

We generate revenues from advertisers that desire increased exposure for their businesses. As described below, advertisers pay us monthly fees in the same manner that advertisers pay additional fees to traditional print Yellow Pages providers for enhanced advertisement font, location or display. The users of our website are prospective customers for our advertisers, as well as the other businesses for which we publish basic listings.

Our primary product is our Internet Advertising Package™, or IAP. Under this package, advertisers pay for additional exposure by purchasing a Mini-WebPage™. In order to provide search traffic to our advertiser’s Mini-WebPage, we elevate the advertiser to a preferred listing status, at no additional charge. We also provide our IAP advertisers with enhanced presentation and additional unique products, such as larger font, bolded business name, map directions, ease of communication between our advertisers and users of our website, a link to the advertiser’s webpage, as well as other benefits.
 
12

Customer Counts

The success of our business model is based on our ability to retain, add and efficiently bill our subscribers.

There have been different methodologies employed in the reporting of customer count. To more properly reflect customer count we now only count billed listings. A billed listing is defined by management as any listing that has successfully been submitted through one of our billing channels or in the case of listings billed by direct invoice only those listings that have paid for their listing at the end of the reporting period.

Management believes that this change when coupled with the knowledge of our average price and percentage of returns and allowances will provide greater insight into our business model for the public.

When this change is applied to the last 5 Quarters our key disclosures would look as follows:

Quarter Ended
  
Previously Reported Quarter-End Customer Count
  
Billed Listings at Quarter-End
  
Average Billed Listings During Quarter
  
Gross Revenue
  
Returns and Allowance (% of Gross Revenue)
  
Net Revenues
  
Average Monthly Gross Revenue per Average Billed Listing
  
December 31st, 2005
  
N/A
  
95,876
  
90,809
  
8,328,583
  
8.43%
 
7,626,776
  
$30.57
  
September 30th, 2005
  
92,000
  
84,879
  
81,342
  
6,856,082
  
11.71%
 
6,052,936
  
$28.10
  
June 30th, 2005
  
108,000
  
92,600
  
83,096
  
7,419,827
  
12.17%
 
6,517,158
  
$29.76
  
March 31st, 2005
  
105,000
  
76,774
  
76,633
  
7,527,086
  
14.38%
 
6,444,609
  
$32.74
  
December 31st, 2004
  
95,000
  
64,616
  
82,579
  
7,502,125
  
17.49%
 
6,190,155
  
$30.28
  
 
Recent Operating Results

We bill our customers through four primary channels: LEC billing, ACH billing, recurring credit card and direct invoice. During the end of 2004 and throughout 2005, we had been reducing our use of LEC billing channels as the LEC’s policies regarding the use of our check mailer as our primary letter of authorization prevented us from billing many existing customers through this particular billing channel. Additionally, the major LECs (i.e. Regional Bell Operating Companies or RBOCs) prevented us from billing any new customers acquired via check mailers. As such, we transitioned a significant number of our customers to alternate billing means, the most significant of which was ACH billing. ACH billing is less expensive than LEC billing; however, many of our customers view this as a less desirable billing method, leading to increased cancellations..

In fiscal 2006, we began acquiring new customers via telemarketing campaigns, which are allowed to be billed via LECs. These telemarketing campaigns have reopened the LEC billing channel as a viable billing channel Additionally, our monthly billing rates are higher for customers acquired via telemarketing campaigns. For these reasons, we expect to continue to expand our telemarketing campaigns in the future. Check mailings remain a component of our marketing efforts and a significant increase in the volume of our mailings have contributed to our recent revenue growth.

