**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-K**




(Mark
      One)




x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934




For
      the
      fiscal year ended November 30, 2006




OR




o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934




For
      the
      transition period from ___________ to
      ___________




Commission
      file number 0-27046





**TRAFFIX,** **INC.**


(Exact
      name of registrant as specified in its charter)


Delaware
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              22-3322277
                (I.R.S.
                  EmployerIdentification
                  No.)


One
                  Blue Hill Plaza
                Pearl
                  River, New York
                (Address
                  of principal executive offices)
              
              10965
                (Zip
                  Code)




Registrant's
      telephone number, including area code:
(845)
      620-1212


Title
                  of Class
              
              Exchange
                  on Which RegisteredSecurities
                  registered pursuant
                to
                  Section 12(b) of the Act:
              
              Common
                  Stock
                $.001
                  Par Value
              
              NASDAQ
                  National MarketSecurities
                  registered pursuant
                to
                  Section 12(g) of the Act:
              
              Common
                  Stock
                $.001
                  Par Value




Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
oNo
x




Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.     Yes
o No x




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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of Registrant's knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer  o 
Accelerated filer o  Non-accelerated
      filer  x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).    YES  o   NO x




The
      number of shares outstanding of the
      Registrant's common stock is 14,434,017 (as of 02/26/07). The aggregate market
      value of the voting stock held by nonaffiliates of the Registrant
      was $73,467,582 (as of 2/26/06, based upon a closing price of the Company’s
      Common Stock on the Nasdaq National Market on such date
      of $6.05).





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None.









**TRAFFIX,
      INC.**


**INDEX
      TO ANNUAL REPORT ON FORM 10-K**


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**FOR
      THE FISCAL YEAR ENDED NOVEMBER 30, 2006**





ITEMS
      IN FORM 10-K




PageFacing
                  pagePart
                  IItem
                  1. Business
              
              
              1Item
                  1A. Risk Factors
              
              
              21Item
                  1B. Unresolved Staff Comments
              
              
              NoneItem
                  2. Properties.
              
              
              30Item
                  3. Legal Proceedings
              
              
              30Item
                  4. Submission of Matters to a Vote of Security Holders
              
              
              NonePart
                  IIItem
                  5. Market for the Registrant's Common Equity, Related Stockholder
                  Matters
                  and Issuer Purchases of Equity Securities
              
              
              33Item
                  6. Selected Financial Data
              
              
              34Item
                  7. Management's Discussion and Analysis of Financial Condition
                  and Results
                  of Operations
              
              
              37Item
                  7A. Quantitative and Qualitative Disclosures About Market
                  Risk
              
              
              NoneItem
                  8. Financial Statements and Supplementary Data
              
              
              99Item
                  9. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              
              
              NoneItem
                  9A. Controls and Procedures
              
              
              99Item
                  9B. Other Information
              
              
              NonePart
                  IIIItem
                  10. Directors and Executive Officers of the Registrant
              
              
              100Item
                  11. Executive Compensation
              
              
              110Item
                  12. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder Matters
              
              
              118Item
                  13. Certain Relationships and Related Transactions
              
              
              121Item
                  14. Principal Accountant Fees and Services
              
              
              121Part
                  IVItem
                  15. Exhibits and Financial Statement Schedules
              
              
              124Signatures
              
              
              126




*FORWARD
        LOOKING INFORMATION*
 *MAY
        PROVE INACCURATE*
 
 *This
        Annual Report on Form 10-K* , *including
        without limitation the Business section and Management’s Discussion and Analysis
        of Financial Condition and Results of Operations,*  *contains
        certain forward-looking statements within the meaning of Section 27A of the
        Securities and Exchange Act of 1933 and Section 23E of the Securities and
        Exchange Act of 1934, and information relating to the Company that is based
        on
        our current beliefs, as well as current assumptions made by and information
        currently available to us. When used in this document, the words "anticipate,"
        "believe," "estimate," and "expect" and similar expressions, as they relate
        to
        us, are intended to identify forward-looking statements. Such statements
        reflect
        our current views with respect to future events and are subject to certain
        risks, uncertainties and assumptions, including those described in this Annual
        Report on Form 10-K. Should one or more of these risks or uncertainties
        materialize, or should underlying assumptions prove incorrect, actual results
        may vary materially from those described herein as anticipated, believed,
        estimated or expected. Factors that could cause or contribute to such
        differences include, but are not limited to, those discussed under the heading
        “Risk Factors” included below and in other documents we file from time to time
        with the Securities and Exchange Commission. Our business and the associated
        risks may have changed since the date of this report; we assume no obligation
        to
        update these forward-looking statements.*
 
 **Item
        1. Business**
 
 **Overview**
  We
        are a
        leading Interactive media and marketing company that provides complete
        end-to-end marketing solutions for our clients who seek to increase sales
        and
        customer contact deploying the numerous facets of online marketing we offer.
        Our
        clients include advertisers, direct marketers, agencies and wireless service
        providers. Our online marketing offers include search engine marketing, search
        engine optimization, email marketing, affiliate marketing, lead generation,
        creative support, and development and hosting solutions. We own and operate
        customized websites, hosted and third-party web pages, and email marketing
        platforms to facilitate consumer interaction with, and ultimate transactions
        for, our clients. We generate and record revenue primarily on a
        performance-based model, whereby revenue is recognized upon the successful
        delivery of a qualifying lead, customer, survey, completed application, ultimate
        sale or the delivery of some other measurable marketing benefit as defined
        in
        the underlying marketing agreement.
  1
  In
        addition to generating customers, sales and leads for our advertising clients,
        we also use this media platform for the promotion of our own services which
        include subscriptions to our online personals websites and our mobile services,
        under which we bill consumers directly.
  In
        January of Fiscal 2005, we, through our wholly owned subsidiary, Hot Rocket
        Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
        Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
        the business of buying and selling performance based online advertising space
        for third parties, as well as providing such services to the sales activities
        of
        our consolidated entity. The Hot Rocket acquisition has broadened our reach
        into
        the Internet direct marketing arena, which continues to allow for expanded
        client relationships and various other synergistic possibilities, such as
        adding
        value to our core operations by the enhancement of our current and developing
        marketing programs conducted in our Online Advertising and Media Services
        activities.
  The
        initial purchase price for the Hot Rocket acquisition, recorded in Fiscal
        2005,
        was approximately $3.8 million and was comprised of $3.1 million in cash,
        $0.7
        million (or 113,821 shares) of our common stock and transaction fees
        approximating $0.1 million. Pursuant to an independent third party valuation,
        the reported purchase price was allocated to approximately $2.2 million of
        goodwill and $1.6 million of identifiable intangibles. There were no tangible
        assets acquired.
  In
        addition to the initial purchase price of the acquisition, we agreed to pay
        Hot
        Rocket a contingent purchase price of up to $12.5 million if Hot Rocket
        generates an aggregate of $27 million in EBITDA (as quantified in the Agreement)
        over the four year period following the closing. In accordance with the terms
        of
        the acquisition agreement, for the period February 1, 2005 to January 31,
        2006,
        we were liable for a combined additional purchase price payment of $1.467
        million, which has been settled by a cash payment of approximately $0.886
        million made on May 9, 2006, and an issuance of 103,354 shares issued on
        May 10,
        2006 (then having a fair market value of approximately $0.581 million). Future
        contingent payments made, if any, will be treated as additional purchase
        price
        and included as an addition to goodwill.
  2
  At
        November 30, 2006, we determined that at the current rate of growth recognized
        by Hot Rocket, there exists the possibility that the second anniversary tier
        of
        contingent payment will not be attained within the second measurement period,
        which ended January 31, 2007. Based on that lack of absolute certainty as
        to the
        second anniversary additional purchase price liability, we have not accrued
        any
        additional contingent payments at this time. Future contingencies, if any,
        will
        be recorded when the contingency has been satisfied and the additional
        consideration is issued or becomes issuable.
  The
        terms
        of the acquisition agreement also provide for additional contingent payments
        of
        purchase price for the periods February 1, 2006 through July 31, 2006, and
        August 1, 2006 through January 31, 2007, upon the attainment of certain EBITDA
        thresholds as specified in the Agreement. Hot Rocket did not reach the $1.35
        million EBITDA threshold for the period ended July 31, 2006. As of November
        30,
        2006, based on the lack of absolute certainty regarding the EBITDA contingent
        threshold as it relates to the additional payment period ended January 31,
        2007,
        we have not accrued any additional contingent payments at this
        time.
  3
 
 We
        made
        one asset acquisition in each of Fiscal 2004 and 2005, which accounted for
        approximately $6.9 million and $16.6 million of our consolidated
        revenue s
        during
        such fiscal periods, respectively, and approximated $28.85 million, or 39.5%
        of
        consolidated revenues during the year ended November 30, 2006. Such asset
        acquisitions are described in further detail below and also described in
        the
        notes to the November 30, 2006 audited consolidated financial statements
        included herein.
  **Background
        and Available Information**
 
 From
        our
        inception in 1993 (under the name "Quintel Communications, Inc.") through
        Fiscal
        1999, we generated the bulk of our revenue from direct marketing using the
        traditional media of television, postal mail and telemarketing.
  In
        Fiscal
        2000, we repositioned our operations, focus and direct marketing business
        to the
        online media of the Web. Applying the marketing disciplines honed from our
        years
        of operating in the "off-line" media arena, we have been able to provide
        enhanced response-based results in a cost-effective and scaleable manner
        via our
        online marketing strategy.
  During
        December 1995, we completed our initial public offering of common stock,
        which
        is publicly traded and is currently reported on the NASDAQ National Market
        under
        the symbol “TRFX”.
  4
  We
        are
        headquartered in Pearl River, New York and our mailing address is 1 Blue
        Hill
        Plaza, Pearl River, New York, 10965. The telephone number of our executive
        offices is (845) 620-1212. We have subsidiaries and branch offices in
        Canada.
  Our
        Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
        on
        Form 8-K, and all amendments to those reports filed or furnished pursuant
        to
        Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
        free
        of charge on our website, www.traffixinc.com, as soon as reasonably practicable
        after we electronically file such material with, or furnish it to, the
        Securities and Exchange Commission (SEC). Any and all information found on
        our
        website is not part of this or any other report we file with or furnish to
        the
        SEC.
  The
        public may also read and copy any materials we file with the SEC at the SEC’s
        Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
        Information on the operation of the Public Reference Room may be obtained
        by
        calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov ,
        which
        contains reports, proxy and information statements, and other information
        regarding our Company that we file electronically with the SEC.
  Unless
        the context otherwise requires, in this Annual Report on Form 10-K, the term
        “Traffix”, “the Company”, “we”, “us,” and “our” refer to Traffix Inc. and its
        subsidiaries. Our fiscal year ends on November 30 and fiscal years are referred
        to by the calendar year in which they end. For example, “fiscal year 2006” and
“Fiscal 2006” refer to the fiscal year ended November 30, 2006.
  5
  **Online
        Advertising and Media Services**
 
 We
        own
        and operate a variety of Internet websites featuring specialized content
        such as
        online personals, downloadable ring-tones, wallpaper and music, recipes,
        greeting cards, automobile information, DVD promotions, and other theme-based
        content. We generate traffic to our websites from advertising on third-party
        Internet media (e.g., search engines, email and banner advertisements) and
        through cross-marketing within our own online media. Our Web properties and
        our
        marketing activities utilize proprietary technologies to generate real-time
        response-based marketing results for our advertising clients. When visiting
        our
        online properties, consumers are given the opportunity to purchase, sign-up
        for,
        ask to be contacted regarding, or simply indicate an interest in, hundreds
        of
        offers for various products and services. Specifically, through these
        interactive Web properties we generate a variety of transactional results
        ranging from (a) Web traffic, (b) inbound telemarketing calls, (c) outbound
        telemarketing leads, (d) demographically/psychographically profiled lists
        of
        consumers, (e) highly-targeted customized response-based leads, (f) completed
        applications for products, and (g) sales of our clients’ products and
        services.
  *Online
        Advertising - Website Advertising*
  We
        own
        and operate a variety of websites with a broad range of content. Virtually
        all
        of our websites generate revenue from client advertisements. The advertisements
        are served across all of our websites using our internally developed technology
        that serves ads to websites using an algorithm that takes into account a
        number
        of factors including information supplied by the visitor upon registration
        (e.g., gender, age and zip code), as well as the price paid by our client
        to
        serve the advertisement.
  6
 
 The
        websites feature content ranging from music for downloads to sweepstakes.
        In
        Fiscal 2004, we launched EZ-Tracks.com (a Canadian domiciled majority owned
        subsidiary), our music destination site that features over 30,000 songs
        available for free and legal downloading, as well as other content such as
        musical greeting cards and a downloadable version of the Bible in audio format.
        We have a games website that offers a variety of free parlor-style games,
        such
        as backgammon and checkers. In Fiscal 2004, we also launched reciperewards.com,
        a website that features thousands of cooking recipes.
 
 Our
        PrizeDistributors, Inc. sponsored group of websites offers consumers the
        opportunity to win up to $1 million daily in our free, online sweepstakes.
        The
        sweepstakes prizes are indemnified by an independent, third-party agency.
        In
        order to play, each consumer must provide complete and accurate registration
        information and agree to receive ("opt-in") marketing messages from us and
        our
        marketing partners.
  We
        own
        and operate several other websites such as Q121, Inc., Music of Faith.com,
        AtlasCreditGroup.com, TheBargainSpot.com, AltasAutomotiveGroup.com,
        EZGreets.com, GameFiesta.com, PrizeAmerica.com and LoveFreeGames.com. Each
        of
        these sites is designed for a specific consumer interest category that we
        matched with client promotions that appeal to such interest category.
 
 *Online
        Advertising - Email Marketing Programs*
  Each
        program that we market for our clients can be implemented not only through
        our
        websites, but also, and often, through email marketing. We currently market
        to a
        vast database, which includes consumer data that is either owned by us or
        is
        managed by us under our revenue share arrangements, whereby we recognize
        the
        gross revenue as earned and bear the payment obligation to the list owner,
        irrespective of receipt of payment from our clients.
  7
  *Results
        Analysis*
  Subsequent
        to a campaign being fully implemented, we continually analyze the marketing
        results to gauge whether the campaigns are generating adequate results for
        the
        client, whether the media is being utilized cost-efficiently, and to determine
        whether new and different copy is yielding better overall results. These
        are
        traditional direct-marketing disciplines that we apply and that, we believe,
        distinguish us from many of our competitors in the online marketing
        industry.
  *Affiliate
        Marketing*
  Our
        affiliate marketing business commenced in late Fiscal 2005 under the name
        of
        RocketProfit.com, where publishers and advertisers can make available to
        themselves countless unique and exclusive deals, customized promotions, high
        payouts, detailed tracking capabilities and significant multi-level customer
        support. **
  *Syndication*
  After
        we
        develop a campaign that works efficiently on our own media, we sometimes
        "syndicate" the program to third-party media. Typically, we have expended
        time,
        media and other costs in developing certain campaigns. In exchange for this
        invested effort, we obtain the right to market those campaigns to other online
        media companies. We believe that with syndicated offers we can leverage
        campaigns we have developed so that in future fiscal periods we can generate
        additional revenue with reduced costs and risks associated with such business
        extension. There is no guarantee that this belief will be realized in future
        fiscal periods.
  8
  *Online
        Advertising - Internet Media Performance Based Sales*
  Pursuant
        to our Fiscal 2005 acquisition of Hot Rocket Marketing, Inc., we generate
        revenues from the resale, on a variable performance basis, of Internet Media
        Advertising space acquired on a fixed cost basis.
  *Online
        Advertising - Data Sales, Rentals and List Management*
  We
        also
        generate revenues from the sales, rentals and management (for use both online
        and offline) of our proprietary, profiled databases. Such revenue is included
        in
        our Online Advertising and Media Services activities revenue in the Online
        Advertising revenue line item component.
  *Search
        Engine Marketing*
  Our
        search engine marketing company, SendTraffic (acquired in Fiscal 2004), develops
        and manages search engine marketing (SEM) campaigns for our third party
        advertising clients, as well as for our own proprietary websites, promotions
        and
        offers. Using a proprietary technology called Marketing Dashboard, we build,
        manage and analyze the effectiveness of hundreds of thousands of pay per
        click
        (PPC) keywords in real time across each of the major search engines, like
        Google, Yahoo and MSN. SendTraffic pays the search engines directly for the
        traffic, and generates revenue by billing its clients the search engine costs,
        plus a marketing services fee. We also perform search engine optimization
        (SEO)
        services, for which advertising clients are billed a monthly retainer
        fee.
  9
  *Personals*
  Our
        Personals business is designed as a monthly recurring billing program, with
        various memberships to our Personals program, iMatchUp.com. Revenue from
        our
        Personals business is generated by directly billing consumers. In the latter
        part of Fiscal 2006, we began managing the declining Personals customer base,
        and had, and expect to continue to have a reduction in marketing efforts
        directed at obtaining new enrollments within the Personals program. Competition
        for enrollees has driven the marketing costs in excess of our tolerable
        thresholds.
 
 *Internet
        Game Development*
  Our
        Canadian subsidiary, Infiknowledge, ULC, performs work-for-hire services
        in the
        production of Internet games for third party vendors, and participates in
        royalties related to the development, launch and successful commercialization
        of
        such Internet games.
  Our
        expansion in, and dependence on, our online direct marketing efforts, coupled
        with the potential for state and/or federal legislation limiting our ability
        to
        contact consumers online should all be considered when referring to our current
        fiscal year’s results, as well as prior year’s historical results, in evaluating
        the potential for our future operations, cash flows, and financial
        position.
  10
  **Segment
        Information**
 
 We
        operate in one segment, Online Advertising and Media Services. In classifying
        the financial information for our operating activities, we rely primarily
        upon
        the evaluations of the chief operating decision maker (CODM - as managed
        by
        committee) and executive management in deciding how to allocate our resources
        and assess our performance. Disclosure is also required about products and
        services, geographic areas and major customers. At December 1, 2005, management
        realigned the way it views operations internally and modified the format
        that we
        distribute reports and information to the CODM. In accordance with such
        realignment, the LEC Billed Products and Services segment, which was principally
        inactive in terms of its contributions to gross margin and income from
        operations from the period December 1, 2002 to November 30, 2005, was collapsed
        into our Online Advertising and Media Service activities, and was no longer
        displayed as a separate segment within our CODM reporting information and,
        therefore, was correspondingly reflected as such in our publicly disseminated
        financial information. For the November 30, 2006, 2005 and 2004 Fiscal periods,
        the Company’s income statements and notes to the financial statements were
        reclassified, regarding segment disclosures and the collapse of the LEC segment
        into our single segment presentation of Online Advertising and Media Services
        Activities. All information regarding “Managements’ Discussion and Analysis of
        Financial Condition and Results of Operations” has been reclassified to conform
        with such presentation for all periods reported.
  11




In
        Fiscal
        2006, our Online Advertising revenue component of our Online Advertising
        and
        Media Service activities included $613,000 of legacy revenue from reserve
        releases from our prior LEC segment. Such reserve releases were actual cash
        received by us from third party service bureaus that withheld amounts from
        our
        legacy LEC segment in anticipation of bad debts; actual bad debts proved
        less
        than amounts originally withheld. At the point these monies were withheld
        in
        prior fiscal years, we had treated them as contra revenue. We do not anticipate
        future reserve releases, if any, will represent material amounts.
  We
        sell
        services and not products and, correspondingly, do not carry
        inventory.
  We
        had
        revenue from our Canadian-based subsidiary of approximately $912,000 and
        $647,000 during the fiscal years ended November 30, 2006 and 2005, respectively.
        The primary role of the Canadian subsidiary is to support back office data
        operations and does not directly contribute significant amounts to consolidated
        net income. The majority of the Canadian subsidiary’s outlays are related to the
        generation of our revenues. Correspondingly, we classify them within the
        categories of cost of sales and selling, general and administrative expenses,
        where appropriate.
 
 Segment
        information is set forth in Note 1 to the Consolidated Financial Statements
        referred to in the Financial Statements and Supplementary Data section hereof.
        For a more detailed discussion of our segment information, also see
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations”.
  12
 
 **Competition**
 
 We
        face
        intense competition in the marketing of our Online Advertising and Media
        services. Many of our competitors in the online direct marketing arena are
        well
        established, have reputations for success in the development and marketing
        of
        services and have significant financial, marketing, distribution, personnel
        and
        other resources. We also compete with numerous smaller private companies
        that
        are willing to take extremely aggressive marketing risks that are outside
        of the
        scope of our risk tolerance. These extremely aggressive marketing practices
        and
        other marketing capabilities permit our competitors to implement extensive
        advertising and promotional campaigns, both generally and in response to efforts
        of other competitors, to enter into new markets and introduce new
        services.
  **Seasonality
        and Cyclicality**
  We
        believe that the online marketing industry is subject to seasonal fluctuations,
        where consumers tend to spend less time at the computer during the summer
        months, which is apparent based on the decrease in Internet traffic during
        such
        periods. Historically, we have generally recognized the fourth and first
        fiscal
        quarters of our fiscal year to be our most active. As the acceptance of the
        Internet as a purchasing and transacting medium continues, we believe this
        will
        continue to minimize the affect of seasonality.
 
 **Insurance**
  W e
        may be
        subject to substantial liability as a result of our day-to-day operations.
        Accordingly, we maintain a general liability insurance policy that is subject
        to
        a per occurrence limit of $1 million with a $2 million aggregate limit and
        an
        umbrella policy covering an additional $10 million of liability. In addition,
        we
        have errors and omissions insurance with a limit of $5 million. We also maintain
        Directors and Officers liability insurance providing aggregate coverage of
        $20
        million for legal costs and claims. Such insurance may not be sufficient
        to
        cover all potential claims and additional insurance may not be available
        in
        future fiscal periods at reasonable costs.
  13
  **Government
        Regulation**
  As
        a
        direct-to-consumer marketing company we are subject to a variety of federal,
        state and local laws and regulations designed to protect consumers that govern
        certain of our marketing practices.
 
 Federal
        legislation was signed into law, effective January 1, 2004, substantially
        pre-empting existing and pending state e-mail marketing legislation. The
        CAN-SPAM Act of 2003 (“CAN-SPAM“) requires that certain “opt-out” procedures,
        including, but not limited to, a functioning return e-mail address, be included
        in commercial e-mail marketing. CAN-SPAM prohibits the sending of e-mail
        containing false, deceptive or misleading subject lines, routing information,
        headers and/or return address information; however, CAN-SPAM does not permit
        consumers to file suit against e-mail marketers for violations of CAN-SPAM.
        We
        believe that this may benefit us, as individuals will be more limited in
        their
        ability to file frivolous suits against us, as they have in the past. If
        any
        subsequent federal regulations are enacted, including, but not limited to,
        those
        implementing regulations promulgated by the FTC that limit our ability to
        market
        our offers, we could potentially realize a material adverse impact in future
        fiscal period net revenue growth, and, therefore, profitability and cash
        flows
        could be adversely affected.
 
 In
        contrast to CAN-SPAM, most state deceptive marketing statutes contain private
        rights of action. Such private right of action lawsuits may have an adverse
        impact in future fiscal period net revenue growth, as individuals may be
        more
        inclined to file frivolous state deceptive marketing suits against
        us.
 
 14
 
 Under
        its
        rule-making authority, the Federal Communications Commission (“FCC”) in
        August 2004 adopted rules prohibiting sending of unsolicited commercial
        e-mails to wireless phones and pagers. To assist in compliance with the rules,
        the FCC published on February 7, 2005 a list of mail domain names
        associated with wireless devices. Senders were given thirty (30) days to
        come into compliance. Thereafter, it became illegal to send unsolicited
        commercial e-mail to a domain address on the list unless the subscriber gave
        prior express authorization. The effect of these rules is to create a "double
        opt-in" requirement for each sender of mail (advertiser and publisher). The
        practical consequence of these requirements on senders of commercial e-mail
        is
        that conducting compliant campaigns will necessitate the suppression of the
        domains listed in the FCC's list of wireless domains. Additionally, since
        domain
        suppression is now required as a practical matter by law, any campaigns that
        have domain suppression lists will have those lists included with the regular
        e-mail suppression lists. Our publishers will be required to suppress the
        domain
        lists associated with each campaign in the same manner that they already
        suppress the e-mail address lists. Although these new regulations do not
        have a
        material adverse impact on our current operations, there can be no assurance
        that they will not have a material adverse impact on our future
        operations.
 