The following represents a summary of recent financial results:
 
   
Q1 2006
  
Q4 2005
  
Q3 2005
  
Q2 2005
  
Q1 2005
  
Net Revenues
  
$
7,626,776
  
$
6,052,936
  
$
6,517,158
  
$
6,444,609
  
$
6,190,155
  
Gross margin
    
6,510,430
    
4,993,639
    
5,591,353
    
5,583,676
    
5,055,571
 
Operating expenses
    
5,689,644
    
6,295,000
    
5,269,473
    
5,199,870
    
5,291,031
  
Operating income (loss)
    
820,786
    
(1,301,361
)
  
321,880
    
383,806
   
(235,460
)
Net income (loss) (1)(1)
    
435,031
    
(815,727
)
  
(149,784
)
  
298,280
   
49,072
 
 
13
 
(1) The following non-recurring items are relevant to our recent quarterly operating results, each of which are further described herein:
 
____
·
______
First quarter of fiscal 2006 - includes an increase of general and administrative expenses totaling approximately $338,000 related to separation costs with our former Chief Executive Officer and in increase in other expenses associated with an additional accrual of $172,000 relating to an outstanding legal matter .
 _____
       
 
·
Fourth quarter of fiscal 2005 - includes an increase of general and administrative expenses totaling approximately $212,000 relating to the termination of consulting agreements with certain of our former officers and an increase in sales and marketing expense of $921,000 associated with a change in the amortization period of our customer acquisition costs, offset by a reduction of general and administrative expenses of approximately $295,000 associated with the true-up of estimates of forfeitures of restricted stock grants.
 
       
 
·
Third quarter of fiscal 2005 - includes losses of $328,000 associated with a litigation settlement and approximately $282,000 associated with our agreement to settle outstanding amounts due from two of our largest stockholders (with the loss being equal to the difference between the fair value of debt forgiven and the value of the consideration received).
  
       
 
·
First quarter of fiscal 2005 - includes a gain of approximately $100,000 (net of tax effects) associated with the cumulative effect of an accounting change with respect to our restricted stock grants.
 
 
The following represents the breakdown of net billings by channel during recent fiscal quarters:
 
   
Q1 2006
  
Q4 2005
  
Q3 2005
  
Q2 2005
  
Q1 2005
  
Q4 2004
  
LEC billing
    
35% 
   
 
32% 
    
 
23% 
    
 
26% 
    
 
49% 
    
 
64% 
 
ACH billing
 
 
54% 
 
 
54% 
 
 
64% 
 
 
56% 
 
 
42% 
 
 
32% 
 
Direct billing and other
 
 
11% 
 
 
14% 
 
 
13% 
 
 
18% 
 
 
9% 
 
 
4% 
 
 
 
Recent Developments

On January 19, 2006, we entered into a Separation Agreement with Chris Broquist, our Chief Financial Officer, pursuant to which Mr. Broquist and the Company have agreed to terminate their employment relationship effective February 28, 2006. Pursuant to the terms of the Separation Agreement & General Release, among other items, Mr. Broquist will receive a severance package consisting of six months of compensation and health benefits and the continued vesting of his restricted stock and Mr. Broquist has agreed not to compete with the Company or solicit any of the employees of the Company for a period of two years.

At a meeting of our Board of Directors, held on January 8, 2006, John T. Kurtzweil, R.A. Johnson-Clague, Peter J. Bergmann and Paul Gottlieb each resigned from our Board of Directors and their respective committees on which they were serving. Subsequent to the foregoing resignations, Joseph F. Cunningham, Jr. and Elisabeth Demarse were elected to the Board of Directors of the Company. In addition, Daniel L. Coury, Sr., a current member of our Board of Directors, was elected Chairman of the Board and Mr. Cunningham was appointed to serve as the Chairman of the Audit Committee of our Board of Directors.

On November 3, 2005, we entered into a Separation Agreement with Peter J. Bergmann in connection with his resignation as Chairman and President of our company. Under the terms of this agreement, Mr. Bergmann resigned as Chief Executive Officer during the second quarter of fiscal 2006. Mr. Bergmann will receive a cash payment of $337,500 and will continue to vest in a portion of his stock-based compensation earned during his tenure, in accordance with the terms of this agreement.

14
 
Attorneys General Complaints Concerning Direct Marketing Mail Solicitation

We have received a number of notices from the Attorney General offices of the States of Nevada, Nebraska, and Oregon concerning consumer complaints about the use of our direct mail solicitation. In Nebraska, the notice required us to cease and desist the use of our check mail program in that State immediately. The notices generally claim that the promotional check mailer practice engaged in by the Company violates state consumer protection statutes and deceptive trade practices acts.

We believe that the language in the various state statutes referenced is very vague as to what constitutes a deceptive trade practice or misleading practice, such that they are subject to wide-ranging constructions. Moreover, we do not believe that we are in violation of the referenced statutes. To this end, we are maintaining an ongoing dialogue with the various states in an effort to dispel such concerns, explain the non-deceptive nature of our business solicitations, and, if practicable, tailor our marketing practices so as to comply with the various states’ interpretation of what conduct would not violate the applicable consumer protection statutes.

Our current cooperative posture, however, does not obviate the possibility of a particular State Attorney General instituting formal action against us in a wider attempt to curb solicitations for business utilizing check promotions. We hope to continue our good faith discussions with these various States Attorney General offices in an effort to formulate a uniform set of standards to be used to determine if any specific check solicitation violates consumer protection laws. However, to the extent future standards are deemed too onerous, we may consider pursuing a legal course of action challenging those standards.
 
Results of Operations
 
Net Revenues

   
Net Revenues
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
7,626,776
  
$
6,190,155
  
$
1,436,621
    
23
%

The increase in revenues for the three months ended December 31, 2005, as compared to December 31, 2004, was largely due to an increased customer count attributable to expanded marketing efforts. As discussed in “Executive Overview - Recent Operating Results” above, we increased our number of monthly check mailers and introduced telemarketing campaigns. Our use of telemarketing campaigns has reopened LEC billing as an effective means of billing new customers. Additionally, our monthly billing rates are higher for customers acquired through telemarketing efforts, which has also contributed to our revenue growth.
 
Although we have concentrations of risk with our billing aggregators (as described in the Notes to Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report) these aggregators bill via many underlying LECs. As we no longer have any significant concentrations of customers with any single LEC, we do not expect any future changes in billing practices with our remaining LECs to have a material adverse impact on our net revenues.

The price for our IAP product ranges from $17.95 to $39.95 per month.

15

Cost of Services

   
Cost of Services
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
1,116,346
  
$
1,134,584
  
$
(18,238
)
  
(2
)%

While our cost of services has remained largely consistent in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005, it has declined as a percentage of net revenues. This decrease is directly attributable to a reduction in our dilution expense as a result of our transition from LEC billing to alternative billing methods during fiscal 2005. Billings through LEC channels, which drives a substantial majority of our dilution expense, was 35% of total billings in the first quarter of fiscal 2006 from 49% of total billings in the first quarter of fiscal 2005. A significant portion of these customers were converted to ACH and direct billing methods, which have minimal dilution. Additionally, we have engaged the services of an additional third-party service provider that has resulted in decreased fees for a portion of our LEC-billed customers.

We have recently begun acquiring new customers serviced through our LEC billing channels. To the extent we increase our use of LEC billing channels, our future cost of services as a percentage of net revenues is likely to increase.

Gross Profit 

   
Gross Profit
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
6,510,430
  
$
5,055,571
  
$
1,454,859
    
29
%

The increase in our gross profits was due primarily to increased revenues as discussed above. Gross margins increased to 85.4% of net revenues in the first quarter of fiscal 2006 compared to 81.7% of net revenues in the first quarter of fiscal 2005 due to decreased dilution in fiscal 2006.
 
General and Administrative Expenses

   
General and Administrative Expenses
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
3,758,849
  
$
3,320,296
  
$
438,553
    
13
%

General and administrative expenses increased primarily due to approximately $338,000 of one-time settlement costs associated with the separation agreement with our former Chief Executive Officer that was incurred during the first quarter of fiscal 2006. We also experienced increased costs of approximately $208,000 associated with reconfirmation, mailing, billing and other customer-related expenses and increased non-cash compensation costs of approximately $245,000 associated with restricted stock awards to employees. These increases were offset by decreased cash compensation costs stemming from staffing reductions and other cost containment initiatives that took place during fiscal 2005.