 Under
        its
        rule-making authority, in May 2005, the Department of Justice adopted rules
        that amend the record keeping and inspection requirements for producers of
        sexually explicit performances. Codified in 18 U.S.C. 2257 of the federal
        criminal code, Section 2257, as amended, went into effect on June 23,
        2005 and requires a class referred to as “secondary producers” to comply with
        the record keeping and inspection requirements that apply to primary producers.
        On June 16, 2005, The Free Speech Coalition, Inc. brought an action
        challenging, among other things, the extent to which webmasters and/or web
        sites
        fall under the definition of “secondary producers” under the new
        Section 2257 regulations. In a ruling issued December 28, 2005, the U.S.
        District Court rejected the establishment of a class of “secondary producers”
that would have to comply with the record-keeping and inspection requirements
        of
        Section 2257 and reaffirmed the decision in Sundance Associates v. Reno,
        which
        held that primary “producers” would be limited to those persons involved in the
“hiring, contracting for, managing, or otherwise arranging for the participating
        of the depicted performer.” Secondary producers will likely still have to comply
        with the labeling requirements of Section 2257, which require that secondary
        producers obtain from the primary producer a letter or other correspondence
        indicating who the custodian of records is, where such records are kept and
        the
        date of production of the material. The ruling in this proceeding is limited
        to
        current or future members of The Free Speech Coalition, Inc. There is the
        risk that the definition of “secondary producers” may be reinstated and/or more
        broadly interpreted in the future. At this juncture, Section 2257 has had
        no material effect on our net revenue growth, profitability and cash flows.
  15
 
 The
        states of Michigan and Utah have passed Child Protection Registry laws that
        bar
        the transmission of commercial e-mail to registered state residents under
        the
        age of eighteen (collectively, the “Statutes”). The Statutes contain provisions
        for fines and jail time for violators, and create a private right of action
        for
        aggrieved parties. Under the Statutes, state residents may register any e-mail
        address, fax number, wireless contact information or instant message identifier
        assigned to the account of a minor or one to which a minor has access. Unlike
        other e-mail marketing statutes, there are no opt-in or pre-existing business
        relationship exceptions. The Statutes provide that once an address of a state
        resident is on the registry for thirty (30) days, commercial e-mailers are
        prohibited from sending to that address anything containing an advertisement,
        or
        even a link to an advertisement, for a product or service that a minor is
        legally prohibited from accessing. Such products and/or services include,
        but
        are not limited to, alcohol, tobacco, gambling, firearms, automotive, financial,
        prescription drug and adult material. This prohibition remains in force even
        if
        the e-mail or other communication is otherwise solicited. The Free Speech
        Coalition, Inc. has brought an action that challenges certain aspects of
        the Utah Child Protection Registry law; no decision on this proceeding has
        yet
        been rendered. We await the results of this action. To the extent we market
        these types of products and/or services, we have blocked sending such e-mail
        to
        Michigan and Utah residents. State action was initiated in 2005 and early
        2006
        in the respective legislative bodies in the states of Illinois, Connecticut,
        Georgia, Hawaii, Iowa and Wisconsin in order to pursue the enactment of
        legislation similar to the Statutes that will create state-level e-mail
        registries for minors. None of the proposed legislation has been enacted
        as of
        yet. We await the results of the respective legislative processes associated
        with these proposed child e-mail registry laws. Depending on the outcome,
        and to
        the extent we market these types of products and/or services, we may have
        to
        block sending such e-mail to Illinois, Connecticut, Georgia, Hawaii and/or
        Iowa.
  16
 
 Federal
        legislation was signed into law, effective December
        1, 2006, that makes changes to the Federal Rules of Civil Procedure (“Rules”)
        affecting the storing, retention and production of electronically stored
        information (“ESI”) in connection with discovery pursuant to litigation. As a
        result of the changes to the Rules, attorneys will be required to advise
        their
        adversaries, during litigation, of the details of their clients’ ESI retention
        and management systems and, in many instances, produce ESI including, but
        not
        limited to, e-mails. As a
        result of these changes to the Rules, companies should: (i) identify the
        various
        forms of ESI generated in the course of business, and where such ESI is stored;
        (ii) implement systems and technology capable of storing and retrieving such
        ESI, as necessary; and (iii) adopt a clear ESI document retention program
        and
        adhere to same at all times. The requirements imposed by the changes to the
        Rules as detailed above could require us to change our ESI-related programs
        at
        some additional cost. In addition, any subsequent litigation could result
        in
        substantially higher costs as a result of the need to produce greater quantities
        of ESI, which could have a material adverse impact on profitability and cash
        flows.
 
 Legislation
        has been passed in sixteen (16) different states that are intended to
        regulate “spyware” and, to a limited extent, the use of “cookies.” Of particular
        significance is the Revised Utah Spyware Control Act (the “Utah Act”) that bars
        a person or company from using a context-based trigger mechanism to display
        an
        advertisement that partially or wholly covers paid advertising or other content
        on a website in a way that interferes with the user's ability to view the
        website. The Utah Act also requires purveyors of pop-up advertising to ask
        whether a user is a resident of the state of Utah before downloading “spyware”
software onto the user's computer and further allows a trademark owner to
        sue
        any person or company who displays a pop-up advertisement in violation of
        a
        specific trademark protection which is set forth in the Utah Act. The State
        of
        Alaska has enacted similar legislation that bars the same means of delivering
        advertisements as the Utah Act, and requires similar verification of residency
        prior to downloading “spyware” or “adware” software onto the user's computer.
        Inpractice, we do
        not provide or use “spyware” in
        our marketing, but if more restrictive legislation is adopted, we may be
        required to develop new technology and/or methods to provide our services
        or
        discontinue services in some jurisdictions altogether. Additionally, there
        is a
        risk that state courts will broadly interpret the term “spyware” to include
        legitimate ad-serving software and/or cookie technology that is currently
        provided or used by us.
  17
 
 At
        the
        federal level, competing bills are pending which are also intended to regulate
        “spyware” and, to a limited extent, the use of “cookies.” “Spyware” has not been
        precisely defined in existing and pending legislation, but is generally
        considered to include software which is installed on consumers’ computers and
        designed to track consumers’ activities and collect and possibly disseminate
        information, including personally identifiable information, about those
        consumers without their knowledge and consent. As stated above, we do not
        provide or use “spyware” in our marketing practices, but there is the risk that
        the definition of spyware may be broadly interpreted to include legitimate
        ad-serving software and/or cookie technology that is currently provided or
        used
        by us. Anti-spyware legislation has 1) generally included a limited
        exemption for the use of cookies; and 2) focused on providing consumers
        with notification and the option to accept or decline the installation of
        spyware software. However, there can be no assurance that future legislation
        will not incorporate more burdensome standards by which the use of cookies
        will
        not be exempted and software downloading onto consumers’ computers will not be
        more strictly enforced. If more restrictive legislation is adopted, we may
        be
        required to develop new technology and/or methods to provide our services
        or
        discontinue services in some jurisdictions altogether.
  18
 
 Legislation
        has also been passed at the state level and competing bills are pending at
        the
        federal level which are intended to require that businesses and institutions
        provide notice to consumers of any potential theft or loss of sensitive consumer
        information then in possession of the applicable business or institution.
        At the
        state level, laws that recently took effect in the states of Arizona, Colorado,
        Hawaii, Idaho, Indiana, Kansas, Nebraska, Utah, Vermont and Wisconsin require
        companies, governmental agencies and private organizations to notify individuals
        in cases where their confidential information has been exposed to possible
        data
        thieves (the “New State Laws”). Upon taking effect on April 1, 2006, April 10,
        2006, June 27, 2006, July 1, 2006, September 1, 2006, December 31, 2006 and
        January 1, 2007, as applicable, the New State Laws make customer notification
        mandatory in the event that personally identifiable information (including,
        but
        not limited to, social security numbers, driver's license numbers or bank
        and
        financial account numbers) has been accessed improperly by third parties.
        The
        New State Laws are in addition to similar laws previously in effect in at
        least
        twenty-four (24) other states including the states of Arkansas, California,
        Connecticut, Delaware, Florida, Georgia, Illinois, Louisiana, Maine, Michigan,
        Minnesota, Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina
        North Dakota, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas and Washington
        that all require consumer notification where confidential or sensitive
        information has been improperly accessed, lost or stolen (together with the
        New
        State Laws, the “Information Security Laws”). The Information Security Laws also
        impose obligations on companies that collect, store and transmit sensitive
        information to use secure socket and/or encryption technologies, as applicable,
        when performing the aforementioned tasks. To the extent that we collect such
        personally identifiable information, the Information Security Laws may increase
        our costs to protect such information.
 
 At
        the
        Federal level, the FTC, pursuant to its enforcement authority, filed a complaint
        against BJ’s Wholesale Club, Inc. (“BJ's”) for violation of the FTC Act in
        connection with the theft of consumer credit/debit card information which
        was
        then in BJ’s possession. The FTC alleged that BJ’s failure to secure customers'
        sensitive information was an unfair practice under the FTC Act because it
        caused
        substantial injury that was not reasonably avoidable by consumers and not
        outweighed by offsetting benefits to consumers or competition. BJ’s agreed to a
        settlement that requires BJ’s to establish and maintain a comprehensive
        information security program that includes administrative, technical and
        physical safeguards. Although we do not anticipate that this interpretation
        of
        the FTC Act, nor the Information Security Laws requiring notice of theft
        or loss
        of sensitive consumer information, will have a material adverse impact on
        our
        current operations, we could potentially be subject to regulatory proceedings
        for past and current practices in connection with the storage and security
        of
        sensitive consumer information and notice of such sensitive consumer
        information's theft or loss. In addition, we may be required to make changes
        in
        our future practices relating to the storage, security and provision of notice
        in connection with sensitive consumer information.
  19
 
 At
        present, the laws and regulations governing the Internet remain largely
        unsettled, even in areas where there has been legislative and/or regulatory
        action. It is uncertain as to how long it will take to determine the extent
        to
        which existing laws, including, but not limited to, those relating to
        intellectual property, advertising, sweepstakes and privacy, apply to the
        Internet and Internet marketing. Recently, growing public concern regarding
        privacy and the collection, distribution and use of Internet user information
        has led to increased Federal and state scrutiny, as well as regulatory activity
        concerning data collection, record keeping, storage, security, notification
        of
        data theft, and associated use practices. The application of existing laws
        or
        the adoption or modification of laws or regulations in the future, together
        with
        increased regulatory scrutiny, could materially and adversely affect our
        business, prospects, results of operations and financial condition and could
        potentially expose us and/or our clients to fines, litigation, cease and
        desist
        orders and civil and criminal liability.
  **Employees**
 
 We
        currently employ 93 full-time employees, including four executive officers,
        and
        2 part-time employees in the U.S. and 68 full-time employees in Canada. We
        believe that our relations with our employees are satisfactory. None of our
        employees are represented by a union.
  20
  **Code
        of Ethics and Business** **Conduct**
  We
        have
        adopted a Code of Ethics and Business Conduct (the “Code”) for our principal
        executive and financial and accounting officers, and our directors, employees,
        agents, and consultants. The Code is publicly available on our website at www.traffixinc.com under
“Investor Relations” (following the links to “Corporate Governance” and “Code of
        Ethics”). The Code addresses various issues regarding the practice of ethical
        conduct applied to all levels of our personnel in all the phases of their
        business activities and of their responsibility of reporting illegal or
        unethical behavior.
  We
        have
        also established an accounting ethics complaint procedure for all employees
        to
        report concerns they might have regarding accounting, internal accounting
        controls and auditing matters. All complaints are treated confidentially,
        and we
        do not, and will not condone any retaliation of any kind against employees
        who
        come forward with complaints.
  **Item
        1A. Risk Factors**
 
 From
        time
        to time, including in this Annual Report on Form 10-K, we publish
        forward-looking statements, as disclosed in our Disclosure Regarding
        Forward-Looking Statements, beginning immediately following the Table of
        Contents of this Annual Report. We note that a variety of factors could cause
        our actual results and experience to differ materially from the anticipated
        results or other expectations expressed or anticipated in our forward-looking
        statements. The factors listed below are illustrative of the risks and
        uncertainties that may arise and that may be detailed from time to time in
        our
        public announcements and our filings with the Securities and Exchange
        Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation
        to make any revisions to the forward-looking statements contained in this
        Annual
        Report on Form 10-K to reflect events or circumstances occurring after the
        date of the filing of this report.
  21
 
 *We
        May Not Continue To Pay Dividends On Our Equity Securities.*
  We
        have
        paid a dividend of $0.08 per share of our common stock in the last fourteen
        fiscal quarters and have declared a dividend payable on or about March 10,
        2007
        to holders of record of our common stock at the close of business on March
        1,
        2007. The declaration of each such dividend was approved by our Board of
        Directors upon the conclusion of each quarter. We
        can
        give you no assurances that our Board will declare any dividends in future
        fiscal periods. Any further declarations will depend upon our performance,
        the
        level of our then current and retained earnings and other pertinent factors
        relating to our financial position. You should not rely on any prior approvals
        of our Board as an indicator of its intent to approve the declaration of
        any
        dividends in the future.
 
 *Advertisers
        May Be Reluctant To Devote A Portion Of Their Budgets To Internet Advertising
        And Digital Marketing Solutions.*
  22





Companies
      doing business on the Internet must compete with traditional advertising media,
      including television, radio, cable and print, for a share of advertisers' total
      marketing budgets. Potential customers may be reluctant to devote a significant
      portion of their marketing budget to Internet advertising or digital marketing
      if they perceive the Internet to be a limited or ineffective marketing medium.
      Any shift in marketing budgets away from Internet advertising spending or
      digital marketing solutions could materially and adversely affect our business,
      results of operations and financial condition.





*We
      May Not Be Able To Comply With The Adoption Of Newly Created Laws And
      Governmental Regulation Of The Internet Industry And New Restrictions For
      Internet Use May Increase Our Cost Of Doing Business.*





As
      a
      direct-to-consumer marketing company we are subject to a variety of federal,
      state and local laws and regulations designed to protect consumers that govern
      certain of our marketing practices, all as more fully set forth in this Annual
      Report under the heading “Business - Government Regulation.”





*Demand
      For Our Services May Decline Due To The Proliferation Of "Spam" And Software
      Designed To Prevent Its Delivery.*




23





Our
      business may be adversely affected by the proliferation of "spam" and other
      unwanted Internet solicitations. In response to such proliferation, Internet
      Service Providers ("ISP's") have been adopting technologies, and individual
      computer users are installing software on their computers that are designed
      to
      prevent the delivery of certain Internet advertising, including legitimate
      solicitations such as those delivered by us. We cannot assure you that the
      number of ISP's and individual computer users who employ these or other similar
      technologies and software will not increase, thereby diminishing the efficacy
      of
      our services. In the case that one or more of these technologies are widely
      adopted or the software widely utilized, demand for our services would decline.
      During Fiscal 2006 we recognized a decline in our email marketing revenue of
      approximately 3.3% when compared to Fiscal 2005. We believe that such decline
      is
      the result of the factors mentioned above, and may continue to decline at higher
      rates in future fiscal periods.





*We
      May Be Unable To Keep Up With The Rapid Technological Changes That May Occur
      In
      The Internet And E-Commerce Arenas Which Would Adversely Affect Our Business
      Operations.*





To
      remain
      competitive, we must enhance and continually improve the responsiveness,
      functionality and features of our services. The Internet and the online commerce
      industry are characterized by rapid technological change, changes in user and
      customer requirements and preferences, frequent new product and service
      introductions embodying new technologies, and the emergence of new industry
      standards and practices that could render existing technology and systems
      obsolete at any time. Our success will depend, in part, on our ability to
      license leading technologies that address the increasingly sophisticated and
      varied needs of prospective consumers, and respond to technological advances
      and
      emerging industry standards and practices on a cost-effective and timely basis.
      The development of a website and other proprietary technology entails
      significant technical and business risks. There can be no assurance that we
      will
      use new technologies effectively or adapt existing websites and operational
      systems to customer requirements or emerging industry standards. If we are
      unable, for technical, legal, financial or other reasons, to adapt in a timely
      manner in response to changing market conditions or customer requirements,
      our
      business, prospects, financial condition and results of operations would be
      materially adversely affected.




24





*We
      Depend On Third-Party Internet And Telecommunications Providers, Over Whom
      We
      Have No Control, To Operate Our Services. Interruptions In These Services Caused
      By One Of The Providers Could Have An Adverse Effect On Revenue And Securing
      Alternate Sources Of These Services Could Significantly Increase Expenses.*





We
      depend
      heavily on several third-party providers of Internet and related
      telecommunication services, including hosting and co-location facilities, in
      operating our services. These companies may not continue to provide services
      to
      us without disruptions in service, at the current cost or at all. The costs
      associated with any transition to a new service provider would be substantial,
      requiring the reengineering of computer systems and telecommunications
      infrastructure to accommodate a new service provider. This process would be
      both
      expensive and time-consuming. In addition, failure of the Internet and related
      telecommunications providers to provide the data communications capacity in
      the
      time frame required by us could cause interruptions in the services we provide.
      Unanticipated problems affecting our computer and telecommunications systems
      in
      the future could cause interruptions in the delivery of services, causing a
      loss
      of revenue and potential loss of customers, all of which could materially and
      adversely affect our business, results of operations and financial condition.




25





*We
      Face Intense Competition In The Marketing Of Our Services and Our Clients’
Products.*





We
      face
      intense competition in the direct marketing of our services and of clients’
products and services. Many of our competitors are well established, have
      reputations for success in the development and marketing of services and have
      significant financial, marketing, distribution, personnel and other resources.
      These financial and other capabilities permit such companies to implement
      extensive advertising and promotional campaigns, both generally and in response
      to efforts by additional competitors to enter into new markets and introduce
      new
      services.





*Our
      Success Depends On Our Ability To Continue Forming Relationships With Other
      Internet And Interactive Media Content, Service And Product Providers.*




26





The
      Internet includes an ever-increasing number of businesses that offer and market
      consumer products and services. These entities offer advertising space on their
      websites, as well as profit sharing arrangements for joint effort marketing
      programs. We expect that with the increasing number of entrants into the
      Internet commerce arena, advertising costs and joint effort marketing programs
      will become extremely competitive. This competitive environment might prevent
      us
      from executing profit generating advertising and joint effort marketing programs
      in the future. This competitive environment may also prevent us from providing
      entertaining content and product and service providers from marketing their
      products and services through our websites. If we fail to continue establishing
      new, and maintain and expand existing, profitable advertising and joint
      marketing arrangements, we may suffer substantial adverse consequences to our
      financial condition and results of operations.




*The
      Outcome Of Litigation In Which We Have Been Named As A Defendant Is
      Unpredictable And A Materially Adverse Decision In Any Such Matter Could Have
      A
      Material Adverse Affect On Our Financial Position And Results Of Operations.*





We
      are
      named as defendants in litigation matters, as described under "Legal
      Proceedings" in our periodic reports filed pursuant to the Securities Exchange
      Act of 1934. The defense of these claims may divert financial and management
      resources that would otherwise be used to benefit our operations. Although
      we
      believe that we have meritorious defenses to the claims made in each and all
      of
      the litigation matters to which we are a named party, and intend to contest
      each
      lawsuit vigorously, no assurances can be given that the results of these matters
      will be favorable to us. A materially adverse resolution of any of these
      lawsuits could have a material adverse affect on our financial position and
      results of operations.




27





*We
      Are Dependent On Our Key Personnel For Managing Our Business Affairs. The Loss
      Of Their Services Could Materially And Adversely Affect The Conduct Of Our
      Business.*





We
      are
      and will be highly dependent upon the efforts of the members of our management
      team, particularly those of our Chief Executive Officer, Jeffrey L. Schwartz,
      and our President, Andrew Stollman. The loss of the services of
      Messrs. Schwartz or Stollman may impede the execution of our business
      strategy and the achievement of our business objectives. We can give you no
      assurance that we will
      be
      able to attract and retain the qualified personnel necessary for the development
      of our business. Our failure to recruit key personnel or our failure to
      adequately train, motivate and supervise our existing or future personnel will
      adversely affect our operations.





*Our
      Business Plan Is Subject To Change And Any Expectations We And You May Have
      For
      Its Successful Implementation May Be Unrealized.*




28





Our
      business plan and strategy may quickly change based upon facts or circumstances
      currently unforeseen by us. Due to the ever changing nature of the e-commerce
      industry and the Internet, we, based upon these unforeseen facts or
      circumstances, may change our business plan at the discretion of our Management
      and Board of Directors with results, adverse or otherwise, that we cannot now
      foresee.





*The
      Concentration Of Ownership Of Our Common Stock Will Discourage Purchases Of
      Our
      Common Stock By Persons Who Might Otherwise Seek To Gain Control Of Traffix.*





Our
      executive officers and directors beneficially own 2,288,997 shares of our
      outstanding common stock representing approximately 15.9% of the total of our
      outstanding shares before the exercise of any outstanding options. Accordingly,
      such persons will be able to exercise substantial control in the election of
      our
      directors, increases in our authorized capital, our dissolution or merger,
      or
      sale of our assets, and otherwise influence the control of our affairs. As
      a
      result, potential purchasers may not seek to acquire control of our Company
      through the purchase of common stock which may tend to reduce the market price
      of our common stock. In addition, we are subject to provisions of the General
      Corporation Law of the State of Delaware respecting business combinations which
      could, under certain circumstances, also hinder or delay a change in control.




29





**Item
      2. PROPERTIES**





We lease
      approximately 15,000 square feet of space at One Blue Hill Plaza, Pearl River,
      New York, all of which is currently used for our principal executive offices.
      The lease for such premises expires on November 15, 2011, pursuant to a
      lease amendment executed on February 3, 2006. We own an office building in
      Dieppe, New Brunswick, Canada, acquired in Fiscal 2003, which houses the
      operations of our wholly-owed Canadian subsidiary, Infiknowledge, ULC. The
      New
      Brunswick, Canada property does not carry a mortgage. Additionally, we lease
      approximately 6,000 square feet of space in Lynbrook, New York, which is
      occupied by our wholly-owned subsidiary, Send Traffic.com, Inc. In
      October 2006, pursuant to the terms of such lease, we notified the landlord
      of
      our intent to terminate such lease, which termination takes effect on April
      7,
      2007. The operations performed out of that Lynbrook, New York, space will be
      moved to some of our other locations. Send Traffic.com also entered into
      a sub-lease agreement in Fiscal 2006 for approximately 3,000 square feet of
      office space in New York, New York. We also lease approximately 2,000 square
      feet in Hicksville, New York, which is occupied by our wholly-owned subsidiary,
      Hot Rocket Marketing, Inc. This lease expires November 30, 2010.





**Item
      3. LEGAL PROCEEDINGS**




We
      are
      subject to legal proceedings, lawsuits and other claims, brought by:
      (1) consumers of our products and services; (2) our clients;
      (3) consumers of our clients' products and services; and (4) others
      bringing claims that arise in the normal course of our business. Legal
      proceedings are subject to numerous uncertainties rendering the prediction
      of
      their outcome difficult. As a result of such uncertainty, we are unable to
      estimate the ultimate outcome of any of the subsequently mentioned claims,
      and,
      accordingly, no provision for loss has been recorded. We believe that
      individually, and in the aggregate, the ultimate settlement of the subsequently
      mentioned claims should not have a material adverse effect on our consolidated
      financial position, results of operations or cash flows.




30




*DADA
        USA INC. f/k/a DADAMobile Inc. v.**Q121
        Inc. d/b/a MSFOCUS and Banca Intesa SpA*


In
        September 2006, DADA USA Inc. (“Dada”) filed this action in Supreme Court of the
        State of New York, New York County (Index No. 603365/06).
  The
        action relates to a marketing agreement between Dada and Q121 Inc., our
        subsidiary. Dada alleges, *inter alia,* that
        Q121 Inc. breached the agreement by using unapproved advertisements or failing
        to prevent sub-publishers from using approved ads in an unapproved manner
        or
        misappropriating confidential information or diverting customers; and that
        it
        engaged in unfair competition. The complaint seeks damages in an amount which
        the plaintiff alleges it believes to be in excess of ten million
        dollars.
  Dada
        sought to enjoin Q121 Inc. from drawing down on a letter of credit which
        had
        secured Dada's performance under the agreement. The court denied Dada's
        application for a temporary restraining order, the issuing bank paid the
        full
        amount of the letter of credit, and Dada withdrew the request for a preliminary
        injunction. Limited discovery has taken place; the matter has been referred
        to
        mediation, which is expected to occur as early as March 2007.
  We
        believe that there is no merit to Dada's claims and intend vigorously to
        defend
        the action.
  *Hatton
        v. Prize America/Prize Distributors*






31




In
        or
        about October 2005 Brandon Hatton filed a *pro
        se* action
        in the U.S. District Court, Middle District of Tennessee (No. 05 CV 00073)
        and
        was also granted permission to proceed *in
        forma pauperis.* The
        complaint, as amended, alleges that sometime between June 2002 and July 2004
        the
        plaintiff won a prize, that defendant failed to pay/deliver, and claims damages
        of $391 million.
  In
        December, 2006 we learned that plaintiff had attempted to serve process;
        our
        counsel has made a special appearance and has moved to dismiss the action
        on
        jurisdictional grounds. That application is pending.
 
 We
        believe that there is no merit to this claim and, in the event our application
        is denied, we intend vigorously to defend the action.
  *Nicherie
        v. Pellicano et al, CV 06-6434**United
        States District Court; Central District of California*
 
 We
        were
        recently served with a Second Amended Complaint in this action, which alleges
        twenty causes of action variously directed against forty-seven individuals
        and
        entities as well as against Does 1 - 200. The plaintiff alleges that he is
        an
        inmate at the Metropolitan Detention Center in Los Angeles, that he was
        President and CEO of Federal Transtel, Inc. and that through a trust he owns
        or
        controls an interest in that company. The third cause of action is directed
        at a
        number of defendants, including us, and purports to state a RICO claim;
        plaintiff also purports to bring the twentieth cause of action on behalf
        of the
        United States of America against a number of individuals and entities including
        us pursuant to the False Claim Act, 31 USC 3730(b), alleging, among other
        things, what he describes as “’small increment billing’ frauds ... which targeted
        the United States government and its employees who had authority to use
        government credit cards . . ..” and seeks unspecified damages and attorneys
        fees. In some of the other causes of action, the plaintiff purports to bring
        the
        claim against “all defendants” but fails to allege any act by us.
 
 Portions
        of the Second Amended Complaint, including the causes of action directed
        at us,
        were dismissed by the court on motion of some of the other defendants, and
        plaintiff was granted leave to replead by February 13, 2007. We are named
        as a
        defendant in the Third Amended Complaint, for the same claims, but the
        substantive allegations or wrongdoing, or the lack thereof, remain the same.


32





We
        believe that there is no merit to the claims and intend vigorously to defend
        the
        action.


**PART
      II**





**Item
      5.**  **MARKET
      FOR THE REGISTRANT'S COMMON EQUITY** **AND
      RELATED STOCKHOLDER MATTERS**





Market
      Information .





Our
      Common Stock trades on the Nasdaq National Market System under the symbol
      "TRFX". Prior to September 12, 2000, the date upon which we changed our name
      to
      Traffix, Inc. from Quintel Communications, Inc., our Common Stock had traded
      under the symbol "QTEL". The following table sets forth the high and low sales
      prices of the Common Stock as reported by Nasdaq for each full quarterly period
      within the two most recent fiscal years.





HIGH
            
            LOWFiscal
                Year Ended November 30, 2006First
                Quarter
            
            $
            5.92
            
            $
            5.01Second
                Quarter
            
            
            6.35
            
            
            5.20Third
                Quarter
            
            
            5.91
            
            
            5.09Fourth
                Quarter
            
            
            5.46
            
            
            5.09Fiscal
                Year Ended November 30, 2005First
                Quarter
            
            $
            7.00
            
            $
            5.59Second
                Quarter
            
            
            5.73
            
            
            4.35Third
                Quarter
            
            
            6.47
            
            
            4.58Fourth
                Quarter
            
            
            6.20
            
            
            5.07




33




Security
      Holders .





To
      the best of our knowledge, at
      February 26, 2007, there were 88 record holders of our Common Stock. We believe
      there are numerous beneficial owners of Common Stock whose shares are held
      in
      "street name."





Dividends .





We
      have
      paid a dividend of $0.08 per share of our common stock in each of the
      last fourteen fiscal quarters and have declared a dividend payable on or
      about March 10, 2007 to holders of record of our common stock at the close
      of
      business on March 1, 2007. The declaration of each such dividends was approved
      by o ur
      Board
      of Directors upon the conclusion of each quarter. We
      can
      give you no assurances that our Board will declare any dividends in future
      fiscal periods. Any further declarations will depend upon our performance,
      the
      level of our then current and retained earnings and other pertinent factors
      relating to our financial position. You should not rely on any prior approvals
      of our Board as an indicator of its intent to approve the declaration of any
      dividends in the future.




**Item
      6.**  **SELECTED
      FINANCIAL DATA**





The
      following table presents our selected historical financial data of the Company
      for each of the years in the five-year period ended November 30, 2006. The
      financial data set forth should be read in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
and our financial statements.






34


**Statement
        of Operations Data** :


**Year
                  Ended November 30,****2006
                  (1)(2)**
              
              **2005
                  (1)(2)**
              
              **2004
                  (1)(2)**
              
              **2003
                  (2)(3)**
              
              **2002
                  (2)(3)**Net
                  revenue
              
              $
              72,843,943
              
              $
              62,856,982
              
              $
              37,281,214
              
              $
              32,388,852
              
              $
              44,042,925Costs
                  of sales
              
              
              47,985,127
              
              
              41,052,260
              
              
              22,052,610
              
              
              13,080,555
              
              
              12,243,635Gross
                  profit
              
              
              24,858,816
              
              
              21,804,722
              
              
              15,228,604
              
              
              19,308,297
              
              
              31,799,290Selling,
                  general and administrative expenses21,248,532
              
              
              19,927,933
              
              
              15,155,749
              
              
              20,142,448
              
              
              26,724,110Bad
                  debt expense
              
              
              539,155
              
              
              (403,186
              )
              
              406,699
              
              
              576,350
              
              
              647,875Income
                  (loss) from operations
              
              
              3,071,129
              
              
              2,279,975
              
              
              (333,844
              )
              
              (1,410,501
              )
              
              4,427,305Interest
                  expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (101,385
              )Other
                  income, net
              
              
              468,275
              
              
              1,190,819
              
              
              1,752,661
              
              
              1,683,830
              
              
              202,364Income
                  before provision (benefit) for income taxes
              
              
              3,539,404
              
              
              3,470,794
              
              
              1,418,817
              
              
              273,329
              
              
              4,528,284Provision
                  (benefit) for income taxes
              
              
              1,636,561
              
              
              1,042,637
              
              
              404,603
              
              
              (147,571
              )
              
              1,786,894Net
                  income
              
              $
              1,902,843
              
              $
              2,428,157
              
              $
              1,014,214
              
              $
              420,900
              
              $
              2,741,390Basic
                  net income per share
              
              $
              0.13
              
              $
              0.17
              
              $
              0.08
              
              $
              0.03
              
              $
              0.21Diluted
                  net income per share
              
              $
              0.13
              
              $
              0.17
              
              $
              0.07
              
              $
              0.03
              
              $
              0.19Common
                  Shares outstandingBasic
              
              
              14,332,598
              
              
              13,973,899
              
              
              13,257,869
              
              
              12,776,295
              
              
              13,350,794Diluted
              
              
              14,514,232
              
              
              14,344,584
              
              
              13,928,375
              
              
              13,085,297
              
              
              14,247,450Cash
                    dividends percommon share
              
              $
              0.32
              
              $
              0.32
              
              $
              0.32
              
              $
              0.16
              
              $
              -




35




**Balance
        Sheet Data:**
  **Year
                  Ended November 30,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**Working
                  capital
              
              $
              31,707,360
              
              $
              30,720,637
              
              $
              34,558,222
              
              $
              38,246,883
              
              $
              39,344,095Total
                  assets
              
              
              52,725,627
              
              
              56,262,764
              
              
              51,958,510
              
              
              50,012,944
              
              
              51,190,993Total
                  liabilities
              
              
              9,083,597
              
              
              11,421,388
              
              
              8,436,075
              
              
              6,674,031
              
              
              7,404,985Stockholders’
                  equity
              
              
              43,328,393
              
              
              44,475,739
              
              
              43,522,435
              
              
              43,338,913
              
              
              43,786,008




36





NOTE:
      Prior year presentations have been changed to conform to Fiscal 2006
      presentation, which changes did not impact net income.





(1)
            On
                January 21, 2005, we acquired the assets of Hot Rocket Marketing,
                Inc. and
                Clockwork Advertising Inc. (collectively “Hot Rocket”), privately-held
                corporations in the business of buying and selling performance-based
                online advertising space for third parties. Hot Rocket’s net revenues for
                the year ended November 30, 2006 and for the period January 22, 2005
                to
                November 30, 2005 were approximately $10.9 million and $7 million
                after
                intercompany eliminations,
                respectively.





(2)
            On
                June 30, 2004, we acquired the assets of SendTraffic, Inc. a
                privately-held search engine marketing company. SendTraffic’s net revenues
                for the years ended November 30, 2006 and 2005, and for the five
                months
                ended November 30, 2004 were approximately $17.9 million, $9.6 million
                and
                $2.1 million after intercompany eliminations,
                respectively.





(3)
            Effective
                September 1, 2001, our financial statements included Montvale Management,
                LLC as a consolidated majority-owned subsidiary, which subsidiary
                was
                disposed of in Fiscal 2003.




**Item
      7.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





The
      matters discussed in the following Management's Discussion and Analysis of
      Financial Condition and Results of Operations may contain forward-looking
      statements and information relating to the Company that are based on the current
      beliefs and expectations of Management, as well as assumptions made by and
      information currently available to us. When used in this Management's Discussion
      and Analysis, and elsewhere in this Form 10-K, the words "anticipate",
      "believe", "estimate", and "expect" and similar expressions, as they relate
      to
      our Company are intended to identify forward-looking statements. Such statements
      reflect the current views of our Company's management, with respect to future
      events and are subject to certain risks, uncertainties and assumptions, which
      could cause the actual results to differ materially from those reflected in
      the
      forward-looking statements.




37





The
      following discussion should be read in conjunction with the consolidated
      financial statements and the related notes thereto, as well as all other related
      notes, and financial and operational references, appearing elsewhere in this
      document.




**Overview**




We
      are a
      leading Interactive media and marketing company that provides complete
      end-to-end marketing solutions for our clients who seek to increase sales and
      customer contact deploying the numerous facets of online marketing we offer.
      Our
      clients include advertisers, direct marketers, agencies and wireless service
      providers. Our online marketing offers include search engine marketing, search
      engine optimization, email marketing, affiliate marketing, lead generation,
      creative support, and development and hosting solutions. We own and operate
      customized websites, hosted and third-party web pages, and email marketing
      platforms to facilitate consumer interaction with, and ultimate transactions
      for, our clients. We generate and record revenue primarily on a
      performance-based model, whereby revenue is recognized upon the successful
      delivery of a qualifying lead, customer, survey, completed application, ultimate
      sale or the delivery of some other measurable marketing benefit as defined
      in
      the underlying marketing agreement.




38




In
      addition to generating customers, sales and leads for our advertising clients,
      we also use this media platform for the promotion of our own services which
      include subscriptions to our online personals websites and our mobile services,
      under which we bill consumers directly.




In
      January of Fiscal 2005, we, through our wholly owned subsidiary, Hot Rocket
      Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
      Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
      the business of buying and selling performance based online advertising space
      for third parties, as well as providing such services to the sales activities
      of
      our consolidated entity. The Hot Rocket acquisition has broadened our reach
      into
      the Internet direct marketing arena, which continues to allow for expanded
      client relationships and various other synergistic possibilities, such as adding
      value to our core operations by the enhancement of our current and developing
      marketing programs conducted in our Online Advertising and Media Services
      activities.




The
      initial purchase price for the Hot Rocket acquisition, recorded in Fiscal 2005,
      was approximately $3.8 million and was comprised of $3.1 million in cash, $0.7
      million (or 113,821 shares) of our common stock and transaction fees
      approximating $0.1 million. Pursuant to an independent third party valuation,
      the reported purchase price was allocated to approximately $2.2 million of
      goodwill and $1.6 million of identifiable intangibles. There were no tangible
      assets acquired.




In
      addition to the initial purchase price of the acquisition, we agreed to pay
      Hot
      Rocket a contingent purchase price of up to $12.5 million if Hot Rocket
      generates an aggregate of $27 million in EBITDA (as quantified in the Agreement)
      over the four year period following the closing. In accordance with the terms
      of
      the acquisition agreement, for the period February 1, 2005 to January 31, 2006,
      we were liable for a combined additional purchase price payment of $1.467
      million, which has been settled by a cash payment of approximately $0.886
      million made on May 9, 2006, and an issuance of 103,354 shares issued on May
      10,
      2006 (then having a fair market value of approximately $0.581 million). Future
      contingent payments made, if any, will be treated as additional purchase price
      and included as an addition to goodwill.




39




At
      November 30, 2006, we determined that at the current rate of growth recognized
      by Hot Rocket, there exists the possibility that the second anniversary tier
      of
      contingent payment will not be attained within the second measurement period,
      which ended January 31, 2007. Based on that lack of absolute certainty as to
      the
      second anniversary additional purchase price liability, we have not accrued
      any
      additional contingent payments at this time. Future contingencies, if any,
      will
      be recorded when the contingency has been satisfied and the additional
      consideration is issued or becomes issuable.




The
      terms
      of the acquisition agreement also provide for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      August 1, 2006 through January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the Agreement. Hot Rocket did not reach the $1.35
      million EBITDA threshold for the period ended July 31, 2006. As of November
      30,
      2006, based on the lack of absolute certainty regarding the EBITDA contingent
      threshold as it relates to the additional payment period ended January 31,
      2007,
      we have not accrued any additional contingent payments at this
      time.




40





We
      made
      one asset acquisition in each of Fiscal 2004 and 2005, which accounted for
      approximately $6.9 million and $16.6 million of our consolidated revenues during
      such fiscal periods, respectively, and approximated $28.85 million, or 39.5%
      of
      consolidated revenues during the year ended November 30, 2006. Such asset
      acquisitions are described in further detail below and also described in the
      notes to the November 30, 2006 audited consolidated financial statements
      included herein.




**Background
      and Available Information**





From
      our
      inception in 1993 (under the name "Quintel Communications, Inc.") through Fiscal
      1999, we generated the bulk of our revenue from direct marketing using the
      traditional media of television, postal mail and telemarketing.




In
      Fiscal
      2000, we repositioned our operations, focus and direct marketing business to
      the
      online media of the Web. Applying the marketing disciplines honed from our
      years
      of operating in the "off-line" media arena, we have been able to provide
      enhanced response-based results in a cost-effective and scaleable manner via
      our
      online marketing strategy.




During
      December 1995, we completed our initial public offering of common stock, which
      is publicly traded and is currently reported on the NASDAQ National Market
      under
      the symbol “TRFX”.




We
      are
      headquartered in Pearl River, New York and our mailing address is 1 Blue Hill
      Plaza, Pearl River, New York, 10965. The telephone number of our executive
      offices is (845) 620-1212. We have subsidiaries and branch offices in
      Canada.




41




Our
      Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
      on
      Form 8-K, and all amendments to those reports filed or furnished pursuant to
      Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
      free
      of charge on our website, www.traffixinc.com, as soon as reasonably practicable
      after we electronically file such material with, or furnish it to, the
      Securities and Exchange Commission (SEC). Any and all information found on
      our
      website is not part of this or any other report we file with or furnish to
      the
      SEC.




The
      public may also read and copy any materials we file with the SEC at the SEC’s
      Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
      Information on the operation of the Public Reference Room may be obtained by
      calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov ,
      which
      contains reports, proxy and information statements, and other information
      regarding our Company that we file electronically with the SEC.




Unless
      the context otherwise requires, in this Annual Report on Form 10-K, the term
      “Traffix”, “the Company”, “we”, “us,” and “our” refer to Traffix Inc. and its
      subsidiaries. Our fiscal year ends on November 30 and fiscal years are referred
      to by the calendar year in which they end. For example, “fiscal year 2006” and
“Fiscal 2006” refer to the fiscal year ended November 30, 2006.





42





**Online
      Advertising and Media Services**





We
      own
      and operate a variety of Internet websites featuring specialized content such
      as
      online personals, downloadable ring-tones, wallpaper and music, recipes,
      greeting cards, automobile information, DVD promotions, and other theme-based
      content. We generate traffic to our websites from advertising on third-party
      Internet media (e.g., search engines, email and banner advertisements) and
      through cross-marketing within our own online media. Our Web properties and
      our
      marketing activities utilize proprietary technologies to generate real-time
      response-based marketing results for our advertising clients. When visiting
      our
      online properties, consumers are given the opportunity to purchase, sign-up
      for,
      ask to be contacted regarding, or simply indicate an interest in, hundreds
      of
      offers for various products and services. Specifically, through these
      interactive Web properties we generate a variety of transactional results
      ranging from (a) Web traffic, (b) inbound telemarketing calls, (c) outbound
      telemarketing leads, (d) demographically/psychographically profiled lists of
      consumers, (e) highly-targeted customized response-based leads, (f) completed
      applications for products, and (g) sales of our clients’ products and
      services.




*Online
      Advertising - Website Advertising*




We
      own
      and operate a variety of websites with a broad range of content. Virtually
      all
      of our websites generate revenue from client advertisements. The advertisements
      are served across all of our websites using our internally developed technology
      that serves ads to websites using an algorithm that takes into account a number
      of factors including information supplied by the visitor upon registration
      (e.g., gender, age and zip code), as well as the price paid by our client to
      serve the advertisement.




43





The
      websites feature content ranging from music for downloads to sweepstakes. In
      Fiscal 2004, we launched EZ-Tracks.com (a Canadian domiciled majority owned
      subsidiary), our music destination site that features over 30,000 songs
      available for free and legal downloading, as well as other content such as
      musical greeting cards and a downloadable version of the Bible in audio format.
      We have a games website that offers a variety of free parlor-style games, such
      as backgammon and checkers. In Fiscal 2004, we also launched reciperewards.com,
      a website that features thousands of cooking recipes.





Our
      PrizeDistributors, Inc. sponsored group of websites offers consumers the
      opportunity to win up to $1 million daily in our free, online sweepstakes.
      The
      sweepstakes prizes are indemnified by an independent, third-party agency. In
      order to play, each consumer must provide complete and accurate registration
      information and agree to receive ("opt-in") marketing messages from us and
      our
      marketing partners.




We
      own
      and operate several other websites such as Q121, Inc., Music of Faith.com,
      AtlasCreditGroup.com, TheBargainSpot.com, AltasAutomotiveGroup.com,
      EZGreets.com, GameFiesta.com, PrizeAmerica.com and LoveFreeGames.com. Each
      of
      these sites is designed for a specific consumer interest category that we
      matched with client promotions that appeal to such interest category.





*Online
      Advertising - Email Marketing Programs*




Each
      program that we market for our clients can be implemented not only through
      our
      websites, but also, and often, through email marketing. We currently market
      to a
      vast database, which includes consumer data that is either owned by us or is
      managed by us under our revenue share arrangements, whereby we recognize the
      gross revenue as earned and bear the payment obligation to the list owner,
      irrespective of receipt of payment from our clients.




44




*Results
      Analysis*




Subsequent
      to a campaign being fully implemented, we continually analyze the marketing
      results to gauge whether the campaigns are generating adequate results for
      the
      client, whether the media is being utilized cost-efficiently, and to determine
      whether new and different copy is yielding better overall results. These are
      traditional direct-marketing disciplines that we apply and that, we believe,
      distinguish us from many of our competitors in the online marketing
      industry.




*Affiliate
      Marketing*




Our
      affiliate marketing business commenced in late Fiscal 2005 under the name of
      RocketProfit.com, where publishers and advertisers can make available to
      themselves countless unique and exclusive deals, customized promotions, high
      payouts, detailed tracking capabilities and significant multi-level customer
      support. **




*Syndication*




After
      we
      develop a campaign that works efficiently on our own media, we sometimes
      "syndicate" the program to third-party media. Typically, we have expended time,
      media and other costs in developing certain campaigns. In exchange for this
      invested effort, we obtain the right to market those campaigns to other online
      media companies. We believe that with syndicated offers we can leverage
      campaigns we have developed so that in future fiscal periods we can generate
      additional revenue with reduced costs and risks associated with such business
      extension. There is no guarantee that this belief will be realized in future
      fiscal periods.




45




*Online
      Advertising - Internet Media Performance Based Sales*




Pursuant
      to our Fiscal 2005 acquisition of Hot Rocket Marketing, Inc., we generate
      revenues from the resale, on a variable performance basis, of Internet Media
      Advertising space acquired on a fixed cost basis.




*Online
      Advertising - Data Sales, Rentals and List Management*




We
      also
      generate revenues from the sales, rentals and management (for use both online
      and offline) of our proprietary, profiled databases. Such revenue is included
      in
      our Online Advertising and Media Services activities revenue in the Online
      Advertising revenue line item component.




*Search
      Engine Marketing*




Our
      search engine marketing company, SendTraffic (acquired in Fiscal 2004), develops
      and manages search engine marketing (SEM) campaigns for our third party
      advertising clients, as well as for our own proprietary websites, promotions
      and
      offers. Using a proprietary technology called Marketing Dashboard, we build,
      manage and analyze the effectiveness of hundreds of thousands of pay per click
      (PPC) keywords in real time across each of the major search engines, like
      Google, Yahoo and MSN. SendTraffic pays the search engines directly for the
      traffic, and generates revenue by billing its clients the search engine costs,
      plus a marketing services fee. We also perform search engine optimization (SEO)
      services, for which advertising clients are billed a monthly retainer
      fee.




46




*Personals*




Our
      Personals business is designed as a monthly recurring billing program, with
      various memberships to our Personals program, iMatchUp.com. Revenue from our
      Personals business is generated by directly billing consumers. In the latter
      part of Fiscal 2006, we began managing the declining Personals customer base,
      and had, and expect to continue to have a reduction in marketing efforts
      directed at obtaining new enrollments within the Personals program. Competition
      for enrollees has driven the marketing costs in excess of our tolerable
      thresholds.





*Internet
      Game Development*




Our
      Canadian subsidiary, Infiknowledge, ULC, performs work-for-hire services in
      the
      production of Internet games for third party vendors, and participates in
      royalties related to the development, launch and successful commercialization
      of
      such Internet games.




Our
      expansion in, and dependence on, our online direct marketing efforts, coupled
      with the potential for state and/or federal legislation limiting our ability
      to
      contact consumers online should all be considered when referring to our current
      fiscal year’s results, as well as prior year’s historical results, in evaluating
      the potential for our future operations, cash flows, and financial
      position.





47




**Background**





In
      Fiscal
      2000, we repositioned
      our operations, focus and direct marketing business to the online media of
      the
      Web. Applying the marketing disciplines honed from our years of operating in
      the
      "off-line" media arena, we have been able to provide enhanced response-based
      results in a cost-effective and scaleable manner via our online marketing
      strategy. From our inception in 1993 (under the name "Quintel Communications,
      Inc.") through 1999, we generated the bulk of our revenue from using the
      traditional media of television, postal mail and telemarketing.




During
      December 1995, we completed our initial public offering of common stock, which
      is publicly traded and is currently reported on the NASDAQ National Market
      under
      the symbol “TRFX”.




**Transactions
      with Major Customers**





Transactions
      with major customers and related economic dependence information is set forth
      (1) following our discussion of Liquidity and Capital Resources, (2) in our
      discussion of Critical Accounting Policy and Accounting Estimates Discussion
      (immediately following {1} previously mentioned) and (3) under the heading
      “Transactions with Major Customers” in Note 1 to the Consolidated Financial
      Statements referred to in the Financial Statements and Supplementary Data
      section hereof and incorporated herein by reference.




48




**BASIS
      OF PRESENTATION**





Certain
      amounts for the prior periods that are presented in the accompanying
      consolidated financial statements and referred to in the discussions below,
      have
      been reclassified in order to conform to the current period presentation.




**Segment
      Information**





We
      operate in one segment, Online Advertising and Media Services. In classifying
      the financial information for our operating activities, we rely primarily upon
      the evaluations of the chief operating decision maker (CODM - as managed by
      committee) and executive management in deciding how to allocate our resources
      and assess our performance. Disclosure is also required about products and
      services, geographic areas and major customers. At December 1, 2005, management
      realigned the way it views operations internally and modified the format that
      we
      distribute reports and information to the CODM. In accordance with such
      realignment, the LEC Billed Products and Services segment, which was principally
      inactive in terms of its contributions to gross margin and income from
      operations from the period December 1, 2002 to November 30, 2005, was collapsed
      into our Online Advertising and Media Service activities, and was no longer
      displayed as a separate segment within our CODM reporting information and,
      therefore, was correspondingly reflected as such in our publicly disseminated
      financial information. For the November 30, 2006, 2005 and 2004 Fiscal periods,
      the Company’s income statements and notes to the financial statements were
      reclassified, regarding segment disclosures and the collapse of the LEC segment
      into our single segment presentation of Online Advertising and Media Services
      Activities. All information regarding “Managements’ Discussion and Analysis of
      Financial Condition and Results of Operations” has been reclassified to conform
      with such presentation for all periods reported.




49




In
      Fiscal
      2006, our Online Advertising revenue component of our Online Advertising and
      Media Service activities included $613,000 of legacy revenue from reserve
      releases from our prior LEC segment. Such reserve releases were actual cash
      received by us from third party service bureaus that withheld amounts from
      our
      legacy LEC segment in anticipation of bad debts; actual bad debts proved less
      than amounts originally withheld. At the point these monies were withheld in
      prior fiscal years, we had treated them as contra revenue. We do not anticipate
      future reserve releases, if any, will represent material amounts.




We
      sell
      services and not products and, correspondingly, do not carry
      inventory.




We
      had
      revenue from our Canadian-based subsidiary of approximately $912,000 and
      $647,000 during the fiscal years ended November 30, 2006 and 2005, respectively.
      The primary role of the Canadian subsidiary is to support back office data
      operations and does not directly contribute significant amounts to consolidated
      net income. The majority of the Canadian subsidiary’s outlays are related to the
      generation of our revenues. Correspondingly, we classify them within the
      categories of cost of sales and selling, general and administrative expenses,
      where appropriate.





Segment
      information is set forth in Note 1 to the Consolidated Financial Statements
      referred to in the Financial Statements and Supplementary Data section hereof.
      For a more detailed discussion of our segment information, also see
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations”.