Our general and administrative expenses consist largely of fixed expenses such as compensation, rent, utilities, etc. Therefore, we do not consider short-term trends of general and administrative expenses as a percent of revenues to be meaningful indicators for evaluating operational performance.

The following table sets forth our recent operating performance for general and administrative expenses:

16

                       
   
Q1 2006
  
Q4 2005
  
Q3 2005
  
Q2 2005
  
Q1 2005
  
Compensation for employees, consultants, officers and directors
 
$
2,423,537
  
$
2,215,276
  
$
2,115,674
  
$
1,869,135
  
$
2,201,308
  
                                 
Other G&A costs
 
$
817,826
  
$
697,436
  
$
600,442
  
$
608,428
  
$
809,396
  
                                 
Reconfirmation, mailing, billing and other customer-related costs
 
$
517,486
  
$
432,447
  
$
535,861
  
$
635,624
  
$
309,592
  
 
Sales and Marketing Expenses

   
Sales and Marketing Expenses
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
1,533,791
  
$
1,610,493
  
$
(76,702
)
  
(5
)%

Sales and marketing expense decreased in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005 due to a decrease in amortization expense and decreased advertising and promotional expenditures. We capitalize certain direct marketing expenses and amortize those costs over a period of time that approximates the estimated life of the customer. In the fourth quarter of fiscal 2005, this amortization period was reduced from 18 months to 12 months. Because the amount of capitalized costs that were subject to amortization was smaller during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005, we incurred less amortization expense, despite the fact that the amortization period has been reduced.

We have recently expanded our direct mailings and telemarketing efforts, resulting in a recent increase in capitalized customer acquisition costs. To the extent that we continue to expand these efforts, we will experience future increases in sales and marketing expense related to this amortization.

Depreciation and Amortization

   
Depreciation and Amortization
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
397,004
  
$
360,242
  
$
36,762
    
10
%

The increase in depreciation and amortization expense is attributable to increased amortization of intangible assets associated with website development costs put in place during fiscal 2005 and amortization of a non-compete agreement that was acquired during the third quarter of fiscal 2005. Amortization relating to the capitalization of our direct mail marketing costs is included in marketing expenses, as discussed previously.

Operating Income

   
Operating Income (Loss)
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
820,786
  
$
(235,460
)
$
1,056,246
    
(449
)%

Our operating income increased substantially due primarily to revenue increases as previously described.

17

Other Income (Expense)

   
Other Income (Expense)
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
(188,545
)
$
86,365
  
$
(274,910
)
  
(318
)%

The change in other income (expense) for the first quarter of fiscal 2006 as compared to fiscal 2005 is due primarily to an increase in a legal accrual related to an ongoing dispute with a former service provider. Based upon recent developments in this matter, we have increased the $328,000 accrual previously recorded in the third quarter of fiscal 2005 by an additional $172,000 in the first quarter of fiscal 2006. We continue to pursue all legal means in defending this matter.

Income Tax Benefit (Provision)
 
   
Income Tax Benefit (Provision)
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
(236,846
)
$
17,370
  
$
(254,216
)
  
(1464
)%
 
The change in our income tax benefit (provision) for the first quarter of fiscal 2006 as compared to fiscal 2005 is due almost entirely to our increase in profitability. We have not experienced a significant change in our effective tax rates during these periods.