50




RESULTS
      OF OPERATIONS





Our net
      revenues, and with disclosure of our revenue components for each of the fiscal
      years ended November 30, 2006, 2005 and 2004, are set forth in the following
      tables:


***Net
                  Revenue Components******Online
                  Advertising and Media Service
                  Activities***


**Year
                  Ended November 30,****2006**
              
              **2005**
              
              **2004**Online
                  Advertising
              
              $
              47,674,007
              
              $
              44,177,956
              
              $
              28,373,640Search
                  Engine Marketing
              
              
              17,860,887
              
              
              9,599,746
              
              
              2,059,722Personals
              
              
              6,397,352
              
              
              8,432,402
              
              
              6,606,541Internet
                  game development
              
              
              911,697
              
              
              646,878
              
              
              241,311**Consolidated
                  totals**
              
              $
              72,843,943
              
              $
              62,856,982
              
              $
              37,281,214





The
      following table sets forth for the periods indicated the percentage of net
      revenues represented by the certain items reflected in our statement of
      operations:


**Year
                  Ended November 30,****2006**
              
              **2005**
              
              **2004**Net
                  Revenue
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of Sales
              
              
              65.9
              %
              
              65.3
              %
              
              59.2
              %Gross
                  Profit
              
              
              34.1
              %
              
              34.7
              %
              
              40.8
              %Selling,
                  general and administrative expenses
              
              
              29.2
              %
              
              31.7
              %
              
              40.7
              %Bad
                  debt - net expense (recapture)
              
              
              0.7
              %
              
              -0.6
              %
              
              1.1
              %Other
                  Income
              
              
              0.6
              %
              
              1.9
              %
              
              4.7
              %Net
                  income
              
              
              2.6
              %
              
              3.9
              %
              
              2.7
              %





51






**For
      the Year Ended November 30, 2006 Compared to Year Ended November 30,
      2005**




Our
      net
      revenues, and the disclosure of our components, for each of the fiscal years
      ended November 30, 2006 and 2005, are set forth below:


***Net
                  Revenue Components******Online
                  Advertising and Media Service
                  Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              47,674,007
              
              $
              44,177,956
              
              $
              3,496,051
              
              
              8
              %Search
                  Engine Marketing
              
              
              17,860,887
              
              
              9,599,746
              
              
              8,261,141
              
              
              86
              %Personals
              
              
              6,397,352
              
              
              8,432,402
              
              
              (2,035,050
              )
              
              -24
              %Internet
                  game development
              
              
              911,697
              
              
              646,878
              
              
              264,819
              
              
              41
              %**Consolidated
                  totals**
              
              $
              72,843,943
              
              $
              62,856,982
              
              $
              9,986,961
              
              
              16
              %





Net
      Revenue increased approximately $10 million, or 16%, to $72.8 million for the
      year ended November 30, 2006, from $62.9 million in the prior year. The Online
      Advertising and Media Services activities’ core business grew organically,
      primarily driven by increased revenues from Search Engine Marketing services
      (increase of $8.3 million, or 87%) and increased revenues from Online
      Advertising (increase of $3.5 million, or 8%). Online Advertising revenue
      included an increase in performance basis revenue from Internet Media
      Advertising (increase of $3.9 million, or 55%), and a net-combined decline
      in
      revenue from our Web Advertising, Email Marketing Programs, Data sales, and
      list
      management of approximately $0.5 million, or 1.5%. Internet Game Development
      revenues approximated $0.9 million, for an approximate $0.3 million increase,
      or
      41%. Search Engine Marketing service revenue increased as a result of our
      increased focus on our Online Advertising and Media service activities as a
      result of recent acquisitions. Online advertising revenue includes the revenues
      we generate upon our resale of Internet Media, and is also the result of recent
      acquisitions. The above-referenced increases were offset by declines in: (a)
      email marketing program revenue, which declined approximately $0.2 million,
      or
      3%, resulting from declines in the delivery rates of our email marketing offers;
      and (b) data sale, rental and list management revenue declines of $1.9 million,
      or 50%, which resulted from the shift in our business, where our increased
      reliance on Search Engine Marketing and Internet Advertising revenue generated
      lesser amounts of data that would otherwise become available for sale and rental
      purposes when compared to our historical incentive based online web advertising
      focus.




52




Our
      Personals business, the iMatchUp.com dating sites, recognized a revenue decline
      of approximately $2.0 million, or 24%, as a result of declining customer
      enrollments. In the latter part of Fiscal 2006 (and as expected in Fiscal 2007),
      we experienced (and expect to continue to experience) a reduction in marketing
      efforts directed at obtaining new enrollments within the Personals program.
      Competition for enrollees has driven the marketing costs in excess of our
      tolerable thresholds, which is the reasoning behind our change in our customer
      contact strategy and resulting revenue declines.




The
      increase in Internet game development revenue was attributable to an increase
      in
      successful games brought to market by our development partners in Fiscal 2006
      when compared to Fiscal 2005.




Our
      cost
      of sales during the year ended November 30, 2006 and 2005, were comprised of
      direct and indirect marketing costs associated with the acquisition  and
      retention of consumers for our Online Advertising and Media Service activities’
marketing programs, and includes direct response email marketing costs
      (including related salaries, depreciation and amortization costs), website
      registrations costs, the cost of customer profiles, other customer acquisition
      costs, search engine marketing costs, and the related contingent-based
      sweepstakes indemnification expense.




53





Our
      cost
      of sales, and the disclosure of our components, for each of the fiscal years
      ended November 30, 2006 and 2005, are set forth below:


***Cost
                  of Sale Components******Online
                  Advertising and Media Service
                  Activities***
  **Year
                  Ended November 30,**
              ****
              **Change**
                    **Inc(Dec)**
              ****
              **Change**
                    **Inc(Dec)**
              ********
              ****
              **2006**
              ****
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              28,110,977
              
              $
              26,301,370
              
              $
              1,809,607
              
              
              7
              %Search
                  Engine Marketing
              
              
              15,155,117
              
              
              7,770,651
              
              
              7,384,466
              
              
              95
              %Personals
              
              
              4,432,433
              
              
              6,776,885
              
              
              (2,344,452
              )
              
              -35
              %Internet
                  game development
              
              
              286,600
              
              
              203,354
              
              
              83,246
              
              
              41
              %**Consolidated
                  totals**
              
              $
              47,985,127
              
              $
              41,052,260
              
              $
              6,932,867
              
              
              17
              %





Cost
      of
      sales on a consolidated basis increased $7.0 million, or 17%, to $48.0 million
      for the year ended November 30, 2006, from $41 million for the year ended
      November 30, 2005.




The
      significant factor contributing to the increase in consolidated costs of sales
      was a net increase of approximately $7.4 million, or 95%, in costs incurred
      in
      the generation of increased Search Engine Marketing service revenues. The Online
      Advertising component recognized a net increase in cost of sales of
      approximately $1.8 million, or 7%, and was comprised of increases in purchases
      of performance based online advertising space of $2.6 million, or 60%, as a
      result of a prior year acquisition within which we make direct purchases of
      online advertising space that is resold on a performance basis. Such increase
      was offset by a combined decline in website advertising registrations and total
      email costs of approximately $0.8 million resulting from a shift to a greater
      reliance on search engine marketing to drive Online Advertising traffic, coupled
      with an increased focus on internal email platform mailings and a lesser
      reliance on third party email vendors.




54




In
      our
      Personals business, costs incurred in the acquisition of new customer profiles
      decreased $2.3 million, or 35%. The decrease in customer profile cost correlates
      to our decreased emphasis on the acquisition of new enrollments during the
      last
      six-months of Fiscal 2006. The cost of enrollment escalation, coupled with
      a
      decline in the billable life of existing customers, caused us to decrease our
      spending budget for the Personals business. We continue our focus of maximizing
      current customer billable lifetime.




Our
      gross
      profit in terms of dollars, and our gross profit percentage, for each of the
      years ended November 30, 2006 and 2005, are set forth below:


***Gross
        Profit Components***
 ***Online
        Advertising and Media Service Activities***


**Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              19,563,030
              
              $
              17,876,586
              
              $
              1,686,444
              
              
              9
              %Search
                  Engine Marketing
              
              
              2,705,770
              
              
              1,829,095
              
              
              876,675
              
              
              48
              %Personals
              
              
              1,964,919
              
              
              1,655,517
              
              
              309,402
              
              
              19
              %Internet
                  game development
              
              
              625,097
              
              
              443,524
              
              
              181,573
              
              
              41
              %**Consolidated
                  totals**
              
              $
              24,858,816
              
              $
              21,804,722
              
              $
              3,054,094
              
              
              14
              %





55


***Gross
        Profit Components***
 ***Online
        Advertising and Media Service Activities***


**Absolute**
                **Change**
              
              **Relative**
                **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              %%%
              
              %%%Online
                  Advertising
              
              
              41.0
              %
              
              40.5
              %
              
              0.5
              %
              
              1.4
              %Search
                  Engine Marketing
              
              
              15.1
              %
              
              19.1
              %
              
              -4.0
              %
              
              -20.5
              %Personals
              
              
              30.7
              %
              
              19.6
              %
              
              11.1
              %
              
              56.4
              %Internet
                  game development
              
              
              68.6
              %
              
              68.6
              %
              
              0.0
              %
              
              0.0
              %**Consolidated
                  totals**
              
              
              34.1
              %
              
              34.7
              %
              
              -0.6
              %
              
              -1.6
              %





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 34.1% during
      the year ended November 30, 2006, compared to 34.7% in the prior year,
      representing an absolute percentage point decrease of 0.6%, or a 1.6% decrease
      on a relative basis.




56




The
      slight negative change in gross profit percentage is primarily attributable
      to
      several offsetting factors. Our Personals business, the iMatchUp.com dating
      sites, recognized a 56.4% relative margin increase in Fiscal 2006, and is the
      result of reductions in our new Personals member acquisition budget and the
      benefit of the attritting billable customer base yielding a gross margin that
      was not encumbered by increasing acquisition costs (the overall impact on gross
      margin dollars is minimal based on the Fiscal 2006 decline in Personals revenue
      of approximately $2.3 million). Our Online Advertising activities gross margin
      remained relatively constant, resulting from the loss of a material customer
      in
      the third quarter of Fiscal 2006, partially offset by increased gross margins
      resulting from a greater reliance on Search Marketing in our Online Advertising
      efforts, which replaced the prior periods' greater reliance on marginally less
      profitable website registrations, as well as a relative decline of 20.5% in
      the
      gross margin recognized in our Search Engine Marketing services provided to
      third parties. In the continued expansion of our search engine marketing
      services, we have recognized declines in the related gross margin as a result
      of
      maintaining such growth, coupled with cost increases arising from competitive
      market conditions.





Our
      Selling Expenses for each of the years ended November 30, 2006 and 2005 are
      presented in the table set forth below:




57




***Selling
      Expense Components***


***Online
      Advertising and Media Service Activities***




**Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              2,917,982
              
              $
              2,426,527
              
              $
              491,455
              
              
              20
              %Selling
                  salaries and related costs
              
              
              2,944,383
              
              
              2,545,218
              
              
              399,165
              
              
              16
              %Travel,
                  entertainment, shows, other
              
              
              220,886
              
              
              261,613
              
              
              (40,727
              )
              
              -16
              %**Consolidated
                  totals**
              
              $
              6,083,251
              
              $
              5,233,358
              
              $
              849,893
              
              
              16
              %





Selling
      expenses, on a consolidated basis, increased approximately $0.8 million, or
      16%,
      to $6.1 million during the year ended November 30, 2006 from $5.2 million during
      the year ended November 30, 2005. The increase resulted from an approximate
      $0.5
      million increase in fee share commissions correlating to our increased use
      of
      third-party databases used to generate our email marketing program revenues
      included in our Online Advertising revenue component. We are the primary obligor
      to the third party list owner and bear the responsibility of payment to the
      list
      owner regardless of whether or not our client pays us. Additionally, selling
      salaries and related costs increased approximately $0.4 million, or 15%, during
      the year ended November 30, 2006 as a result of increased sales commissions
      (on
      total revenues of $72.3 million for the year ended November 30, 2006 compared
      to
      the year ended November 30, 2005 total revenues of $62.9 million).





Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      technology and operation systems, and general administration personnel, (ii)
      professional fees (which include legal; audit, accounting and tax; public
      relations; database management and consulting; and public company related
      printing and filing costs), (iii) insurance costs, (iv) occupancy and other
      equipment rental costs, (v) salaries, depreciation and amortization related
      to
      our site development, maintenance and modification costs related to our Online
      Advertising and Media Services activities, and (vi) all other general and
      miscellaneous corporate expense items.




58




Our
      General and Administrative Expenses for the years ended November 30, 2006 and
      2005 are presented in the table set forth below:




***General
        and Administrative Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              9,251,400
              
              $
              8,933,727
              
              $
              317,673
              
              
              4
              %Professional
                  fees
              
              
              1,291,921
              
              
              1,647,399
              
              
              (355,478
              )
              
              -22
              %Insurance
                  costs
              
              
              945,810
              
              
              936,385
              
              
              9,425
              
              
              1
              %Occupancy
                  and equipment costs
              
              
              457,206
              
              
              406,261
              
              
              50,945
              
              
              13
              %Depreciation
                  and amortization
              
              
              1,443,704
              
              
              1,525,425
              
              
              (81,721
              )
              
              -5
              %All
                  other miscellanous G&A expenses
              
              
              1,775,240
              
              
              1,245,378
              
              
              529,862
              
              
              43
              %**Consolidated
                  totals**
              
              $
              15,165,281
              
              $
              14,694,575
              
              $
              470,706
              
              
              3
              %




General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $0.5 million, or 3%, when comparing G&A of $15.2 million for
      the year ended November 30, 2006 to G&A of $14.7 million incurred during the
      year ended November 30, 2005. The net increase was principally attributable
      to
      combined increases in compensation costs and miscellaneous G&A expenses of
      approximately $0.8 million, or 8%. Offset by a combined decline in professional
      fees, depreciation and amortization of $0.4 million. The significant increase
      in
      compensation costs was attributable to non-cash stock-based compensation costs
      of approximately $0.5 million resulting from the December 1, 2005 adoption
      of
      SFAS 123R, offset by Fiscal 2006 fourth quarter declines in contractually
      legislated officer bonuses based on the decline in Fiscal 2006 fourth quarter
      results, reducing amounts previously accrued to August 31, 2006.




59





***Bad
        Debt Expense and (Recapture) Components***
 ***Online
        Advertising and Media Services***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              335,565
              
              $
              (422,811
              )
              $
              758,376
              
              
              -179
              %Search
                  Engine Marketing
              
              
              199,947
              
              
              19,625
              
              
              180,322
              
              
              919
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              3,643
              
              
              -
              
              
              3,643
              
              
              100
              %**Consolidated
                  totals**
              
              $
              539,155
              
              $
              (403,186
              )
              $
              942,341
              
              
              -234
              %





Bad
      Debt
      expense increased on a net basis by approximately $0.9 million when comparing
      the year ended November 30, 2006 with the year ended November 30, 2005. Our
      Fiscal 2006 bad debt expense of approximately $0.5 million includes a $0.15
      million reduction attributable to a favorable litigation settlement resulting
      in
      a cash-based recapture of receivable amounts previously written-off for one
      particular client in a prior fiscal year. Offsetting the recapture, we increased
      our bad debt reserves for the entire balance of the uncollected receivable
      related to the loss of a significant customer in the third quarter of Fiscal
      2006, as well as providing for bad debt reserves for other smaller receivable
      balances as at November 30, 2006. Our allowance for bad debt results from our
      assessment of the risk of collection embedded in our customer base as described
      below.




60




We
      continuously evaluate the potential of the collectibility of trade receivables
      by reviewing such factors as deterioration in the operating results, financial
      condition or bankruptcy filings of our customers. Not all of our customers
      are
      publicly traded, or otherwise make available financial information in
      significant detail. Therefore, there are limits placed on our ability to draw
      information from financial filings. As a result of our review process, we record
      adjustments to bad debt provisions/(recoveries) to reflect the related accounts
      receivable carrying amount to amounts that estimate their probable realizable
      value. Provisions for bad debts are also recorded resulting from the review
      of
      other factors, including (a) length of time the receivables are past due, and
      (b) historical experience, and other factors obtained during collection efforts.
      If circumstances related to specific customers change, our estimates for bad
      debt provision/(recoveries) could be further increased or decreased in future
      fiscal periods.




61


**Other
        Non-operating Income (Expense)**
  The
        components of our “Other non-operating income (expense)” for the years ended
        November 30, 2006 and 2005 are set forth below:




***OTHER
        NON-OPERATING INCOME (EXPENSE)***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****Other
                  non-operating **income
                  (expense):****
              
              **2006**
              
              **2005**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              1,068,538
              
              $
              957,069
              
              $
              111,469
              
              
              12
              %Realized
                  gains on sale ofmarketable
                  securities
              
              
              16,835
              
              
              561,359
              
              
              (544,524
              )
              
              -97
              %Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              195,000
              
              
              (195,000
              )
              
              -100
              %Other
                  non-operating income:Other
                  miscellaneous
              
              
              
              
              
              
              
              
              -income
                  (expense)
              
              
              23,996
              
              
              (6,832
              )
              
              30,828
              
              
              -451
              %Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (51,192
              )
              
              (21,244
              )
              
              (29,948
              )
              
              141
              %Interest
                  and penalties - taxaudits
                  and settlements
              
              
              (13,902
              )
              
              -
              
              
              (13,902
              )
              
              100
              %Minority
                  interest income
              
              
              (576,000
              )
              
              (494,533
              )
              
              (81,467
              )
              
              16
              %**Total
                  consolidated other****non-operating
                  income:**
              
              $
              468,275
              
              $
              1,190,819
              
              $
              (722,544
              )
              
              -61
              %





Consolidated
      Other Non-operating Income (Expense) decreased approximately $0.7 million,
      from
      approximately $1.2 million of other income during the year ended November 30,
      2005, to approximately $0.5 million for the year ended November 30, 2006.




The
      material factors contributing to the net decline in other non-operating income
      as forth in the above table are as follows:


(a)
                Interest
                    income increased approximately $0.1 million, or 12%, with the
                    increase
                    related to more favorable interest rates available during Fiscal
                    2006 when
                    compared to Fiscal 2005.


62


(b)
              Realized
                  gains on the sale of marketable securities decreased by $0.5 million
                  when
                  compared to the prior year’s comparable annual period. During the prior
                  year we had substantial selling activity in the equity-based portion
                  of
                  our marketable security portfolio, resulting from our decision
                  to
                  recognize unrealized capital gains to take the benefit of expiring
                  capital
                  loss carryforwards.




(c)
              Fiscal
                  2005 included approximately $0.2 million in installment payments
                  from a
                  prior year’s sale of a subsidiary. The final installments were collected
                  in Fiscal 2005 and, therefore, no such collections or income were
                  recognized in the comparable period of Fiscal
                  2006.




**MINORITY
      INTEREST**




During
      January 2005, we entered into an agreement with Madacy Entertainment, through
      a
      newly created partnership, EZTracks LP, to market and promote EZTracks.com,
      our
      new web destination consisting of approximately 30,000 downloadable songs
      covering a wide array of musical genres. We, through a wholly-owned subsidiary,
      own 50.7% of the partnership and will be responsible for managing the operations
      of the business, including generating traffic to the website, as well as selling
      advertising on the site. Madacy Entertainment, through its wholly-owned
      subsidiary, owns 49.3% of the partnership and provides its inventory of
      downloadable music, including an extensive library of downloadable music
      licensed from other parties. Madacy has limited involvement with certain aspects
      of operations. The results of operations for the year ended November 30, 2006
      include the fully consolidated results of EZTracks LP with minority interest
      established to reflect Madacy’s ownership share of the partnership’s operating
      results. The Fiscal 2005 period reflects the fully consolidated results of
      operations of EZTracks LP for the period January 12, 2005 (inception) to
      November 30, 2005, with the minority interest established to reflect Madacy’s
      ownership share for such period.




63




***The
      following table summarizes the results of EZ Tracks LP for the periods
      indicated:***


**Year**
              
              
              **January
                  21,****Ended**
              
              
              **2005
                  to**
              
              
              **Change**
              
              **Change****November
                  30,**
              
              
              **November
                  30,**
              
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              
              **2005**
              
              
              $$$
              
              %%%Net
                  Revenues
              
              $
              10,262,347
              
              
              $
              8,369,797
              
              
              
              $
              1,892,550
              
              
              23
              %Cost
                  of Sales
              
              
              8,913,489
              
              
              
              7,286,976
              
              
              
              
              1,626,513
              
              
              22
              %Gross
                  Profit
              
              
              1,348,858
              
              
              
              1,082,821
              
              
              
              
              266,037
              
              
              25
              %General
                  andAdministrative
                  Expenses
              
              
              180,501
              
              
              
              79,712
              
              
              
              
              100,789
              
              
              126
              %Net
                  Income
              
              $
              1,168,357
              (1
              )
              $
              1,003,109
              
              (1
              )
              $
              165,248
              
              
              16
              %Minority
                  interest
              
              $
              576,000
              (2
              )
              $
              494,533
              
              (2
              )
              $
              81,467
              
              
              16
              %Distributions
                  toMinority
                  Interest
              
              $
              628,000
              
              
              $
              128,896
  (1)
        All
        items included in our Online Advertising and Media Services
        activities
 (2)
          Represents Madacy Entertainment's 49.3% minority interest
  64


**PROVISION
      FOR INCOME TAXES**





We provide
      for income taxes at the end of each interim period based on the estimated
      effective tax rate for the full fiscal year. Cumulative adjustments to the
      tax
      provision are recorded in the interim period in which a change in the estimated
      annual effective rate is determined. A final adjustment is made to our provision
      for income taxes pursuant to the computation of our annual tax provision
      (benefit). Our current year’s tax provision approximates $1.6 million, coupled
      with pre tax income of approximately $3.5 million. This effective rate
      relationship of 46.2%, when compared to our historical effective rate of
      approximately 30%, principally results from taxes incurred and expensed from
      our
      foreign operations. We settled Scientific Research and Experimental Development
      Credits (“SR&ED credits”) for our Canadian (New Brunswick based) subsidiary
      with the Canadian Revenue Agency for the fiscal years ended November 30, 2002
      through 2005. During such Fiscal 2002 to 2005 period, the related items
      attributable to the SR&ED credit were exhausted. Therefore, under our
      current tax structure, our Canadian subsidiary’s foreign earnings are fully
      taxed in Canada, and as such, based on the lack of any foreign source income,
      a
      foreign tax credit is not available to us on the related foreign taxes, with
      such taxes being fully included in our US tax provision, resulting in the
      effective tax rate increase. We are formulating tax planning that should be
      in
      place for Fiscal 2007 whereby our future effective tax rate should range from
      approximately 36% to 39%. See Note 9 of the Consolidated Financial Statements
      for further details of our tax expense (benefit), and deferred tax assets and
      liabilities. We are subject to examination by taxing authorities in various
      jurisdictions, and believe that we have adequately provided for all such tax
      liabilities. Matters raised upon audit from such jurisdictions may involve
      substantial amounts and could be material. Management considers it unlikely
      that
      resolution of any such matters would have a material adverse effect upon our
      consolidated financial statements.




**For
      the Year Ended November 30, 2005 Compared to Year Ended November 30,
      2004**





Our
      net
      revenues, and the disclosure of our components, for each of the fiscal years
      ended November 30, 2005 and 2004, are detailed in the following
      tables:




65




***Net
        Revenue Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              44,177,956
              
              $
              28,373,640
              
              $
              15,804,316
              
              
              56
              %Search
                  Engine Marketing
              
              
              9,599,746
              
              
              2,059,722
              
              
              7,540,024
              
              
              366
              %Personals
              
              
              8,432,402
              
              
              6,606,541
              
              
              1,825,861
              
              
              28
              %Internet
                  game development
              
              
              646,878
              
              
              241,311
              
              
              405,567
              
              
              168
              %**Consolidated
                  totals**
              
              $
              62,856,982
              
              $
              37,281,214
              
              $
              25,575,768
              
              
              69
              %




Net
      Revenue increased approximately $25.6 million, or 69%, to $62.8 million for
      the
      year ended November 30, 2005, from $37.3 million in the prior year. The Online
      Advertising and Media Services activities’ core business grew organically,
      primarily driven by an extension in our customer base across the majority of
      our
      revenue components, coupled with revenues generated from a prior year
      acquisition, and accounted for approximately $19.8 million of the consolidated
      revenue increase. The prior year acquisition, Send Traffic, Inc. acquired on
      June 30, 2004, accounted for approximately $7.5 million of such increase, and
      contributed approximately $9.6 million, or 15.3% to Fiscal 2005 net revenues,
      compared to $2.1 million, or 5.5% in Fiscal 2004 revenues. Supplementing our
      core Online Advertising and Media Service revenue growth was approximately
      $7.0
      million in revenue earned from our January 21, 2005 Hot Rocket acquisition,
      with
      such revenue being included in our Online Advertising revenue component.




At
      December 1, 2005, the first month of our fiscal year ended November 30, 2006,
      we
      reviewed our segment reporting and determined that we were in one segment,
      with
      that segment being the business of Online Advertising and Media Services. We
      correspondingly have restated all financial information disclosed in the current
      Form 10-K, for the year ended November 30, 2006, in order not to disrupt any
      financial statement trend analysis. In Fiscal 2005, and prior, we had reported
      revenue from an additional segment, LEC Billed Products and Services, which
      was
      primarily inactive regarding its contribution to gross margin, income from
      operations and net income for the period December 1, 2002 through November
      30,
      2005. The revenues from this collapsed segment have been combined with the
      Online Advertising revenue component for all periods reported; such revenue
      declined approximately $1.3 million when comparing Fiscal 2005 with Fiscal
      2004,
      based on our intentional decline in the marketing focus and emphasis applied
      to
      this terminated business resulting from its underlying unprofitable customer
      base.




66




Our
      cost
      of sales during the year ended November 30, 2005 and 2004, were comprised of
      direct and indirect marketing costs associated with the acquisition  and
      retention of consumers for our Online Advertising and Media Service activities’
marketing programs, and includes direct response email marketing costs
      (including related salaries, depreciation and amortization costs), website
      registrations costs, the cost of customer profiles, other customer acquisition
      costs, search engine marketing costs, and the related contingent-based
      sweepstakes indemnification expense.





The
      cost
      of sales, and the disclosure of the components, for each of the years ended
      November 30, 2005 and 2004, are set forth below:





67




***Cost
        of Sale Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              26,301,370
              
              $
              15,831,138
              
              $
              10,470,232
              
              
              66
              %Search
                  Engine Marketing
              
              
              7,770,651
              
              
              1,623,691
              
              
              6,146,960
              
              
              379
              %Personals
              
              
              6,776,885
              
              
              4,520,673
              
              
              2,256,212
              
              
              50
              %Internet
                  game development
              
              
              203,354
              
              
              77,108
              
              
              126,246
              
              
              164
              %**Consolidated
                  totals**
              
              $
              41,052,260
              
              $
              22,052,610
              
              $
              18,999,650
              
              
              86
              %




Cost
      of
      sales on a consolidated basis increased $19.0 million, or 86%, to $41 million
      for the year ended November 30, 2005, from $22.1 million for the year ended
      November 30, 2004.




68




The
      primary factor contributing to the increase in consolidated cost of sales was
      related to a net increase of approximately $10.5 million, or 66%, in costs
      incurred in the generation of our Online Advertising revenue stream. Online
      Advertising costs include: (a) purchases of online advertising space, which
      increased $4.3 million, and was the result of our January 21, 2005 acquisition
      of our Hot Rocket Marketing subsidiary; (b) purchases of website advertising
      registrations, which increased $7.2 million, and was the result of our increased
      website presence and expanded website based marketing efforts; (c) costs
      incurred from our email marketing activities which increased $0.8 million,
      and
      was the result of our expansion and increased reliance email delivered from
      internal sources; (d) costs associated with the indemnification for potential
      sweepstakes payouts which decreased approximately $0.1 million, and was the
      result of a decline in the promotion of sweepstake offers; and (e) the inclusion
      in Online Advertising of a approximate $1.7 million decrease in costs incurred
      from our collapsed LEC segment, as previously discussed, and further referenced
      in the notes to our consolidated financial statements. Our Search Engine
      Marketing costs increased $6.1 million, or 379%, and correlates to our increased
      focus on growing our search engine marketing business, as well as using our
      in-house search engine marketing capabilities to generate revenues for our
      Personals business, and our other Online Advertising and Media Services activity
      revenue components. In our Personals business, costs incurred in the acquisition
      of new customer profiles increased $2.3 million, or 50%, and was the result
      of
      unitary profile cost increases based on highly competitive market conditions
      encountered in profile acquisitions. The increase in Internet game development
      costs relates specifically to the manpower costs required for the game
      development activities, with such costs increasing $0.1 million, or 164%.




Our
      gross
      profit in terms of dollars, on a segmental basis, and our gross profit
      percentage, on a segmental basis, for each of the years ended November 30,
      2005
      and 2004, are set forth below:




69





***Gross
        Profit Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              17,876,586
              
              $
              12,542,502
              
              $
              5,334,084
              
              
              43
              %Search
                  Engine Marketing
              
              
              1,829,095
              
              
              436,031
              
              
              1,393,064
              
              
              319
              %Personals
              
              
              1,655,517
              
              
              2,085,868
              
              
              (430,351
              )
              
              -21
              %Internet
                  game development
              
              
              443,524
              
              
              164,203
              
              
              279,321
              
              
              170
              %**Consolidated
                  totals**
              
              $
              21,804,722
              
              $
              15,228,604
              
              $
              6,576,118
              
              
              43
              %




***Gross
      Profit Components***


***Online
      Advertising and Media Service Activities***





**Absolute**
            
            **Relative****Change**
            
            **Change****Year
                Ended November 30,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2005**
            
            **2004**
            
            %%%
            
            %%%Online
                Advertising
            
            
            40.5
            %
            
            44.2
            %
            
            -3.7
            %
            
            -8.5
            %Search
                Engine Marketing
            
            
            19.1
            %
            
            21.2
            %
            
            -2.1
            %
            
            -10.0
            %Personals
            
            
            19.6
            %
            
            31.6
            %
            
            -12.0
            %
            
            -37.8
            %Internet
                game development
            
            
            68.6
            %
            
            68.0
            %
            
            0.6
            %
            
            0.8
            %**Consolidated
                totals**
            
            
            34.7
            %
            
            40.8
            %
            
            -6.1
            %
            
            -15.1
            %






70




Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 34.7% during
      the year ended November 30, 2005, compared to 40.8% in the prior year,
      representing an absolute percentage point decrease of 6.2%, or a 15.1% decrease
      on a relative basis.




The
      decline in gross profit percentage is primarily attributable to three factors:




(1)
      The
      impact on gross margin from our Online Advertising business, which decreased
      3.7% in absolute terms, and 8.5% in relative terms, and was primarily the result
      of increased competitive market forces affecting the cost of acquisition of
      registered users that are marketed our services, and our clients’ products and
      services, once registered.




(2)
      Search engine marketing gross margin decreased 2.1% in absolute terms, and
      10%
      in relative terms as a result of our significant expansion of our search engine
      marketing services and the related declines encountered in growing such
      business, coupled with cost increases arising from increased competitive market
      conditions.




(3)
      In
      our Personals business, we expense customer acquisition costs during the period
      we acquire a free Personals membership account, while the recognition of the
      revenue is dependent upon whether or not the free account converts to a paying
      membership. The period that a free account may convert to a billable account
      ranges from one week after acquisition, to as long as two years, after its
      initial month of acquisition, based on available historical conversion to
      billable experience. The costs of acquiring free memberships has risen in Fiscal
      2005 approximately three fold, and that conversion rates regarding first-time
      conversion and renewal billing retention have both declined during Fiscal 2005,
      with both factors having a negative impact on the future growth potential and
      the future fiscal period profit generating potential of our Personals business.
      We believe the primary cause for the cost increase results from the market
      conditions regarding competition; where our competitors continue to increase
      the
      cost that they accept to pay for new member data.





71





Our
      Selling Expenses for each of the years ended November 30, 2005 and 2004 are
      presented in the table set forth below:




***Selling
        Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              2,426,527
              
              $
              1,190,894
              
              $
              1,235,633
              
              
              104
              %Selling
                  salaries and related costs
              
              
              2,545,218
              
              
              1,072,652
              
              
              1,472,566
              
              
              137
              %Travel,
                  entertainment, shows, other
              
              
              261,613
              
              
              280,792
              
              
              (19,179
              )
              
              -7
              %**Consolidated
                  totals**
              
              $
              5,233,358
              
              $
              2,544,338
              
              $
              2,689,020
              
              
              106
              %




Selling
      expenses, on a consolidated basis, increased approximately $2.7 million, or
      106%, to $5.2 million during the year ended November 30, 2005 from $2.5 million
      during the year ended November 30, 2004. The increase resulted from an
      approximate $1.2 million increase in fee share commissions correlating to our
      increased use of third-party databases used to generate our email marketing
      program revenues included in our Online Advertising revenue component. We are
      the primary obligor to the third party list owner and bear the responsibility
      of
      payment to the list owner regardless of whether or not our client pays us.
      Additionally, selling salaries and related costs increased approximately $1.5
      million, or 137%, during the year ended November 30, 2005 as a result of
      increased sales commissions (on total revenues of $62.9 million for the year
      ended November 30, 2005 compared to the year ended November 30, 2005 total
      revenues of $37.3 million), as well as from increases in our consolidated sales
      staff resulting from Fiscal 2004’s Send Traffic acquisition and Fiscal 2005’s
      Hot Rocket Marketing acquisition.




72





Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      and
      operation systems, and general administration personnel, (ii) professional
      fees
      (which include legal; audit, accounting and tax; public relations; database
      management and consulting; and public company related printing and filing
      costs), (iii) insurance costs, (iv) occupancy and other equipment rental costs,
      (v) site development, maintenance and modification costs related to our various
      active segments, and (vi) all other general and miscellaneous corporate expense
      items.




Our
      General and Administrative Expenses for the years ended November 30, 2005 and
      2004, are presented in the table set forth below:




73




***General
        and Administrative Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              8,933,727
              
              $
              7,616,368
              
              $
              1,317,359
              
              
              17
              %Professional
                  fees
              
              
              1,647,399
              
              
              1,710,824
              
              
              (63,425
              )
              
              -4
              %Insurance
                  costs
              
              
              936,385
              
              
              1,065,603
              
              
              (129,218
              )
              
              -12
              %Occupancy
                  and equipment costs
              
              
              406,261
              
              
              296,494
              
              
              109,767
              
              
              37
              %Depreciation
                  and amortization
              
              
              1,525,425
              
              
              807,354
              
              
              718,071
              
              
              89
              %All
                  other miscellanous G&A expenses
              
              
              1,245,378
              
              
              1,114,768
              
              
              130,610
              
              
              12
              %**Consolidated
                  totals**
              
              $
              14,694,575
              
              $
              12,611,411
              
              $
              2,083,164
              
              
              17
              %





General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $2.1 million, or 17%, when comparing G&A of $14.7 million for
      the year ended November 30, 2005 to G&A of $12.6 million incurred during the
      year ended November 30, 2004. The significant portion of the net increase was
      attributable to an increase in compensation expense of $1.3 million, or 17%,
      attributable to the growth in our employee base in Fiscal 2005 resulting from
      the acquisition of Hot Rocket Marketing on January 21, 2005, and the inclusion
      of a full year of employee cost in Fiscal 2005 when compared to Fiscal 2004
      and
      that year’s June 30, 2004 acquisition of Send Traffic, Inc. Depreciation and
      amortization increased $0.7 million, or 89%, resulting from the Fiscal 2005
      Hot
      Rocket acquisition and the Fiscal 2004 Send Traffic acquisition, and their
      respective amortization costs related to acquired identifiable intangible
      assets. Additionally, increases in occupancy costs and other miscellaneous
      G&A of approximately $240,000, attributable the recent acquisitions, were
      primarily offset by combined decreases in insurance and legal expenses,
      resulting from a decline in our Fiscal 2005 directors and officers insurance
      premium renewal.




74




Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception to August 25, 2006. During the year ended November 30, 2005, we
      incurred approximately $0.87 million in legal fees (exclusive of disbursements),
      of which $0.70 million was expensed, and $0.17 million was capitalized in the
      Hot Rocket acquisition. The $0.70 million of FKIWSBR expense was then reduced
      by
      $0.36 million, representing amounts recoverable from our insurance providers
      under the terms of their respective coverage provisions. We incurred
      approximately $0.3 million in legal fees (exclusive of disbursements) from
      FKIWSBR during the year ended November 30, 2004.





75


***Bad
        Debt Expense and (Recapture) Components***


***Online
        Advertising and Media Services***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2005**
              
              **2004**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              (422,811
              )
              $
              294,336
              
              $
              (717,147
              )
              
              -244
              %Search
                  Engine Marketing
              
              
              19,625
              
              
              91,284
              
              
              (71,659
              )
              
              -79
              %Personals
              
              
              -
              
              
              -
              
              
              -Internet
                  game development
              
              
              -
              
              
              21,079
              
              
              (21,079
              )
              
              -100
              %**Consolidated
                  totals**
              
              $
              (403,186
              )
              $
              406,699
              
              $
              (809,885
              )
              
              -199
              %




Bad
      Debt
      expense decreased on a net basis by approximately $0.8 million, or 199%, to
      a
      net bad debt recapture of $0.4 million in the year ended November 30, 2005,
      as
      compared to bad debt expense of $0.4 million incurred in the year ended November
      30, 2004.




During
      the year ended November 30, 2005, we settled a dispute with Qwest Communications
      International Inc., where, in accordance with the arbitration settlement, Qwest
      was required to pay us $600,000, plus interest. Such amount represented revenue
      earned in fiscal years dating back to Fiscal 2000, the year in which the
      agreement was wrongfully terminated, and the year we commenced the arbitration.
      During Fiscal 2000, we had not recorded the $600,000 of revenue based on the
      questionable nature of its receipt pursuant to the final arbitration decision,
      effectively recording bad debt expense in that year. Upon the Fiscal 2005
      settlement of the arbitration in our favor, we recorded the receipt as a bad
      debt recapture in accordance with the original recording in Fiscal 2000.
      Offsetting this bad debt recapture was approximately $197,000 in net increases
      in our reserves for smaller accounts. Our allowance for bad debts results from
      our assessment of the risk of collection embedded in our customer base as
      described below.




76




We
      continuously evaluate the potential of the collectibility of trade receivables
      by reviewing such factors as deterioration in the operating results, financial
      condition or bankruptcy filings of our customers. Not all of our customers
      are
      publicly traded, or otherwise make available financial information in
      significant detail. Therefore, there are limits placed on our ability to draw
      information from financial filings. As a result of our review process, we record
      adjustments to bad debt provisions/(recoveries) to reflect the related accounts
      receivable carrying amount to amounts that estimate their probable realizable
      value. Provisions for bad debts are also recorded resulting from the review
      of
      other factors, including (a) length of time the receivables are past due, and
      (b) historical experience, and other factors obtained during collection efforts.
      If circumstances related to specific customers change, our estimates for bad
      debt provision/(recoveries) could be further increased or decreased in future
      fiscal periods.




**Other
      Non-operating Income (Expense)**




The
      components of our “Other non-operating income (expense)” for the years ended
      November 30, 2005 and 2004 are set forth below:




77


***OTHER
        NON-OPERATING INCOME (EXPENSE)***
  **Change**
              
              **Change****Year
                  Ended November 30,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****Other
                  non-operating income (expense):**
              
              **2005**
              
              **2004**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              957,069
              
              $
              544,153
              
              $
              412,916
              
              
              76
              %Realized
                  gains on sale ofmarketable
                  securities
              
              
              561,359
              
              
              25,490
              
              
              535,869
              
              
              2102
              %Realized
                  gain on sale of subsidiary
              
              
              195,000
              
              
              784,900
              
              
              (589,900
              )
              
              -75
              %Other
                  non-operating income:Other
                  miscellaneous
              
              
              
              
              
              
              
              
              -income
                  (expense)
              
              
              (6,832
              )
              
              104,311
              
              
              (111,143
              )
              
              -107
              %Vendor
                  settlement on prior year
              
              
              
              
              
              
              
              
              -year
                  marketing fee
              
              
              -
              
              
              350,000
              
              
              (350,000
              )
              
              -100
              %Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (21,244
              )
              
              (20,793
              )
              
              (451
              )
              
              2
              %Interest
                  and penalties - taxaudits
                  and settlements
              
              
              -
              
              
              (69,581
              )
              
              69,581
              
              
              100
              %Reduction
                  of prior years'sLEC
                  reserve
              
              
              -
              
              
              34,181
              
              
              (34,181
              )
              
              100
              %Minority
                  interest income
              
              
              (494,533
              )
              
              -
              
              
              (494,533
              )
              
              100
              %**Total
                  consolidated other****non-operating
                  income:**
              
              $
              1,190,819
              
              $
              1,752,661
              
              $
              (561,842
              )
              
              -32
              %




Consolidated
      Other Income (Expense) decreased approximately $0.6 million, from approximately
      $1.8 million during the year ended November 30, 2004, to approximately $1.2
      million for the year ended November 30, 2005.




The
      material factors contributing to the net decrease as set forth in the above
      table are as follows:





(a)
            Interest
                income increased approximately $0.4 million, or 76%, with the increase
                related to more favorable rates available during Fiscal 2005 when
                compared
                to Fiscal 2004. The general interest rate environment improved, as
                measured by the average 12 month treasury yield of 2.68% in Fiscal
                2005,
                compared to 1.41% in Fiscal 2004, for a relative increase of 90%
                compared
                to our interest income increase of 76%. Additionally, interest income
                was
                positively impacted in the fourth quarter of fiscal 2005 with
                approximately $68,000 of interest income paid to the Company, as
                a result
                of a settlement award secured by the Company in an arbitration action
                against a vendor.






78






(b)
            Realized
                gains on the sale of marketable securities increased by approximately
                $0.5
                million over the comparable prior year period. This resulted from
                our
                decision in the first quarter of Fiscal 2005 to recognize unrealized
                gains
                on our equity security portfolio enabling us to utilize the federal
                tax
                benefits of capital loss carryforwards that were set to expire within
                the
                next 24 months.


(c)
            The
                year ended November 30, 2004 included $0.8 million in installment
                payments
                from a prior year’s sale of a subsidiary, compared to $0.2 million in the
                year ended November 30, 2005. The decline was the result of the
                installment agreement being completed in February,
                2005.


(d)
            The
                prior year ended November 30, 2004 included a collection of approximately
                $0.4 million in settlement of a prior year’s marketing agreement dispute.
                No comparable amount is reflected in the year ended November 30,
                2005.




79






(e)
            Minority
                Interest resulting from our EZ Tracks partnership with Madacy
                Entertainment in Fiscal 2005 amounted to $0.5 million. The partnership
                agreement was entered into on January 12, 2005 and, as such, the
                prior
                year comparable period includes no comparable
                amount.




On
      January 12, 2005, we entered into an agreement with Madacy Entertainment,
      through a newly created partnership, EZTracks LP, to market and promote
      EZTracks.com, our new web destination consisting of approximately 30,000
      downloadable songs covering a wide array of musical genres. We, through a
      wholly-owned subsidiary, own 50.7% of the partnership and will be responsible
      for managing the operations of the business, including generating traffic to
      the
      website, as well as selling advertising on the site. Madacy Entertainment,
      through its wholly-owned subsidiary, owns 49.3% of the partnership and provides
      its inventory of downloadable music, including an extensive library of
      downloadable music licensed from other parties. Madacy has limited involvement
      with certain aspects of operations. The results of operations for the year
      ended
      November 30, 2005 include the fully consolidated results of EZTracks LP with
      minority interest established to reflect Madacy’s ownership share of the
      partnership’s operating results for the period January 12, 2005 to November 30,
      2005.




80





***The
      following table set forth below summarizes the results of EZ Tracks LP for
      the
      period indicated:***




**January
                  21,****2005
                  to****November
                  30,****2005**Net
                  Revenues
              
              
              
              
              $
              8,369,797Cost
                  of Sales
              
              
              
              
              
              7,286,976Gross
                  Profit
              
              
              
              
              
              1,082,821General
                  andAdministrative
                  Expenses
              
              
              
              
              
              79,712Net
                  Income
              
              
              (1
              )
              $
              1,003,109Minority
                  interest
              
              
              (2
              )
              $
              494,533Distributions
                  toMinority
                  Interest
              
              
              
              
              $
              128,896


(1)
          All
          items included in the Company's Online Advertising and Media Services
          activities
  (2)
        Represents Madacy Entertainment's 49.3% minority interest


**PROVISION
      FOR INCOME TAXES**





We
      provide for income taxes at the end of each interim period based on the
      estimated effective tax rate for the full fiscal year. Cumulative adjustments
      to
      the tax provision are recorded in the interim period in which a change in the
      estimated annual effective rate is determined. A final adjustment is made to
      our
      provision for income taxes pursuant to the computation of our annual tax
      provision (benefit). Our current year’s tax provision approximates $1.0 million,
      coupled with pre tax income of approximately $3.5 million. This effective rate
      relationship of 30.0%, when compared to our historical effective rate of
      approximately 36% results from two factors. We benefited from state tax benefits
      partially offset by foreign income tax expense. Additionally, in the fourth
      quarter we settled state tax audits which resulted in an approximate tax benefit
      of $200,000. See Note 9 of the Consolidated Financial Statements for further
      details of our tax expense (benefit), and deferred tax assets and liabilities.
      We are subject to examination by taxing authorities in various jurisdictions,
      and believe that we have adequately provided for all such tax liabilities.
      Matters raised upon audit from such jurisdictions may involve substantial
      amounts and could be material. Management considers it unlikely that resolution
      of any such matters would have a material adverse effect upon our consolidated
      financial statements.





81




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      November 30, 2006, we had aggregate working capital of $31.7 million compared
      to
      aggregate working capital of $30.7 million as of November 30, 2005. We had
      available cash, cash equivalents, equities and readily available marketable
      debt
      securities of $30.4 million as of November 30, 2006, compared to available
      cash,
      cash equivalents, equities and readily available marketable debt securities
      of
      $28.2 million as of November 30, 2005. The equity component of our marketable
      securities was $2.0 million at November 30, 2006, compared to $1.9 million
      at
      November 30, 2005. At November 30, 2006, all annuity contracts mature within
      one
      year, compared to $2.66 million of long-term annuity maturities at November
      30,
      2005.




82




Cash
      provided by operating activities was approximately $5.9 million for the year
      ended November 30, 2006, compared to approximately $1.0 million in cash provided
      by operating activities during the year ended November 30, 2005, representing
      an
      approximate $4.9 million increase in cash provided by operating activities.
      Changes in assets and liabilities of the business, net of acquisitions, provided
      $2.7 million more in cash when comparing the year ended November 30, 2006 with
      the year ended November 30, 2005. Additionally, there was an increase in
      stock-based compensation of approximately $0.5 million, when comparing the
      year
      ended November 30, 2006 to the year ended November 30, 2005, and was primarily
      the result of our December 1, 2005 SFAS 123R adoption related to stock-based
      compensation, which yielded a non-cash amortization charge of approximately
      $0.5
      million in Fiscal 2006.




Cash
      used
      in investing activities was approximately $1.1 million during the year ended
      November 30, 2006, compared to $3.4 million of cash provided by investing
      activities during the year ended November 30, 2005. The primary use of cash
      in
      investing activities during the year ended November 30, 2006 was related to
      approximately $0.9 million expended on the Hot Rocket contingent additional
      purchase price payment and $0.5 million expended on fixed asset acquisitions.
      During the year ended November 30, 2005, net proceeds from the sale of
      securities and subsidiary sales exceeded cash used in security purchases by
      approximately $7 million and was offset by approximately $3.1 million expended
      in the Hot Rocket asset acquisition and $0.4 million in cash paid for capital
      expenditures and licenses.




83




Cash
      used
      for financing activities was approximately $5.2 million during the year ended
      November 30, 2006, compared to $2.6 million used by financing activities during
      the year ended November 30, 2005. Fiscal 2006 cash outflows were attributable
      to: (a) dividends paid of approximately $4.6 million; (b) a distribution of
      $0.6
      million to a minority interest holder; and (c) $0.2 million in capital lease
      obligation payments, offset by $0.2 million in financing proceeds from stock
      option exercises. In Fiscal 2005 we paid dividends of approximately $4.5 million
      and made approximately $0.1 million in distributions to a minority interest
      holder. We offset such outflows with approximately $2.1 million in proceeds
      from
      stock options exercised.




Our
      days-sales-outstanding ("DSO") in accounts receivable at November 30, 2006
      was
      45 days, compared to 56 days at August 31, 2006, 46 days at May 31, 2006, 54
      days at February 28, 2006, and 65 days at November 30, 2005. The 11 day, or
      20%
      decrease in the current quarter’s DSO compared to the third quarter of this
      fiscal year relates to approximately $2.4 million in collections from a former
      client that terminated its association with us in September 2006 (and which
      client’s accounts receivable was approximately $2.7 million at August 31, 2006),
      coupled with an approximate $2.5 million decline in Fiscal 2006 fourth quarter
      revenue.




The
      majority of our customers are extended 30-day credit terms. In limited
      instances, customer credit is extended in ranges exceeding 30 days, and in
      very
      limited circumstances can exceed 180 days. We continually monitor customer
      adherence to credit terms and constantly strive to improve the effectiveness
      of
      our collection efforts with the goal of achieving a DSO in the 40-day range.
      Future fiscal periods might not reflect this goal of a 40-day DSO, and might
      exceed the 51-day DSO recognized during the year ended November 30, 2006.




84




Historically,
      our primary cash requirements have been used to fund the cost of advertising
      and
      promotion and test-marketing new services and promotions, with additional funds
      having been used in the purchasing of equipment and services in connection
      with
      the commencement of new business lines, further development of businesses being
      test marketed and for the development of the equipment infrastructure of our
      subsidiaries.




Our
      future plans and business strategy may continue to call for our Internet-based
      On-line Advertising and Media Service activities to be our sole operating focus
      as it was for the years ended November 30, 2006 and 2005. Our cash demands
      for
      capital expenditures and equipment lease obligations have increased to $0.719
      million during the year ended November 30, 2006 compared to $0.519 million
      during the year ended November 30, 2005. Our capital expenditures and capital
      lease obligation payments during the fiscal years ended November 30, 2002 to
      2004 were (in millions): $1.9, $1.5, and $0.141, respectively. The significant
      portion of Fiscal 2006 and 2005’s capital expenditure was for new email servers
      that substantially reduced our reliance on and related additional costs
      associated with third party email delivery suppliers. All other outlays for
      capital expenditures were also used to support other facets of our Online
      Advertising and Media Services business.




85




We
      may,
      in future fiscal periods, be required to invest significant amounts of capital
      into our business. If our operations fail to generate sufficient revenue, we
      could realize a material adverse impact on our capital and liquidity resources
      resulting from expenditures necessary to generate such revenue, including,
      but
      not limited to, expenditures for (a) marketing campaigns, including media costs
      and other costs of customer acquisition information, (b) service and/or product
      development costs, (c) site development and maintenance and related technology
      based costs, (d) potential online, and/or off-line, business acquisitions,
      or
      (e) costs associated with developing alternative means of email promotion
      delivery.




On
      January 21, 2005, we, through our wholly owned subsidiary, Hot Rocket
      Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
      Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
      the business of buying and selling performance based online advertising space
      for third parties, as well as providing such services to the sales activities
      of
      our consolidated entity. The Hot Rocket acquisition has broadened our reach
      into
      the Internet direct marketing arena, which continues to allow for expanded
      client relationships and various other synergistic possibilities, such as adding
      value to our core operations by the enhancement of our current and developing
      marketing programs conducted in our Online Advertising and Media Services
      activities.




The
      initial purchase price was approximately $3.8 million and was comprised of
      $3.1
      million in cash, $0.7 million (or 113,821 shares) of our common stock and
      transaction fees approximating $0.1 million. Pursuant to an independent third
      party valuation, the reported purchase price was allocated approximately $2.2
      million towards goodwill and $1.6 million of identifiable intangibles. There
      were no tangible assets acquired.