Cumulative Effect of Accounting Change

   
Cumulative Effect of Accounting Change
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
-
  
$
99,848
  
$
(99,848
)
  
0
%
 
During the first fiscal quarter of 2005, we changed our method of accounting for forfeitures of restricted stock awards to employees, officers, and directors. Prior to October 1, 2004, we recognized forfeitures as they occurred. Upon occurrence, we reversed the previously recognized expense associated with such grant. Effective October 1, 2004, we changed to an expense recognition method that is based on an estimate of the number of shares that are ultimately expected to vest. We believe that this is a preferable method as it provides less volatility in expense recognition. Additionally, while both methods of accounting for forfeitures are acceptable under current guidance, the implementation of FAS 123R (effective during the first quarter of fiscal 2006) will no longer permit us to recognize forfeitures as they occur. This change resulted in an increase to net income of $99,848, net of income taxes of $53,764, during the first quarter of fiscal 2005.

Net Income (Loss)

   
Net Income (Loss)
 
   
2005
  
2004
  
Change
  
Percent
  
                   
Three Months Ended December 31,
  
$
435,031
  
$
49,072
  
$
385,959
    
787
%

The substantial increase in net income for the three months ended December 31, 2005 is due primarily to increased revenues, offset by increased income tax expense and the effects of the cumulative effect of accounting change in fiscal 2005, each of which is described above.
 
Liquidity and Capital Resources

18

Net cash provided by operating activities decreased $1,579,070, or 61 %, to $1,009,298 for the three months ended December 31, 2005, compared to $2,588,368 for the three months ended December 31, 2004. During the first quarter of fiscal 2005, we generated a significant portion of our operating cash flow from the conversion of many of our customers from LEC billing to alternate billing channels that have a shorter collection time. During the first quarter of fiscal 2006, we did not have a significant amount of such conversions. Additionally, during the first quarter of fiscal 2006, we made substantial investments in direct customer acquisition costs as compared to the first quarter of fiscal 2005, where we had no such investments.
 
Our primary source of cash inflows is net remittances from our billing channels, including LEC billings and ACH billings. For LEC billings, we receive collections on accounts receivable through the billing service aggregators under contracts to administer this billing and collection process. The billing service aggregators generally do not remit funds until they are collected. Generally, cash is collected and remitted to us (net of dilution and other fees and expenses) over a 60- to 120-day period subsequent to the billing dates. Additionally, for each monthly billing cycle, the billing aggregators and LECs withhold certain amounts, or “holdback reserves,” to cover potential future dilution and bad debt expense. These holdback reserves lengthen our cash conversion cycle as they are remitted to us over a 12- to 18-month period of time. We classify these holdback reserves as current or long-term receivables on our balance sheet, depending on when they are scheduled to be remitted to us. For ACH billings, we generally receive the net proceeds through our billing service processors within 15 days of submission. Additionally, approximately 51% of our accounts receivable are due from a single aggregator.
 
Our most significant cash outflows include payments for marketing expenses and general operating expenses. Cash outflows for direct response advertising, our primary marketing strategy, typically occur in advance of expense recognition as these costs are capitalized and amortized over 12 months, the average estimated retention period for new customers. General operating cash outflows consist of payroll costs, income taxes, and general and administrative expenses that typically occur within close proximity of expense recognition.
 
There was no net cash used for investing activities for the first three months of fiscal 2006. During the first three months of fiscal 2005, cash used for investing activities was $8,732 which consisted of purchases of equipment.
 
Net cash used for financing activities was $90,026 for the first three months of fiscal 2006 and consisted exclusively of acquisitions of our common stock through our stock repurchase program.

We had working capital of $ 13,809,239 as of December 31, 2005, compared to $13,374,172 as of September 30, 2005. Our cash position increased during the past three months to over $9,000,000 at December 31, 2005 from approximately $8,100,000 at the end of fiscal 2005.
 
We maintain a $1,000,000 credit facility with Merrill Lynch Business Financial Services Inc., The applicable interest rate on borrowings, if any, will be a variable rate of the one-month LIBOR rate (as published in the Wall Street Journal), plus 3%. The facility requires an annual line fee of 1% of the committed amount. Outstanding advances are secured by all of our existing and acquired tangible and intangible assets located in the United States. There was no balance outstanding at December 31, 2005. The line has been renewed for an additional one-year period, extending the maturity date to April 30, 2006.