86




In
      addition to the initial purchase price of the acquisition, we agreed to pay
      Hot
      Rocket a contingent purchase price of up to $12.5 million if Hot Rocket
      generates an aggregate of $27 million in EBITDA (as quantified in the Agreement)
      over the four year period following the closing. In accordance with the terms
      of
      the acquisition agreement, for the period February 1, 2005 to January 31, 2006,
      we were liable for a combined additional purchase price payment of $1.467
      million, which has been settled by a cash payment of approximately $0.886
      million made on May 9, 2006, and an issuance of 103,354 shares issued on May
      10,
      2006 (then having a fair market value of approximately $0.581 million). Future
      contingent payments made, if any, will be treated as additional purchase price
      and included as an addition to goodwill.




The
      terms
      of the acquisition agreement also provide for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      August 1, 2006 through January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the Agreement. Hot Rocket did not reach the $1.35
      million EBITDA threshold for the period ended July 31, 2006, and the possibility
      exists that for the period ending January 31, 2007, the EBITDA threshold will
      not be attained. Therefore, as of November 30, 2006, based on the lack of
      absolute certainty regarding the EBITDA threshold as it relates to the
      additional payment period ending January 31, 2007, we have not accrued any
      additional contingent payments at this time. Future contingencies, if any,
      will
      be recorded when the contingency has been satisfied and the additional
      consideration is issued or becomes issuable.





87





The
      shares of common stock issued to Hot Rocket were originally issued by us in
      non-public transactions, which issuances were exempt from the registration
      requirements of the Securities Act pursuant to Section 4(2)
      thereof.




On
      June
      30, 2004, we consummated the acquisition of the assets of SendTraffic.com,
      Inc.
      (“Send”) and its affiliated entity, The Traffic Group, LLC, (“TG”), privately
      held search engine marketing companies based in New York. We purchased the
      assets for approximately $5.0 million, comprised of $3.5 million in cash and
      176,799 shares of Traffix common stock. The asset acquisition agreement calls
      for contingent earn-out payments based on the post closing attainment of certain
      earnings before interest, taxes, depreciation and amortization (EBITDA)
      thresholds during the thirty-six month period following the transaction. As
      of
      November 30, 2006, none of the contractual thresholds were attained, and it
      is
      not deemed probable that any remaining threshold will be reached during the
      remainder of the post closing period.




Under
      currently proposed operating plans and assumptions, management believes that
      projected cash flows from operations and available cash resources and working
      capital, as described above, will be sufficient to satisfy our anticipated
      cash
      requirements for at least the next twelve months.




Additionally,
      as we seek to further extend our reach into the Online Advertising and Media
      Services arena, as well as potentially identify new and other consumer oriented
      services and products, we may use existing cash reserves, enter into long-term
      financing arrangements, acquire the assets or securities of other companies,
      or
      employ other means to finance such diversification, none of which is
      specifically identifiable or measurable at this time.




88





**OBLIGATIONS
      AND COMMITMENTS**





We
      are
      not aware of any specific factors, outside of those described in the following
      table, and those “potential factors” described in the “Critical Accounting
      Policy and Accounting Estimate Discussion” which is set forth below, that are
      reasonably likely to cause a material impact, either positive or negative,
      on
      our liquidity trends.




Additionally,
      we do not have off-balance sheet arrangements, other than those described in
      the
      following table, and do not engage in trading activities involving non-exchange
      traded contracts.




A
      summary
      table of future contractual commitments, for future minimum lease payments
      under
      non-cancelable operating leases and employment contracts are set forth below:


Total
                  ContractualOperating
                  Leases
              
              Employment
                  agreements
              
              Other
              
              ObligationsDomestic
              
              Foreign
              
              Domestic
              
              Foreign
              
              Domestic
              
              Domestic
              
              Foreign2007
              
              $
              489,910
              
              
              -
              
              $
              1,978,157
              
              $
              300,000
              
              
              -
              
              $
              2,468,067
              
              $
              300,0002008
              
              
              450,500
              
              
              -
              
              
              398,827
              
              
              325,000
              
              
              
              
              
              849,327
              
              
              325,0002009
              
              
              351,625
              
              
              -
              
              
              198,168
              
              
              350,000
              
              
              
              
              
              549,793
              
              
              350,0002010
              
              
              353,001
              
              
              -
              
              
              28,658
              
              
              -
              
              
              -
              
              
              381,659
              
              
              -2011
              
              
              292,142
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              292,142$
              1,937,178
              
              $
              -
              
              $
              2,603,810
              
              $
              975,000
              
              $
              -
              
              $
              4,540,988
              
              $
              975,000





89





**RELATED
      PARTIES**




Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, had been a member of our Board of Directors
      from
      inception to August 25, 2006, at which time he chose not to stand for
      re-election. FKIWSBR legal services are billed on an arms length transaction
      basis. We incurred approximately $0.3 million in legal fees (exclusive of
      disbursements), as reduced by approximately $30,000 in settlement awards, from
      FKIWSBR during the year ended November 30, 2006. We incurred approximately
      $0.87
      million in legal fees (exclusive of disbursements) from FKIWSBR during the
      year
      ended November 30, 2005, of which $0.70 million was expensed, and $0.17 was
      capitalized in the Hot Rocket acquisition. The $0.70 million of FKIWSBR expense
      was then reduced by $0.36 million, representing amounts recoverable from our
      insurance providers under the terms of their respective coverage provisions.





**TRANSACTIONS
      WITH MAJOR CUSTOMERS**





During
      the fiscal year ended November 30, 2006, we had seven customers which, in
      combination, accounted for approximately $22.4 million, or 31% of consolidated
      net revenues during such period, and approximately $3.1 million, or 35% of
      consolidated net accounts receivable as of November 30, 2006. The seven
      customers accounted for 7.7%, 7.3%, 5.7%, 3.4%, 2.6%, 2.1%, and 2.0% of
      consolidated net revenue for the year ended November 30, 2006.




90




During
      the fiscal year ended November 30, 2005, we had eight customers which, in
      combination, accounted for approximately $20.6 million, or 33% of consolidated
      net revenues during such period, and approximately $5.7 million, or 51% of
      consolidated net accounts receivable as of November 30, 2005. The eight
      customers accounted for 11.3%, 5.2%, 3.2%, 3.0%, 2.9%, 2.6%, 2.4%, and 2.3%
      of
      consolidated net revenue for the year ended November 30, 2005.




**CRITICAL
      ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION**





In
      accordance with the Commission’s Release Nos. 33-8040 and 34-45149 and FR-60
      issued in December 2001, referencing the Commission’s statement “regarding the
      selection and disclosure by public companies of critical accounting policies
      and
      practices”, we have set forth below what we believe to be the most pervasive
      accounting policies and estimates that could have a material effect on our
      results of operations and cash flows, if general business conditions or
      individual customer financial circumstances change in an adverse way relative
      to
      the policies and estimates used in the attached financial statements or in
      any
      "forward looking" statements contained herein.





**Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires our 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 revenue and expenses
      during the period. Actual results could differ from those estimates. Our most
      significant estimates relate to reserves for uncollectible receivables,
      recoverability of long-lived assets, and the realizability of deferred tax
      assets. Additionally, we have potential exposure resulting from pending and/or
      threatened litigation for which we currently assess no risk and do not provide
      for loss. No provision for loss has been recorded for the potential of currently
      unknown actions naming us as defendant in future fiscal periods. Actual results
      could differ from our estimates.





91





**FACTORS
      THAT COULD AFFECT FUTURE RESULTS**





**Historically
      High Levels of Volatility in Revenue and Cost Trends**





Our
      revenues and profitability from operations have historically varied. Our
      revenues, cost of providing revenues, profit margins and overhead expenses
      have
      varied historically among our Online and Media Service components, as well
      as on
      a consolidated basis. The revenue derived from our Online and Media Service
      components may likely be different in future fiscal periods due to several
      factors, including consumer tastes, business opportunities, and regulatory
      issues that may exist in future periods. Therefore, it is difficult to predict
      revenue and gross margin trends, and their corresponding impact on liquidity
      and
      capital resources. Actual trends may cause us to adjust our operating emphasis,
      which could result in continued period-to-period fluctuations in our results
      of
      operations. Historically, we have been able to rapidly react to changes in
      the
      business environment within which we operate. Management responds to these
      changes as deemed appropriate at the time of change, and as dictated by the
      nature of such changes. Management's reaction to such changes could cover a
      broad range of business-related adjustments, ranging from product mix
      repositioning and staff reductions, to entire business model overhauls. Based
      on
      our current operations and marketing methods, as well as the dynamic, ever
      changing status of the Internet marketing environment, it is conceivable that
      we
      would institute changes to our business practices in future fiscal periods.
      There can be no assurance that any such potential change would be successful
      in
      its implementation, and there can be no assurance that any such implementation
      would benefit our operating margins, profitability, cash flows or capital
      resources.





92




**Revenue
      Recognition, Variable Costs and Bad Debts**





We
      currently earn our revenue from our Online and Media Service activities pursuant
      to marketing agreements with our marketing partners and corporate customers.
      The
      provisions of each agreement determine the type and timing of revenue to be
      recorded. We invoice our customers in accordance with the terms of the
      underlying agreement. Revenue is recognized at the time the marketing activity
      is delivered, or service is provided, net of an estimated sales allowance,
      when
      applicable. Such sales allowance may include an estimate for duplications,
      invalid addresses, and/or age restrictions that are due from, but have not
      yet
      been reported to us by our customers. These sales allowances are recorded as
      contra-revenue. Our revenues are adjusted in later fiscal periods if actual
      sales allowances vary from amounts previously estimated. Historically, the
      variance between actual sales allowances and previously estimated sales
      allowances has been immaterial. If events were to occur that would cause actual
      sales allowances (which are recorded as offsets against gross revenue, as
      contra-revenues, in arriving at reported net revenue) to vary significantly
      from
      those originally estimated and reflected in the financial statements, we could
      suffer material deterioration in future fiscal period gross margins, and,
      therefore, our profitability, cash flows and capital resources could be
      adversely affected.




93





Certain
      revenue related obligations are recorded at the time revenue is recognized.
      They
      include costs payable to other online, as well as off-line, media companies
      for
      generating registered users and consumer data for us, database fee sharing
      costs
      under third-party database use agreements, email message delivery costs,
      contingent-based prize indemnification coverage (i.e. sweepstakes payout
      indemnification), estimated premium fulfillment costs related to the respective
      promotion (when and if applicable) and all other variable costs directly
      associated with completing our obligations relative to the revenue being
      recognized. When our estimates vary from that which was originally accrued,
      the
      associated variance is deemed a change in management’s estimate, and accordingly
      we take the increase or decrease to sales, costs, or overhead in the fiscal
      period that the variance is determinable.





Should
      the Internet operating landscape change resulting in (a) higher costs of
      acquiring consumer data and registered users for our websites; (b) higher costs
      of acquiring data for our marketing partners, compromising such marketing
      partners' ability to maintain adequate sized databases to allow for continued
      third-party database use agreements; (c) the InfiKnowledge asset acquisition
      failing to maintain a lower cost of our email delivery activities and web
      development and web hosting service costs as compared to our competitors, or
      us
      being required to depend on third-party emailing service bureaus, to a degree
      higher, and/or at a cost in excess of our anticipated internally-generated
      costs, (d) our contingent-based prize indemnification premiums for
      indemnification coverage increasing due to an increase in the number of prize
      winners at the sites; or (e) unpredictable technology changes or commercial
      technology applications; then, if any one, or a combination, of the above
      factors were to materialize we could suffer material deterioration in future
      fiscal period revenue growth and gross margins and, therefore, our
      profitability, cash flows and capital resources could be materially adversely
      affected.




94





Revenue
      recognition is also subject to provisions based on the probability of collection
      of the related trade accounts receivable. We continuously evaluate the potential
      of the collectibility of trade receivables by reviewing such factors as
      deterioration in the operating results, financial condition, or bankruptcy
      filings, of our customers. As a result of this review process, we record bad
      debt provisions to adjust the related receivables' carrying amount to an
      estimated realizable value. Provisions for bad debts are also recorded due
      to
      the review of other factors, including the length of time the receivables are
      past due, historical experience and other factors obtained during the conduct
      of
      collection efforts. If circumstances change regarding our specific customers
      on
      an individual basis, or if demand for Internet direct marketing softens, or
      if
      the U.S. economy stumbles, our estimates for bad debt provisions could be
      further increased, which could adversely affect our operating margins,
      profitability, cash flows and capital resources.





95




**Impairment
      of Goodwill, Other Intangibles and investment Portfolio Could Impact net Income**





We
      carry
      goodwill and other identifiable intangibles on our balance sheet arising from
      current and prior-year acquisitions. We are required to review, at least
      annually goodwill for any asset impairment. If the review of the goodwill
      related to the subsidiaries organized to acquire such assets determines that
      such goodwill is impaired, then we will be required to recognize an impairment
      charge on such goodwill necessary to reduce the carrying value of the goodwill
      to its net realizable value. Should events occur that would give rise to such
      impairment charge, we would recognize decreased profitability to the extent
      of
      such adjustment. Cash flows would not be directly affected by the impairment
      charge, but cash flows would, most likely, be adversely affected as a result
      of
      the facts and circumstances that created the impairment charge. As of November
      30, 2006, we performed our annual review of goodwill and determined there to
      be
      no impairment, and have not recognized any events through the date of this
      report that would negatively impact goodwill.





**Market
      Fluctuation and Debt Repayment Risk of Marketable Securities Investment
      Portfolio**





We
      maintain an investment portfolio that is managed by prominent financial
      institutions. The portfolio includes high-grade corporate commercial paper
      and
      auction rate securities, and common stock equities, all of which are held for
      varying periods of time, pursuant to maturity dates, market conditions and
      other
      factors. The fair value of our investments in the common stock of publicly
      traded companies as of November 30, 2006 amounted to approximately $2.0 million.
      These investments are subject to market price volatility, in addition to the
      potential for business failure at the company level. Moreover, due to the
      potential for an economic downturn and the potential of related fiscal
      difficulties that may be faced by some of the companies in which we have
      investments, our investment portfolio could become impaired by the failure
      of
      such companies to fulfill their responsibility of adhering to the repayment
      of
      principal upon maturity. Additionally, our cash flows and interest income could
      be negatively impacted by Federal Reserve Bank interest rate reductions, if
      any.





96




**Recent
      Accounting Pronouncements**




In
      September 2006, the U.S. Securities and Exchange commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Qualifying Financial Statement Misstatements” (SAB
      108), which provides interpretive guidance on how registrants should qualify
      misstatements when evaluating the materiality of financial statement errors.
      SAB
      108 also provides transition accounting disclosure guidance for situations
      in
      which a material error existed in prior period financial statements by allowing
      companies to restate prior period financial statements or recognize the
      cumulative effect of initially applying SAB 108 through an adjustment to
      beginning retained earnings in the year of adoption. SAB 108 is effective for
      our Company in Fiscal 2007. We do not expect the adoption of SAB 108 will have
      a
      material impact on the consolidated financial statements.




97




In
      June
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes- an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions. FIN 48 clarifies certain provisions of SFAS No.
      109
      by prescribing a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. A tax benefit from such uncertain tax
      positions may be recognized only if it is “more likely than not” that the
      position is sustainable based on its technical merits. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. We do not believe the adoption
      of FIN 48 will have a material impact on its financial statements.




During
      the year ended November 30, 2006, specifically effective December 1, 2005,
      we
      adopted the fair value recognition provisions of Statement of Financial
      Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”). See Notes 2 and 3 of the attached audited financial statements
      for additional disclosure on SFAS 123R.





98




**Item
      8.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





Reference
      is made to the Financial Statements referred to in the accompanying Index,
      setting forth the consolidated financial statements of Traffix, Inc. and
      subsidiaries, together with the report of Goldstein Golub Kessler LLP for the
      year ended November 30, 2006, dated February 3, 2007, and the report of
      PricewaterhouseCoopers LLP for the years ended November 30, 2005 and 2004,
      dated
      February 28, 2006 (except for the changes in Segment reporting and
      classifications of operating expenses in Note 1, as to which the date is
      Feburary 27, 2007).





**Item
      9A. CONTROLS AND PROCEDURES**





a)  Evaluation
      of disclosure controls and procedures.





Our
      Chief
      Executive Officer and Chief Financial Officer, after evaluating the
      effectiveness of our disclosure controls and procedures (as defined in Exchange
      Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
      Annual Report, have concluded that as of that date, our disclosure controls
      and
      procedures were adequate and effective, and communicated to us to allow for
      timely decisions regarding required disclosure, and to ensure that information
      required to be disclosed by us in the reports we file or submit with the
      Securities and Exchange Commission is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms.





(b)  Changes
      in internal control over financial reporting.





There
      were no changes in our internal control over financial reporting identified
      in
      connection with the evaluation required by Exchange Act Rules 13a-15(d) and
      15d-15 that occurred during the period covered by this Annual Report that has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.





99





**PART
      III**





**Item
      10.**  **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**





**Directors
      and Executive Officers**





Set
      forth
      below are the directors and executive officers of our Company, their respective
      names and ages, positions with our Company, principal occupations and business
      experiences during at least the past five years and the dates of the
      commencement of each individual's term as a director and/or officer.




Name
            
            Age
            
            PositionJeffrey
                L. Schwartz
            
            58
            
            Chairman
                of the Board and Chief Executive OfficerAndrew
                Stollman
            
            41
            
            President,
                Secretary and DirectorDaniel
                Harvey
            
            48
            
            Chief
                Financial OfficerRichard
                Wentworth
            
            57
            
            Chief
                Operating OfficerLawrence
                Burstein
            
            64
            
            DirectorMark
                Gutterman
            
            51
            
            DirectorRobert
                B. Machinist
            
            54
            
            Director





100


**Directors**




*Jeffrey
      L. Schwartz* has been
      our Chairman and Chief Executive Officer since January 1995,
      Secretary/Treasurer from September 1993 to December 1994 and a
      director since our inception in 1993. From January 1979 until
      May 1998, Mr. Schwartz was also Co-President and a director of Jami
      Marketing Services, Inc., a list brokerage and list management consulting
      firm, Jami Data Services, Inc., a database management consulting firm, and
      Jami Direct, Inc., a direct mail graphic and creative design firm
      (collectively, the "Jami Companies"). The Jami Companies were sold by the
      principals thereof in May 1998.




*Andrew
      Stollman* has been
      our President since November 21, 2002, Chief Operating Officer from
      January 1, 2001 to November 21, 2002, and Secretary and a director of
      our Company since January 1995. From February 2000 until
      January 2001, Mr. Stollman was also our Executive Vice President and
      from January 1995 until February 2000, he was Senior Vice President.
      Mr. Stollman was our President from September 1993 to
      December 1994.




*Lawrence
      Burstein* has been
      a director since April 1999. Since March 1996, Mr. Burstein has
      been Chairman of the Board and a principal shareholder of Unity Venture Capital
      Associates, Ltd., a private venture capital firm. For approximately ten
      years prior thereto, Mr. Burstein was the President, a director and
      principal stockholder of Trinity Capital Corporation, a private investment
      banking concern. Trinity ceased operations upon the formation of Unity Venture
      in 1996. Mr. Burstein is a director of several companies, being,
      respectively, THQ, Inc., engaged in the development and marketing of games
      for Sony, Microsoft and Nintendo; CAS Medical Systems, Inc., engaged in the
      manufacture and marketing
      of blood pressure monitors and other disposable products, principally for the
      neonatal market; I.D. Systems Inc., engaged in the design, development and
      production of a wireless monitoring and tracking system which uses radio
      frequency technology; Millennium India Acquisition Corp., a public acquisition
      vehicle engaged in searching for an acquisition in India; and American Telecom
      Systems, Inc., engaged in the development and marketing of convergent
      telecommunication services.




101




*Mark
      Gutterman* was
      appointed a director in November 2003. He had previously served as a
      director from December 1995 to April 1999. Mr. Gutterman has been
      the Chief Financial Officer of Starpoint Solutions LLC, a company providing
      IT
      staffing and solutions, since 1999, prior to which he was a partner in the
      accounting firm of Feldman, Gutterman, Meinberg & Co.
      Mr. Gutterman is a Certified Public Accountant.




*Robert
      B. Machinist* was
      appointed a director in August 2004. Mr. Machinist is currently a
      managing partner of M Capital, LLC, a private equity investment firm in Rye,
      New
      York. He also runs a private family investment company. From November 1998
      until December 2001, Mr. Machinist served as managing director and
      head of investment banking for the Bank of New York and its Capital Markets
      division. From 1986 through November 1998, Mr. Machinist was president
      and one of the principal founders of Patricof & Co. Capital Corp. (and
      its successor companies), a multinational investment banking business.
      Mr. Machinist is also a director of Dobi Medical International, Inc.,
      a publicly-held development stage company in the business of advanced medical
      technology imaging.




102




A
      majority of our directors are “independent,” as defined under the rules of the
      Nasdaq Stock Market. Such independent directors are Messrs. Burstein, Gutterman
      and Machinist. Our directors hold office until the next annual meeting of
      stockholders and until their successors are elected and qualified.




103




**Executive
      Officers**




Officers
      are elected annually by the Board of Directors and serve at the direction of
      the
      Board of Directors. Two of our executive officers, Jeffrey L. Schwartz and
      Andrew Stollman, are also directors of our Company. Information with regard
      to
      such persons is set forth above under the heading "Directors."




The
      remaining executive officers are Mr. Daniel Harvey, Chief Financial Officer,
      and
      Mr. Richard Wentworth, Chief Operating Officer.





Mr.
      Harvey has been our Chief Financial Officer since January 1997. He joined us
      in
      September 1996. From November 1991 to August 1996, he was a Senior Manager
      with
      the accounting firm of Feldman, Gutterman, Meinberg & Co. Mr. Harvey is a
      Certified Public Accountant.





Mr.
      Wentworth has been our Chief Operating Officer since November 21, 2002. He
      initially joined us in 1998, and had served as our Vice President of Data
      Operations since January 2000. From November 1994 to 1999, Mr. Wentworth was
      the
      President and Chief Operating Officer of TIAC, a prominent New England based
      regional Internet Service Provider.




We
      have
      obtained "key man" life insurance in the amount of $1,000,000 on each of the
      lives of Jeffrey L. Schwartz and Andrew Stollman.




**Committees
      of the Board of Directors**





We
      have
      an Audit Committee, Compensation Committee and Nominating and Corporate
      Governance Committee.




104





*Audit
      Committee.* The
      functions of the Audit Committee are to recommend to the Board of Directors
      the
      engagement of the independent accountants, review the audit plan and results
      of
      the audit engagement, review the independence of the auditors and review the
      adequacy of our system of internal accounting controls. The current members
      of
      the Audit Committee are Messrs. Gutterman, Burstein and Machinist, and the
      Board has determined that they are each "independent" (as that term is defined
      under the applicable rules of the Nasdaq Stock Market), and are each able to
      read and understand fundamental financial statements. Mr. Gutterman is the
      Chairman of the Audit Committee and possesses the financial expertise required
      under Rule 401(h) of Regulation SK of the Securities Act of 1933, as
      amended (the "Act"), and NASD Rule 4350(d)(2). He is further "independent,"
      as that term is defined under Item 7(d)(3)(iv) of Schedule 14A under
      the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We will,
      in the future, continue to have (i) an Audit Committee of at least three
      members comprised solely of independent directors, each of whom will be able
      to
      read and understand fundamental financial statements (or will become able to
      do
      so within a reasonable period of time after his or her appointment); and
      (ii) at least one member of the Audit Committee that will possess the
      financial expertise required under the applicable rules of the Nasdaq Stock
      Market. Our Board adopted a written charter for the Audit Committee (a copy
      of
      which can be found on our website, www.traffixinc.com, and the Audit Committee
      reviews and reassesses the adequacy of that charter on an annual basis.




105





**  *Compensation
      Committee.* The
      functions of the Compensation Committee are to make recommendations to the
      Board
      regarding compensation of management employees and to administer plans and
      programs relating to employee benefits, incentives, compensation and awards
      under our Employee Stock Option Plans. Messrs. Burstein (Chairman) and
      Gutterman are the current members of the Compensation Committee. The Board
      has
      determined that each of them are "independent," as defined under the applicable
      rules of the Nasdaq Stock Market.


**


*Nominating
      and Corporate Governance Committee.* The
      functions of the Nominating and Corporate Governance Committee are to develop
      our corporate governance system and to review proposed new members of our board
      of directors, including those recommended by our stockholders.
      Messrs. Machinist (Chairman), Burstein and Gutterman are the current
      members of our Nominating and Corporate Governance Committee. The Nominating
      and
      Corporate Governance Committee operates pursuant to a written charter adopted
      by
      the Board. The full text of the charter is available on our website at *www.traffixinc.com* .
      The
      Board has determined that each member of this Committee is "independent," as
      defined under the applicable rules of the Nasdaq Stock Market.





The
      Nominating and Corporate Governance Committee will review, on an annual basis,
      the composition of our Board of Directors and the ability of its current members
      to continue effectively as directors for the upcoming fiscal year. In the
      ordinary course, absent special circumstances or a change in the criteria for
      Board membership, the Nominating and Corporate Governance Committee will
      renominate incumbent directors who continue to be qualified for Board service
      and are willing to continue as directors. If that Committee thinks it in our
      best interests to nominate a new individual for director in connection with
      an
      annual meeting of stockholders, or if a vacancy on the Board occurs between
      annual stockholder meetings, the Committee will seek out potential candidates
      for Board appointment who meet the criteria for selection as a nominee and
      have
      the specific qualities or skills being sought. Director candidates will be
      selected based on input from members of the Board, our senior management and,
      if
      the Committee deems appropriate, a third-party search firm. The Nominating
      and
      Corporate Governance Committee will evaluate each candidate’s qualifications and
      check relevant references and each candidate will be interviewed by at least
      one
      member of that Committee. Candidates meriting serious consideration will meet
      with all members of the Board. Based on this input, the Nominating and Corporate
      Governance Committee will evaluate whether a prospective candidate is qualified
      to serve as a director and whether the Committee should recommend to the Board
      that this candidate be appointed to fill a current vacancy on the Board, or
      presented for the approval of the stockholders, as appropriate.





106




**Stockholder
      Communications**





Stockholders
      interested in communicating with our Board may do so by writing to any or all
      directors, care of our Chief Financial Officer, at our principal executive
      offices. Our Chief Financial Officer will log in all stockholder correspondence
      and forward to the director addressee(s) all communications that, in his
      judgment, are appropriate for consideration by the directors. Any director
      may
      review the correspondence log and request copies of any correspondence. Examples
      of communications that would be considered inappropriate for consideration
      by
      the directors include, but are not limited to, commercial solicitations,
      trivial, obscene, or profane items, administrative matters, ordinary business
      matters, or personal grievances. Correspondence that is not appropriate for
      Board review will be handled by our Chief Financial Officer. All appropriate
      matters pertaining to accounting or internal controls will be brought promptly
      to the attention of our Audit Committee Chair.


107





Stockholder
      recommendations for director nominees are welcome and should be sent to our
      Chief Financial Officer, who will forward such recommendations to our Nominating
      and Corporate Governance Committee, and should include the following
      information: (a) all information relating to each nominee that is required
      to be disclosed pursuant to Regulation 14A under the Securities Exchange
      Act of 1934 (including such person’s written consent to being named in the proxy
      statement as a nominee and to serving as a director if elected); (b) the
      names and addresses of the stockholders making the nomination and the number
      of
      shares of our common stock which are owned beneficially and of record by such
      stockholders; and (c) appropriate biographical information and a statement
      as to the qualification of each nominee, and must be submitted in the
      appropriate time frame . The Nominating and Corporate Governance Committee
      will
      evaluate candidates recommended by stockholders in the same manner as candidates
      recommended by other sources, using criteria, if any, approved by the Board
      from
      time to time. Our stockholder communication policy may be amended at any time
      with the consent of our Corporate Governance and Nominating
      Committee.




108





**Code
      of Ethics**




We
      have a
      Code of Ethics that applies to all our employees, officers and directors. Such
      code has been posted on our website, *www.traffixinc.com* .
      We will
      disclose when there have been waivers of, or amendments to, such Code as
      required by the rules and regulations promulgated by the Securities and Exchange
      Commission and/or Nasdaq.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





To
      the best of our knowledge,
      all Forms 3, 4 and 5 required to be filed during the fiscal year ended
      November 30, 2006 were done so on a timely basis.




109





**Item
      11.**  **EXECUTIVE
      COMPENSATION**




The
      following table sets forth the executive compensation paid during the three
      fiscal years ended November 30, 2006, 2005 and 2004 for (i) our Chief Executive
      Officer; (ii) our four most highly compensated executive officers (other than
      the Chief Executive Officer) whose cash compensation for the fiscal year ended
      November 30, 2006 exceeded $100,000; and (iii) up to two additional individuals
      for whom disclosure would have been provided under the above clause (ii) but
      for
      the fact that the individuals were not serving as executive officers at the
      end
      of the last completed fiscal year (the "Named Officers").





Annual
                Compensation Awards
            
            
            
            Long
                Term Compensation Payouts(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)Other
            
            
            
            Securities
            
            
            
            All
                OtherAnnual
            
            Restricted
            
            Underlying
            
            Plan
            
            Compen-Salary
            
            Bonus
            
            Compensa-
            
            Stock
            
            Options
            
            Payouts
            
            SationName
                  and Principal
                  Position
            
            Year
            
            ($)
            
            ($)
            
            Tion($)
            
            Awards
            
            (#)
            
            ($)
            
            ($)(1)Jeffrey
                L. Schwartz
            
            
            2006
            
            $
            605,000
            
            $
            106,758
            
            
            -
            
            
            -
            
            
            60,000
            
            
            -
            
            $
            21,916Chairman
                and
            
            
            2005
            
            $
            605,000
            
            $
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            20,779Chief
                Executive Officer
            
            
            2004
            
            $
            605,000
            
            $
            -
            
            
            -
            
            
            -
            
            
            185,000
            
            
            -
            
            $
            29,625Andrew
                Stollman
            
            
            2006
            
            $
            544,500
            
            $
            136,758
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            20,552President
                and
            
            
            2005
            
            $
            544,500
            
            $
            30,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            18,793Secretary
            
            
            2004
            
            $
            544,500
            
            $
            -
            
            
            -
            
            
            -
            
            
            405,000
            
            
            -
            
            $
            22,928Daniel
                Harvey
            
            
            2006
            
            $
            223,000
            
            $
            27,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            12,000Chief
                Financial
            
            
            2005
            
            $
            213,000
            
            $
            24,000
            
            
            -
            
            
            -
            
            
            40,000
            
            
            -
            
            $
            12,000Officer
            
            
            2004
            
            $
            208,667
            
            $
            24,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            9,000Richard
                Wentworth
            
            
            2006
            
            $
            216,000
            
            $
            35,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Operating
            
            
            2005
            
            $
            213,539
            
            $
            35,000
            
            
            -
            
            
            -
            
            
            50,000
            
            
            -
            
            
            -Officer
            
            
            2004
            
            $
            200,000
            
            $
            25,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




(1)  Consists
      of medical insurance reimbursements and auto allowance payments in the case
      of
      Messrs. Schwartz and Stollman, and auto allowance payments in the case of Mr.
      Harvey.




110


The
      following table sets forth certain information regarding the granting of options
      to the Named Officers during the fiscal year ended November 30,
      2006.


**Option
      Grants in Last Fiscal Year**




**Potential****Realizable****Value
                at Assumed****Annual****Rates
                of Stock****Price
                Appreciation****for
                Option****Individual
                Grants**
            
            **Term
                (2)****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**
            
            **(f)**
            
            **(g)****Number
                of****Securities**
            
            **%
                of Total****Underlying**
            
            **Options
                Granted**
            
            **Exercise
                or****Options**
            
            **to
                Employees in**
            
            **Base
                Price**
            
            **Expiration****Name**
            
            **Granted
                (#)**
            
            **Fiscal
                Year (1)**
            
            **($/Share)**
            
            **Date**
            
            **5%($)**
            
            **10%($)**Jeffrey
                L. Schwartz
            
            
            60,000(3)
            
            
            75%
            
            $5.44
            
            
            03/09/2016
            
            $205,272
            
            $520,198




(1)
        Options to purchase a total of 142,500 shares of Common Stock were granted
        to
        our employees and consultants, including the Named Officers, during the fiscal
        year ended November 30, 2006.




(2)
      Based
      upon the closing price of the Common Stock, as listed by the Nasdaq National
      Market, on the date of grant of the respective options.





(3) One-half
      (1/2) of these options became exercisable on each of the grant date and December
      1, 2006.




The
      following table sets forth certain information regarding options exercised
      and
      exercisable during the fiscal year ended November 30, 2006 and the value of
      the
      options held as of November 30, 2006 by the Named Officers.





**Aggregated
      Option Exercises In Last Fiscal Year**


**and
      Fiscal Year-End Option Value**




**(a)**
            
            **(b)**
            
            **(c)****Number
                of Securities**
            
            **Value
                of Unexercised****Underlying
                Unexercised**
            
            **In-the-Money
                Options****Options
                At Fiscal Year-End (#)**
            
            **at
                Fiscal Year-End (1)($)****Name**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Jeffrey
                L. Schwartz
            
            
            460,000
            
            
            30,000
            
            $
            398,500
            
            
            -Andrew
                Stollman
            
            
            635,000
            
            
            110,000
            
            
            358,650
            
            
            -Daniel
                Harvey
            
            
            33,333
            
            
            6,667
            
            
            -
            
            
            -Richard
                Wentworth
            
            
            76,666
            
            
            8,334
            
            
            80,150
            
            
            -





(1)
            The
                product of (x) the difference between $5.26 (the closing price of
                our
                Common Stock at November 30, 2006, as reported by Nasdaq) and the
                exercise
                price of the unexercised options, multiplied by (y) the number of
                unexercised options.





111




**Board
      Compensation**





As
      a
      result of our policy to compensate non-employee directors for their services,
      our 2006 Employee Incentive Plan (the "Plan") provides for an automatic one-time
      grant to all non-employee directors of options to purchase 25,000 shares of
      Common Stock and for additional automatic grants of 7,500 shares of restricted
      common stock on each December 1 that they are then serving in such capacity,
      which restricted shares vest quarterly thereafter. The exercise prices for
      all of such non-employee director options are the market value of the Common
      Stock on their date of grant.




Under
      the
      Plan, for each attended meeting of the Audit Committee, the Chairman receives
      $4,000 and each other member receives $2,000, and for each attended meeting
      of
      the Compensation Committee and the Nominating and Corporate Governance
      Committee, the Chairman receives $2,000 and each other member receives $1,000.





112





**Employment
      Agreements**




*Jeffrey
      L. Schwartz*




We
      entered into an employment agreement on March 10, 2006, effective as of
      December 1, 2005, with Jeffrey L. Schwartz (the “Schwartz Employment
      Agreement”), which expires on November 30, 2007; provided, however, that if
      our Pre-Tax Income (as defined in the Schwartz Employment Agreement) for the
      21
      months ending August 31, 2007 is at least $4.2 million, Mr. Schwartz has the
      right to extend the term to November 30, 2008 (provided he exercises that option
      no later than November 1, 2007).




Pursuant
      to the Schwartz Employment Agreement, (i) Mr. Schwartz is employed as
      our Chairman and Chief Executive Officer; (ii) Mr. Schwartz will be
      paid a base salary of $605,000 per annum; (iii) Mr. Schwartz will
      receive bonuses upon our Company’s achievement of certain pre-tax income
      milestones, as well as discretionary bonuses subject to approval of our Board
      of
      Directors; (iv) Mr. Schwartz was issued on March 10, 2006 a 10-year option
      to
      acquire 60,000 shares of our Common Stock at an exercise price of $5.44 per
      share, which option vested as follows:




(x)
  
30,000
      shares vested immediately;
      and




113




(y)  
      30,000 shares vested on December 1, 2006;





(vi)
      we
      will pay for all expenses reasonably incurred by Mr. Schwartz in connection
      with
      the performance of his duties, including paying up to $25,000 per year towards
      the total per annum costs of an automobile; (vii) Mr. Schwartz agreed not
      to compete or engage in a business competitive with our business during the
      term
      of the Schwartz Employment Agreement and for a period of one year thereafter;
      (viii) if Mr. Schwartz’s employment is terminated other than as a result of
      a “For Cause Event” (as defined in the Schwartz Employment Agreement) or if he
      resigns for “Good Reason” (as defined in the Schwartz Employment Agreement), he
      will be entitled to receive additional compensation and other consideration,
      all
      as more fully described in the Schwartz Employment Agreement; and (ix) from
      and
      after September 2, 2006, Mr. Schwartz may terminate the Schwartz Employment
      Agreement, whereupon he will receive additional compensation and other
      consideration, as summarized below (and as more fully described in the Schwartz
      Employment Agreement).




The
      Schwartz Employment Agreement provides that, if the Schwartz Employment
      Agreement terminates due to the scheduled expiration of the term, or if Mr.
      Schwartz voluntarily terminates his employment after September 2, 2006, Mr.
      Schwartz will (i) in partial consideration for agreeing to assume consulting
      obligations for us (as set forth in clause (iii), below), be entitled to receive
      a one-time, lump-sum payment of $250,000; (ii) be entitled to receive those
      bonuses which he was otherwise entitled to receive for the last bonus period
      ending before the termination of the Schwartz Employment Agreement; (iii) become
      a consultant to our Company for a period of three years, for which he will
      be
      paid a consulting fee of $108,334 per annum; and (iv) be entitled to receive
      additional consideration and compensation, all as more fully described in the
      Schwartz Employment Agreement.




114





*Andrew
      Stollman*





We
      entered into an employment agreement, effective December 1, 2001, with
      Andrew Stollman, which agreement was orally amended on June 3, 2004 (the
“First Amendment”).  On May 10, 2005, the First Amendment was reduced
      to writing and we executed a second amendment to Mr. Stollman’s employment
      agreement (the “Second Amendment”).  The employment agreement, as amended
      by the First Amendment and Second Amendment, expires on November 30, 2007
      and further provides that Mr. Stollman (i) is employed as our
      President and Secretary; (ii) was paid for the fiscal year ended
      November 30, 2005, and will be paid for all fiscal years remaining under
      the term, $544,500 per annum; (iii) will receive bonuses upon our Company’s
      achievement of certain pre-tax income milestones and (as added by the Second
      Amendment) certain EBITDA (as defined) milestones, as well as discretionary
      bonuses subject to approval of our Board of Directors; (iv) upon the
      commencement of the agreement on December 1, 2001, was issued a ten-year
      option to acquire 105,000 shares of our Common Stock at an exercise price of
      $5.70 per share; (v) upon the execution of the First Amendment, was issued
      a ten-year option to acquire 405,000 shares of our Common Stock at an exercise
      price of $7.34 per share, which option vests as follows:


(a)
              75,000
                  shares vested immediately;


115


(b)
            110,000 shares
              vested
              upon the determination that we had Operating Cash Flow (as defined
              in
              the First Amendment) for Fiscal 2005 equal to or greater than
              $4.0 million;(c)
            110,000
              shares vested upon the determination that we had Operating Cash Flow
              (as
              defined in the First Amendment) for Fiscal 2006 equal to or greater
              than $4.65 million; and(d)
            110,000
              shares will vest if we have Operating Cash Flow for Fiscal 2007 equal
              to
              or greater than $5.29 million;





(vi)  agreed
      not to compete or engage in a business competitive with our business during
      the
      term of the agreement and for a period of one year thereafter; (vii) if his
      employment is terminated other than as a result of a “For Cause Event” (as
      defined in the original 2001 employment agreement), will be entitled to receive
      additional compensation and other consideration, all as more fully described
      in
      the original 2001 employment agreement; and (viii) if his employment is
      terminated as a result of a “Change in Control” (as defined in the original 2001
      employment agreement), will be entitled to receive a one-time payment in an
      amount equal to 2.99 times his “base amount” determined in accordance with the
      applicable provisions of the Internal Revenue Code.




116





The
      foregoing is only a summary of the material terms of our employment agreements
      with the Named Officers. For a complete description, copies of such agreements
      are annexed hereto in their entirety as exhibits or are otherwise incorporated
      herein by reference.





**Compensation
      Committee Interlocks and Insider Participation**




Messrs.
      Burstein and Gutterman are the members of our Compensation Committee. None
      of
      our executive officers has served as a director or member of a compensation
      committee (or other board committee performing equivalent functions) of any
      other entity, one of whose executive officers served as a director or a member
      of our Compensation Committee.




117




**Item
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN** **BENEFICIAL
      OWNERS AND MANAGEMENT**





The
      following table sets forth information, as of February 26, 2007, based upon
      information obtained from the persons named below, regarding beneficial
      ownership of our Common Stock by (i) each director of our Company, (ii) each
      of
      our executive officers named in the Summary Compensation Table set forth under
      the caption “Executive Compensation”, below, (iii) each person who is known
      by us to own beneficially more than 5% of the outstanding shares of our Common
      Stock and (iv) all of our executive officers and directors as a
      group.





Name
                and Address of
              Beneficial
                Owner (1)
            
            Number
                of Shares
              Beneficially
                Owned (2)
            
            Percent
              of
                Class (2)Jeffrey
                L. Schwartz
            
            
            2,123,615
            (3)
            
            14.25
            %Andrew
                Stollman
            
            
            1,180,000
            (4)
            
            7.90Dimensional
                Fund Advisors, L.P.
              (f/k/a
                Dimentional Fund Advisors, Inc.)
              1299
                Ocean Avenue
              11th
                Floor
              Santa
                Monica, CA 92651
            
            
            1,081,186
            (5)
            
            7.50Al
                Frank Asset Management, Inc.
              32392
                Coast Highway, Suite 260
              Laguna
                Beach, CA. 92651
            
            
            890,669
            (6)
            
            6.18Richard
                Wentworth
            
            
            145,000
            (7)
            
            *Lawrence
                Burstein
            
            
            133,125
            (8)
            
            *245
                Fifth AvenueNew
                York, NY 10016Mark
                Gutterman
              115
                Broadway
              2nd
                Floor
              New
                York, NY 10006
            
            
            89,375
            (9)
            
            *Robert
                Machinist
              555
                Theodore Fremd Avenue, Suite B302
              Rye,
                NY 10580
            
            
            70,625
            (10)
            
            *Daniel
                Harvey
            
            
            40,000
            (11)
            
            *All
                executive officers and directors as a group (7 persons)
            
            
            3,781,740
            (12)
            
            23.79
            %





*
            Less
                than 1% of our outstanding shares.




(1)
            Unless
                otherwise provided, such person's address is c/o Traffix, Inc., One
                Blue
                Hill Plaza, Pearl River, New York
                10965.




118






(2)
            The
                number of shares of Common Stock beneficially owned by each person
                or
                entity is determined under the rules promulgated by the Securities
                and
                Exchange Commission (the "Commission"). Under such rules, beneficial
                ownership includes any shares as to which the person or entity has
                sole or
                shared voting power or investment power. The percentage of our outstanding
                shares is calculated by including among the shares owned by such
                person
                any shares which such person or entity has the right to acquire within
                60
                days after February 26, 2007. The inclusion herein of any shares
                deemed
                beneficially owned does not constitute an admission of beneficial
                ownership of such shares.(3)
            Includes
                490,000 shares of Common Stock issuable upon the exercise of options
                held
                by Mr. Schwartz.(4)
            Includes
                525,000 shares of Common Stock issuable upon the exercise of options
                held
                by Mr. Stollman.(5)
            All
                the information presented with respect to this beneficial owner was
                extracted solely from the Schedule 13G/A filed on February 9,
                2007.(6)
            Possesses
                sole voting power with respect to 576,278.60 of such shares and sole
                dispositive power with respect to all of such shares. All the information
                presented with respect to this beneficial owner was extracted solely
                from
                the Schedule 13G filed on January 30, 2007.(7)
            Represents 131,250
                shares of Common Stock issuable upon the exercise of options held
                by Mr.
                Wentworth.(8)
            Includes
                1,875 shares of Common Stock and 131,250 shares of Common Stock issuable
                upon the exercise of options held by Mr. Burstein.(9)
            Includes
                1,875 shares of Common Stock and 87,500 shares of Common Stock issuable
                upon the exercise of options held by Mr. Gutterman.(10)
            Includes
                1,875 shares of Common Stock and 68,750 shares of Common Stock issuable
                upon the exercise of options held by Mr. Machinist.(11)
            Represents
                shares of Common Stock issuable upon the exercise of options held
                by Mr.
                Harvey.(12)
            Includes
                1,487,500 shares of Common Stock issuable upon the exercise of options
                held by our executive officers and directors. See footnotes (3) and
                (4)
                and (7) through (11), above.





119




**Equity
      Compensation Plan Information**





The
      table
      below sets forth the following information as of the fiscal year ended November
      30, 2006 for (i) all compensation plans previously approved by our stockholders
      and (ii) all compensation plans not previously approved by our stockholders,
      if
      any:


(a)
              the
                  number of securities to be issued upon the exercise of outstanding
                  options, warrants and rights;
  (b)
              the
                  weighted-average exercise price of such outstanding options, warrants
                  and
                  rights;




(c)
              other
                  than securities to be issued upon the exercise of such outstanding
                  options, warrants and rights, the number of securities remaining
                  available
                  for future issuance under the
                  plans.


Plan
                category
            
            Number of
              securities
                to be
              issued upon exercise
              of outstanding options,
              warrants
                and rights
              (
                a
                )
            
            Weighted-average
              exercise
                price of
              outstanding options,
              warrants
                and rights
              (
                b
                )
            
            Number
                of
              securities remaining
                available for future
              issuance under equity
                compensation plans
              (excluding
                securities
              reflected in column (a))
              (
                c
                )Equity
                compensation plans approved by security holders
            
            
            2,783,677
            
            $
            4.40
            
            
            1,282,145Equity
                compensation plans not approved by security holders
            
            
            0
            
            $
            0.00
            
            
            0Total
            
            
            2,783,677
            
            $
            4.40
            
            
            1,282,145




The
      only
      equity compensation plan approved by our stockholders is the 2006 Employee
      Incentive Plan.




120




**Item
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, had been a member of our Board of Directors
      from
      inception to August 25, 2006, at which time he chose not to stand for
      re-election. FKIWSBR legal services are billed on an arms length transaction
      basis. We incurred approximately $0.3 million in legal fees (exclusive of
      disbursements), as reduced by approximately $30,000 in settlement awards, from
      FKIWSBR during the year ended November 30, 2006. We incurred approximately
      $0.87
      million in legal fees (exclusive of disbursements) from FKIWSBR during the
      year
      ended November 30, 2005, of which $0.70 million was expensed, and $0.17 was
      capitalized in the Hot Rocket acquisition. The $0.70 million of FKIWSBR expense
      was then reduced by $0.36 million, representing amounts recoverable from our
      insurance providers under the terms of their respective coverage provisions.





**Item
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Before
      our principal accountant is engaged by us to render audit or non-audit services,
      where required by the rules and regulations promulgated by the Securities and
      Exchange Commission and/or Nasdaq, such engagement is approved by the Audit
      Committee.




121




The
      following are the fees billed us by Goldstein Golub Kessler LLP, our principal
      auditor since March 17, 2006, for services rendered thereby during the fiscal
      year ended November 30, 2006:





2006Audit
                Fees
            
            $
            239,540Audit
                - Related Fees
            
            $
            1,389Tax
                Fees
            
            $
            17,220All
                Other Fees
            
            $
            3,894




The
      following are the fees billed us by PricewaterhouseCoopers LLP, our predecessor
      auditor, for services rendered thereby during the fiscal years ended November
      30, 2006 and 2005:





2006
            
            2005Audit
                Fees
            
            $
            1,000
            
            $
            404,000Audit
                - Related Fees
            
            $
            2,500
            
            $
            4,000Tax
                Fees
            
            $
            7,780
            
            $
            50,604All
                Other Fees
            
            $
            92,650
            
            $
            76,500




*Audit
      Fees* consist
      of the aggregate fees billed for professional services rendered for the audit
      of
      our annual financial statements and the reviews of the financial statements
      included in our Forms 10-Q and for any other services that are normally provided
      by the auditors in connection with our statutory and regulatory filings or
      engagements.




122





*Audit
      Related Fees* consist
      of the aggregate fees billed for professional services rendered for assurance
      and related services that were reasonably related to the performance of the
      audit or review of our financial statements and were not otherwise included
      in
      Audit Fees. Included in such Audit Related Fees were fees incurred in connection
      with the auditors' review of financial information included in our filed
      registration statements.





*Tax
      Fees* consist
      of the aggregate fees billed for professional services rendered for tax
      compliance, tax advice and tax planning. Included in such Tax Fees were fees
      incurred for tax planning services and state and local tax advice.





*All
      Other Fees* consist
      of the aggregate fees billed for products and services provided by the auditors
      and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.





Our
      Audit
      Committee has considered whether the provisions of the non-audit services
      described above is compatible with maintaining our auditor’s independence and
      determined that such services are appropriate.




The
      Audit
      Committee does not formally approve specific amounts to be spent on non-audit
      related services which in the aggregate do not exceed amounts to be spent on
      audit related services. In determining the reasonableness of audit fees, the
      Audit Committee considers historical amounts paid and the scope of services
      to
      be performed.




123




**PART
      IV**





**Item
      15.**  **EXHIBITS
      and FINANCIAL STATEMENT SCHEDULES**





**(a)**
            **Financial
                Statements and Financial Statement Schedules****.**





*(i)*  *Financial
      Statements:*




See
      Index
      to Financial Statements.





*(ii)*  *Financial
      Statement Schedules*





Schedule
      of Valuation and Qualifying Accounts and Reserves





All
      other
      financial statement schedules have been omitted since either (i) the schedule
      or
      condition requiring a schedule is not applicable or (ii) the information
      required by such schedule is contained in the Consolidated Financial Statements
      and Notes thereto or in Management's Discussion and Analysis of Financial
      Condition and Results of Operation.




**(a)****Exhibits****.**





3.1.1
            
            Articles
                of Incorporation of the Company, as amended.(1)3.1.2
            
            Amendment
                to the Articles of Incorporation of the Company.(2)3.2
            
            Bylaws
                of the Company.(3)10.1
            
            Sixth
                Amended and Restated 1996 Employee Incentive Plan.(4)10.2.1
            
            Lease
                of the Company's offices at One Blue Hill Plaza, Pearl River, New
                York.(5)10.2.2*
            
            Feburary 3,
              2006 Amendment to Lease of the Company's Offices at One Blue
              Hill Plaza, Pearl River, New York10.3.1
            
            December 1,
                2001 Employment Agreement by and between the Company and Andrew
                Stollman(6)10.3.2
            
            Amendment
                No. 1 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)10.3.3
            
            Amendment
                No. 2 to December 1, 2001 Employment Agreement by and between the
                company and Andrew Stollman(7)10.4
            
            December
                1, 2005 Employment Agreement by and between the Company and Jeffrey
                L.
                Schwartz (8)




124




14.1
            
            Code
                of Ethics(9)21.1
            *
            Subsidiaries
                of the Company31.1
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Jeffrey L. Schwartz31.2
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Daniel Harvey32.1
            *
            Section 1350
                Certification of Jeffrey L. Schwartz32.2
            *
            Section 1350
                Certification of Daniel Harvey










(1)
       Filed as an Exhibit to the Company's Registration Statement on
      Form 8-A dated October 23, 1995 and incorporated herein by reference.