The credit facility requires us to maintain a “Leverage Ratio” (total liabilities to tangible net worth) that does not exceed 1.5-to-1 and a “Fixed Charge Ratio” (earnings before interest, taxes, depreciation, amortization and other non-cash charges minus any internally financed capital expenditures divided by the sum of debt service, rent under capital leases, income taxes and dividends) that is not less that 1.5-to-1 as determined quarterly on a 12-month trailing basis. The credit facility includes additional covenants governing permitted indebtedness, liens, and protection of collateral. As of December 31, 2005, we were in compliance with the covenants and are able to fully draw on the credit facility.
 
Until April 1, 2005, we were contractually obligated to pay a $0.01 per share dividend each quarter, subject to compliance with applicable laws, to all common stockholders, including those who hold unvested restricted stock. We are no longer required to pay quarterly dividends. Future dividend payments will be evaluated by the Board of Directors based upon earnings, capital requirements and financial position, general economic conditions, alternative uses of capital and other pertinent factors.

19

During the third quarter of fiscal 2005, our Board of Directors initiated the repurchase of up to $3 million of our common stock from time to time on the open market or in privately negotiated transactions. To date, we have reacquired 775,850 shares at an aggregate cost of $655,635 under the program.

The following table summarizes our contractual obligations at December 31, 2005 and the effect such obligations are expected to have on our future liquidity and cash flows: .

   
Payments due by Period
  
   
Total
  
Fiscal 2006
  
Fiscal 2007
  
Fiscal 2008
  
Thereafter
  
Contractual Obligations
                      
Lease commitments
  
$
313,000
  
$
277,000
  
$
28,000
  
$
8,000
  
$
-
  
Termination agreements
  
$
337,500
  
$
337,500
  
$
-
  
$
-
  
$
-
  

We believe that our existing cash on hand and cash flow from operations will provide us with sufficient liquidity to meet our operating needs for the next twelve months.

*  *  *

20

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As of June 30, 2005, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. We believe that we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases (of which there were none in the first three months of fiscal 2006 or in any of 2005) or commodity price risk.
 
ITEM 4.
CONTROLS AND PROCEDURES
 
Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls are also designed with an objective of ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely consideration regarding required disclosures.
 
The evaluation of our disclosure controls by our principal executive officer and principal financial officer included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our chief executive officer and chief financial officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Based on their review and evaluation as of the end of the period covered by this Form 10-Q, and subject to the inherent limitations all as described above, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report. They are not aware of any significant changes in our disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. During the period covered by this Form 10-Q, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

21

PART II - OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS

None

ITEM 1A.
RISK FACTORS

None

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period
(a) Total Number of Shares (or Units) Purchased
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 2005
 
0
N/A
0
N/A
November 2005
 
0
N/A
0
N/A
December 2005
 
174,600
0.52
0
N/A
Total
 
174,600
0.52
0
$2,344,365(1)
 
(1) On May 18, 2005, we announced the adoption of a $3 million stock repurchase program. To date, we have purchased 775,850 shares at an aggregate price of $655,635.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5.
OTHER INFORMATION

None

ITEM 6.
EXHIBITS
 
The following exhibits are either attached hereto or incorporated herein by reference as indicated:

Exhibit Number
  
Description
     
10.1
  
Separation Agreement, dated November 3, 2005, by and between Peter J. Bergmann and YP Corp.
     
31
  
Certifications pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
  
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
22

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

YP.CORP.
 
Dated: February 14, 2006
/s/ W. Chris Broquist
  
 
W. Chris Broquist
  
 
Chief Financial Officer
  


EXHIBIT INDEX

Exhibit Number
  
Description
     
 
Separation Agreement, dated November 3, 2005, by and between Peter J. Bergmann and YP Corp.
     
 
Certifications pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002