(2)
       Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
      for the fiscal quarter ended August 31, 1998 and incorporated herein by
      reference.




(3)
       Filed as an Exhibit to the Company's Registration Statement on
      Form S-1 dated September 6, 1995 (File No. 33-96632) and
      incorporated herein by reference.





(4)
       Filed as an Exhibit to the Company's Proxy Statement, Schedule 14A,
      filed with the Commission on August 12, 2005 and incorporated herein by
      reference.





(5)
       Filed as an Exhibit to the Company's Current Report on Form 8-K dated
      December 26, 2000 and incorporated herein by reference.





(6)
       Filed as an Exhibit to the Company's Form 10-K for the year ended
      November 30, 2001 and incorporated herein by reference.





(7)
       Filed as an Exhibit to the Company's Current Report on Form 8-K dated
      May 12, 2005 and incorporated herein by reference.





(8)
      Filed
      as an Exhibit to the Company’s Current Report on Form 8-K dated March 14, 2006
      and incorporated herein by reference.





(9)
       Filed as an Exhibit to the Company's Form 10-K for the year ended
      November 30, 2003 and incorporated herein by reference.




125




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) 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.




Dated:
                February 28, 2007
            Traffix,
                Inc.By:
            /s/
              Jeffrey L. SchwartzJeffrey
                L. SchwartzChairman
                and CEO




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                Jeffrey L. Schwartz
              Jeffrey
                L. Schwartz
            
            Chairman
                and Chief
              Executive
                Officer (Principal
              Executive
                Officer)
            
            February
                28, 2007/s/
                Daniel Harvey
              Daniel
                Harvey
            
            Chief
                Financial Officer
              (Principal
                Financial and
              Accounting
                Officer)
            
            February
                28, 2007/s/
                Andrew Stollman
              Andrew
                Stollman
            
            President,
              Secretary
                and Director
            
            February
                28, 2007/s/
                Lawrence Burstein
              Lawrence
                Burstein
            
            Director
            
            February
                28, 2007/s/
                Mark Gutterman
              Mark
                Gutterman
            
            Director
            
            February
                28, 2007/s/
                Robert B. Machinist
              Robert
                B. Machinist
            
            Director
            
            February
                28, 2007




126




**EXHIBIT
      INDEX**





3.1.1
            
            Articles
                of Incorporation of the Company, as amended.(1)3.1.2
            
            Amendment
                to the Articles of Incorporation of the Company.(2)3.2
            
            Bylaws
                of the Company.(3)10.1
            
            Sixth
                Amended and Restated 1996 Employee Incentive Plan.(4)10.2.1
            
            Lease
                of the Company's offices at One Blue Hill Plaza, Pearl River, New
                York.(5)10.2.2*
            
            Feburary
                3, 2006 Amendment to Lease of the Company's Offices at One Blue
                Hill Plaza, Pearl River, New York10.3.1
            
            December 1,
                2001 Employment Agreement by and between the Company and Andrew
                Stollman(6)10.3.2
            
            Amendment
                No. 1 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)10.3.3
            
            Amendment
                No. 2 to December 1, 2001 Employment Agreement by and between the
                Company and Andrew Stollman(7)10.4
            
            December
                1, 2005 Employment Agreement by and between the Company and Jeffrey
                L.
                Schwartz (8)14.1
            
            Code
                of Ethics (9)21.1
            *
            Subsidiaries
                of the Company31.1
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Jeffrey L. Schwartz31.2
            *
            Rule 13a-14(a)/15d-14(a)
                Certification of Daniel Harvey32.1
            *
            Section 1350
                Certification of Jeffrey L. Schwartz32.2
            *
            Section 1350
                Certification of Daniel Harvey


*  Filed
          herewith.





(1)
       Filed as an Exhibit to the Company's Registration Statement on
      Form 8-A dated October 23, 1995 and incorporated herein by reference.





(2)
       Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
      for the fiscal quarter ended August 31, 1998 and incorporated herein by
      reference.





(3)
       Filed as an Exhibit to the Company's Registration Statement on
      Form S-1 dated September 6, 1995 (File No. 33-96632) and
      incorporated herein by reference.





(4)
       Filed as an Exhibit to the Company's Proxy Statement, Schedule 14A,
      filed with the Commission on August 12, 2005 and incorporated herein by
      reference.





(5)
       Filed as an Exhibit to the Company's Current Report on Form 8-K dated
      December 26, 2000 and incorporated herein by reference.





(6)
       Filed as an Exhibit to the Company's Form 10-K for the year ended
      November 30, 2001 and incorporated herein by reference.





(7)
       Filed as an Exhibit to the Company's Current Report on Form 8-K dated
      May 12, 2005 and incorporated herein by reference.




127




**Traffix,
      Inc.**


**and
      Subsidiaries**


**Consolidated
      Financial Statements**


**as
      of November 30, 2006 and 2005**


**and
      for each of the three years in the**


**period
      ended November 30, 2006**








**Traffix,
      Inc. and Subsidiaries**


**Index
      to Consolidated Financial Statements and Financial Statement
      Schedule**





**Page**Reports
                of Independent Registered Public Accounting Firms
            
            F-1
                - F-2Consolidated
                Balance Sheets as of November 30, 2006 and 2005
            
            F-3Consolidated
                Statements of Operations for the
                years ended November 30, 2006, 2005 and 2004
            
            F-4Consolidated
                Statements of Shareholders' Equity for the years ended November 30,
                2006,
                2005
                and 2004
            
            F-5Consolidated
                Statements of Cash Flows for the years ended November 30, 2006, 2005
                and 2004
            
            F-6Notes
                to Consolidated Financial Statements
            
            F-7
                - F-60Schedule
                II - Valuation and Qualifying Accounts and Reserves
            
            F-61











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Shareholders


Traffix,
      Inc.




We
      have
      audited the accompanying consolidated balance sheet of Traffix, Inc., and
      Subsidiaries as of November 30, 2006, and the related consolidated statements
      of
      income, shareholders' equity and cash flows for the year then ended.  These
      financial statements are the responsibility of the Company's management. 
Our responsibility is to express an opinion on these financial statements based
      on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement.  An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements.  An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation.  We believe that
      our audit provides a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Traffix, Inc., and Subsidiaries
      as
      of November 30, 2006 and the results of their operations and their cash flows
      for the year then ended in conformity with accounting principles generally
      accepted in the United States of America.




As
      discussed in Note 13 to the consolidated financial statements, the Company
      changed the manner in which it accounts for share-based compensation effective
      December 1, 2005.




The
      information included on Schedule II is the responsibility of management, and
      although not considered necessary for a fair presentation of financial position,
      results of operations, and cash flows is presented for additional analysis
      and
      has been subjected to the auditing procedures applied in the audit of the basic
      consolidated financial statements.  In our opinion, the information
      included on Schedule II relating to the year ended November 30, 2006 is fairly
      stated in all material respects, in relation to the basic consolidated financial
      statements taken as a whole.  Also, such schedule presents fairly the
      information set forth therein in compliance with the applicable accounting
      regulations of the Securities and Exchange Commission.




**GOLDSTEIN
      GOLUB KESSLER LLP**






New
      York,
      New York


February
      3, 2007




F-1


**Report
          of Independent Registered Public Accounting Firm**
   To
          the
          Board of Directors and Shareholders
 of
          Traffix, Inc.
  In
          our
          opinion, the consolidated balance sheet as of November 30, 2005 and the
          related
          consolidated statements of income, shareholders equity and cash flows for
          each
          of two years in the period ended November 30, 2005 present fairly, in all
          material respects, the financial position of Traffix, Inc. and its subsidiaries
          at November 30, 2005, and the results of their operations and their cash
          flows
          for each of the two years in the period ended November 30, 2005, in conformity
          with accounting principles generally accepted in the United States of America.
          In addition, in our opinion, the financial statement schedule for each
          of the
          two years in the period ended November 30, 2005 presents fairly, in all
          material
          respects, the information set forth therein when read in conjunction with
          the
          related consolidated financial statements. These financial statements and
          financial statement schedule are the responsibility of the Company’s management.
          Our responsibility is to express an opinion on these financial statements
          and
          financial statement schedule based on our audits. We conducted our audits
          of
          these statements in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements, assessing the accounting principles used and significant estimates
          made by management, and evaluating the overall financial statement presentation.
          We believe that our audits provide a reasonable basis for our opinion.
  Pricewaterhousecoopers
          LLP
  Florham
          Park, NJ
 February
          28, 2006 except for
 the
          changes in segment reporting
 and
          classifications of operating expenses
 in
          Note
          1, as to which the date is
 February
          27, 2007




F-2








**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **As
        of November 30, 2006 and 2005**
  **2006**
              
              **2005****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              8,972,197
              
              $
              9,335,723Marketable
                  securities
              
              
              21,433,775
              
              
              18,908,064Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $1,079,661 and $1,025,661 in 2006 and 2005, respectively
              
              
              8,975,402
              
              
              11,137,275Deferred
                  income taxes
              
              
              451,909
              
              
              1,379,877Prepaid
                  expenses and other current assets
              
              
              957,674
              
              
              1,078,621**Total
                  current assets**
              
              
              40,790,957
              
              
              41,839,560Marketable
                  securities
              
              
              -
              
              
              2,662,905Property
                  and equipment, at cost, net of accumulated depreciation
              
              
              1,965,183
              
              
              2,317,690Goodwill
              
              
              7,913,007
              
              
              6,426,336Other
                  intangibles, net
              
              
              1,210,257
              
              
              2,538,223Deferred
                  income taxes
              
              
              846,223
              
              
              478,050**Total
                  assets**
              
              $
              52,725,627
              
              $
              56,262,764**Liabilities
                  and shareholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              4,692,374
              
              $
              5,426,797Accrued
                  expenses
              
              
              3,831,223
              
              
              4,269,995Reserve
                  for customer chargebacks
              
              
              -
              
              
              302,175Due
                  to related parties
              
              
              90,000
              
              
              110,076Income
                  taxes payable
              
              
              470,000
              
              
              1,009,880**Total
                  current liabilities**
              
              
              9,083,597
              
              
              11,118,923Deferred
                  income taxes
              
              
              -
              
              
              302,465**Total
                  liabilities**
              
              
              9,083,597
              
              
              11,421,388Minority
                  interest
              
              
              313,637
              
              
              365,637Commitments
                  and contingencies (Notes 2, 10, 11 and 15)**Shareholders'
                  equity**Preferred
                  stock - $.001 par value; 1,000,000 shares authorized;none
                  issued and outstanding
              
              
              -
              
              
              -Common
                  stock - $.001 par value; authorized 50,000,000 shares;
                  issued14,365,671
                  shares and 14,208,486 shares, respectively
              
              
              14,365
              
              
              14,208Additional
                  paid-in capital
              
              
              42,286,760
              
              
              43,584,229Retained
                  earnings
              
              
              -
              
              
              -Accumulated
                  other comprehensive income
              
              
              1,027,268
              
              
              877,302**Total
                  shareholders' equity**
              
              
              43,328,393
              
              
              44,475,739**Total
                  liabilities and shareholders' equity**
              
              $
              52,725,627
              
              $
              56,262,764


See
      acompanying notes to consolidated financial statements.




F-3





**TRAFFIX,
        INC. AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF INCOME**
 **For
        the years ended November 30, 2006, 2005 and 2004**
  **2006**
              
              **2005**
              
              **2004**Net
                  revenue
              
              $
              72,843,943
              
              $
              62,856,982
              
              $
              37,281,214Cost
                  of revenue
              
              
              47,985,127
              
              
              41,052,260
              
              
              22,052,610**Gross
                  profit**
              
              
              24,858,816
              
              
              21,804,722
              
              
              15,228,604Selling
                  expenses
              
              
              6,083,251
              
              
              5,233,358
              
              
              2,544,338General
                  and administrative expenses
              
              
              15,165,281
              
              
              14,694,575
              
              
              12,611,411Bad
                  debt expense (recovery)
              
              
              539,155
              
              
              (403,186
              )
              
              406,699**Income
                  (loss) from operations**
              
              
              3,071,129
              
              
              2,279,975
              
              
              (333,844
              )Other
                  income (expense):Interest
                  income and dividends
              
              
              1,068,538
              
              
              957,069
              
              
              544,153Realized
                  gains on marketable securities
              
              
              16,835
              
              
              561,359
              
              
              25,490Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              195,000
              
              
              784,900Other
                  non-operating (expense) income
              
              
              (41,098
              )
              
              (28,076
              )
              
              398,118Minority
                  interest in income of consolidated subsidiary
              
              
              (576,000
              )
              
              (494,533
              )
              
              -**Income
                  before provision****for
                  income taxes**
              
              
              3,539,404
              
              
              3,470,794
              
              
              1,418,817Provision
                  for income taxes
              
              
              1,636,561
              
              
              1,042,637
              
              
              404,603**Net
                  income**
              
              $
              1,902,843
              
              $
              2,428,157
              
              $
              1,014,214Basic
                  earnings per share (Note 3):Net
                  income
              
              $
              0.13
              
              $
              0.17
              
              $
              0.08Weighted
                  average shares outstanding
              
              
              14,332,598
              
              
              13,973,899
              
              
              13,257,869Diluted
                  earnings per share (Note 3):Net
                  income
              
              $
              0.13
              
              $
              0.17
              
              $
              0.07Weighted
                  average shares outstanding
              
              
              14,514,232
              
              
              14,344,584
              
              
              13,928,374Cash
                  dividends per common share
              
              $
              0.32
              
              $
              0.32
              
              $
              0.32





See
      accompanying notes to consolidated financial statements.




F-4







**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF SHAREHOLDERS' EQUITY**
 **FOR
        THE YEARS ENDED NOVEMBER 30, 2006, 2005 and 2004**
  **Accumulated****Common**
              
              **Additional**
              
              
              
              **Other**
              
              **Total****Common
                  Stock**
              
              **Stock**
              
              **Paid-in**
              
              **Retained**
              
              **Comprehensive**
              
              **Shareholders'****Shares**
              
              **Amounts**
              
              **Issuable**
              
              **Capital**
              
              **Earnings**
              
              **Income(loss)**
              
              **Equity****Balance,
                  November 30, 2003**
              
              
              12,882,992
              
              $
              12,882
              
              $
              242,879
              
              $
              37,916,110
              
              $
              4,319,356
              
              $
              847,686
              
              $
              43,338,913Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,014,214
              
              
              
              
              
              1,014,214Unrealized
                  gains on available-for-sale securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              59,143
              
              
              59,143Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              240,167
              
              
              240,167Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,313,524Dividends
                  declared
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,281,293
              )
              
              
              
              
              (4,281,293
              )Stock
                  option exercises
              
              
              411,640
              
              
              412
              
              
              
              
              
              1,737,129
              
              
              
              
              
              
              
              
              1,737,541Tax
                  benefit from exercise ofstock
                  options
              
              
              
              
              
              
              
              
              
              
              
              328,297
              
              
              
              
              
              
              
              
              328,297Common
                  stock issued in connectionwith
                  a current year acquisitions
              
              
              215,973
              
              
              216
              
              
              (242,879
              )
              
              1,328,116
              
              
              
              
              
              
              
              
              1,085,453**Balance,
                  November 30, 2004**
              
              
              13,510,605
              
              
              13,510
              
              
              -
              
              
              41,309,652
              
              
              1,052,277
              
              
              1,146,996
              
              
              43,522,435Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,428,157
              
              
              
              
              
              2,428,157Unrealized
                  gains on available-for-sale securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65,616
              
              
              65,616Reclassification
                  adjustment for gains realized innet
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (360,584
              )
              
              (360,584
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,274
              
              
              25,274Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,158,463Dividends
                  declared
              
              
              
              
              
              
              
              
              
              
              
              (989,749
              )
              
              (3,480,434
              )
              
              
              
              
              (4,470,183
              )Stock
                  option exercises
              
              
              584,060
              
              
              584
              
              
              
              
              
              2,057,826
              
              
              
              
              
              
              
              
              2,058,410Tax
                  benefit from exercise ofstock
                  options
              
              
              
              
              
              
              
              
              
              
              
              524,334
              
              
              
              
              
              
              
              
              524,334Common
                  stock issued in connectionwith
                  current year acquisition
              
              
              113,821
              
              
              114
              
              
              
              
              
              682,166
              
              
              
              
              
              
              
              
              682,280**Balance,
                  November 30, 2005**
              
              
              14,208,486
              
              
              14,208
              
              
              -
              
              
              43,584,229
              
              
              -
              
              
              877,302
              
              
              44,475,739Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,902,843
              
              
              
              
              
              1,902,843Unrealized
                  gains on available-for-sale securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              110,062
              
              
              110,062Reclassification
                  adjustment for gains realized innet
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,834
              )
              
              (8,834
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              48,738
              
              
              48,738Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,052,809Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              517,717
              
              
              
              
              
              
              
              
              517,717Dividends
                  declared
              
              
              
              
              
              
              
              
              
              
              
              (2,674,102
              )
              
              (1,902,843
              )
              
              
              
              
              (4,576,945
              )Stock
                  option exercises
              
              
              53,831
              
              
              54
              
              
              
              
              
              248,086
              
              
              
              
              
              
              
              
              248,140Tax
                  benefit from exercise ofstock
                  options
              
              
              
              
              
              
              
              
              
              
              
              30,335
              
              
              
              
              
              
              
              
              30,335Common
                  stock issued in connectionwith
                  terms of prior year acquisition
              
              
              103,354
              
              
              103
              
              
              
              
              
              580,495
              
              
              
              
              
              
              
              
              580,598**Balance,
                  November 30, 2006**
              
              
              14,365,671
              
              $
              14,365
              
              $
              -
              
              $
              42,286,760
              
              $
              -
              
              $
              1,027,268
              
              $
              43,328,393


See
        accompanying notes to consolidated financial statements.
  F-5





**TRAFFIX,
                INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****For
                the years ended November 30, 2006, 2005 and
                2004**




**2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income
            
            $
            1,902,843
            
            $
            2,428,157
            
            $
            1,014,214Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            2,225,774
            
            
            2,200,678
            
            
            1,400,995Stock-based
                compensation
            
            
            517,717
            
            
            -
            
            
            -Reserve
                for customer chargebacks
            
            
            -
            
            
            (358,809
            )
            
            (28,817
            )Provision
                for uncollectible accounts
            
            
            539,154
            
            
            (403,186
            )
            
            406,699Deferred
                income taxes
            
            
            202,468
            
            
            (210,810
            )
            
            (51,257
            )Net
                gains on sale of marketable securities
            
            
            (16,835
            )
            
            (561,359
            )
            
            (25,490
            )Gain
                on sale of subsidiary
            
            
            -
            
            
            (195,000
            )
            
            (784,900
            )Minority
                interest
            
            
            576,000
            
            
            494,533
            
            
            -Changes
                in assets and liabilities,net
                of acquisitions:Accounts
                receivable
            
            
            1,320,544
            
            
            (5,706,420
            )
            
            (42,851
            )Prepaid
                expenses and other current assets
            
            
            120,947
            
            
            (155,552
            )
            
            163,224Accounts
                payable
            
            
            (734,423
            )
            
            1,753,008
            
            
            324,321Income
                taxes payable
            
            
            (539,880
            )
            
            1,227,881
            
            
            300,930Due
                to related parties
            
            
            (20,076
            )
            
            (201,265
            )
            
            (39,994
            )Other,
                principally accrued expenses
            
            
            (207,189
            )
            
            687,359
            
            
            212,070**Net
                cash provided by operating activities**
            
            
            5,887,044
            
            
            999,215
            
            
            2,849,144Cash
                flows from investing activities:Purchases
                of securities
            
            
            (167,733,427
            )
            
            (225,749,291
            )
            
            (300,807,389
            )Proceeds
                from sales of securities
            
            
            168,043,546
            
            
            232,537,892
            
            
            301,137,877Proceeds
                from sale of a subsidiary
            
            
            -
            
            
            195,000
            
            
            784,900Capital
                expenditures
            
            
            (488,158
            )
            
            (413,496
            )
            
            (141,052
            )Cash
                payment for intangible asset -license agreement
            
            
            (8,916
            )
            
            (52,915
            )
            
            (161,499
            )Payments
                for asset acquisition, net of cash received
            
            
            (886,502
            )
            
            (3,077,714
            )
            
            (3,497,653
            )**Net
                cash (used in) provided by investing activities**
            
            
            (1,073,457
            )
            
            3,439,476
            
            
            (2,684,816
            )Cash
                flows from financing activities:Dividends
                paid
            
            
            (4,576,945
            )
            
            (4,470,183
            )
            
            (4,281,293
            )Distribution
                to minority interest holder
            
            
            (628,000
            )
            
            (128,896
            )
            
            -Repayment
                of capital lease obligation
            
            
            (231,583
            )
            
            (105,583
            )
            
            -Proceeds
                from stock options exercised
            
            
            248,140
            
            
            2,058,410
            
            
            1,737,541Excess
                tax benefits from stock-based compensation
            
            
            30,335
            
            
            -
            
            
            -**Net
                cash used in financing activities**
            
            
            (5,158,053
            )
            
            (2,646,252
            )
            
            (2,543,752
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (19,060
            )
            
            (10,001
            )
            
            (6,948
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            (363,526
            )
            
            1,782,438
            
            
            (2,386,372
            )Cash
                and cash equivalents, beginning of year
            
            
            9,335,723
            
            
            7,553,285
            
            
            9,939,657**Cash
                and cash equivalents, end of year**
            
            $
            8,972,197
            
            $
            9,335,723
            
            $
            7,553,285See
                Notes 1, 2, 5, 11, and 13 for a summary of other noncash investing
                activities.The
                accompanying notes are an integral part of these financial
                statements.




F-6




***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**





**1.**  **Significant
      Accounting Policies**




**Nature
      of Business**




Traffix,
      Inc. and its consolidated subsidiaries (collectively, “Traffix” or the
“Company”) provide consumer targeted direct marketing and customer acquisition
      services for businesses. The Company utilizes its proprietary and affiliate
      online databases to generate its revenue from direct marketing activities
      delivered by the Internet. The Company’s online databases grow through online
      marketing and data acquisition programs. The Company’s direct marketing
      activities are conducted through its Online Advertising and Media Services
      activities. Historically, the Company’s operations had been divided into three
      principle operating segments: a) E-commerce, b) LEC Billed Products and
      Services, and c) Off-line Marketing Services (terminated in Fiscal 2003).




The
      Company’s main focus and business strategy is to create compelling content and
      provide marketing vehicles that generate revenue for its corporate advertisers
      and marketing affiliates who seek access to the Company’s databases, and the
      databases of its affiliates under management.




The
      Company’s expansion in, and dependence on, online  direct
      marketing efforts, coupled with the potential for state and/or federal
      legislation limiting online marketers’ consumer contact capability and the
      potential for seasonality within the Online Advertising and Media Services
      activity marketplace, should all be considered when referring to the Company’s
      current fiscal year results, as well as prior year historical results, in
      evaluating the potential for its future operations, cash flows, and financial
      position.




F-7




*Traffix,
      Inc. and Subsidiaries*


**Notes
      to Consolidated Financial Statements**







**Basis
      of Presentation and Principles of Consolidation**




It
      is the
      Company’s policy to prepare its financial statements on the accrual basis of
      accounting in conformity with accounting principles generally accepted in the
      United States of America.




The
      consolidated financial statements of the Company include the accounts of its
      wholly-owned and majority-owned subsidiaries. Any losses allocated to minority
      interests are limited to the amount of minority interest invested capital.
      All
      significant intercompany accounts and transactions have been eliminated in
      consolidation.




The
      Company corrected the classification of selling expenses of $1,216,755 and
      $220,828 previously included in general and administrative expenses for the
      years ended November 30, 2005 and 2004, respectively.




In
      addition, in the Company's Fiscal 2006 fourth quarter, the Company’s Chief
      Operating Decision Maker - a committee consisting of executive employees and
      certain Audit Committee members (“CODM”), reviewed the Company’s operations with
      management, and determined that it currently operates in one segment, with
      those
      operations being in the business of Online Advertising and Media Service
      Activities. As such, the LEC Billed Product Segment, which was effectively
      inactive in terms of contribution to gross margin, income from operations and
      pre-tax income for the years ended November 30, 2006, 2005 and 2004, was
      collapsed into the operations of the current business for all periods presented.
      The collapsing of the inactive segment is the result of the LEC Segment no
      longer being a material component of the Company’s business, and as such it was
      determined that the Company’s current financial statement presentation is better
      situated without the immaterial LEC Segment disclosure burden. As a result
      of
      this modification, consolidated revenues, gross profit, income from operations,
      income before provision for income taxes, provision for income taxes and net
      income for the years ended November 30, 2005 and 2004 were not affected.





F-8


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**




**Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires the Company’s
      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 revenue and
      expenses during the reporting period. Actual results could differ from those
      estimates. The Company's most significant estimates relate to reserves for
      uncollectible receivables, reserves for data qualification allowances (included
      as a contra-asset component of reported net-accounts receivable), recoverability
      of long-lived assets, and the realizability of deferred tax assets . In
      the
      determination of its worldwide provision for income taxes and the recording
      of the related deferred tax assets and liabilities, and currently payable tax
      liabilities, the Company is required to use significant and material levels
      of
      judgment that involve many transactions and calculations. As such, the ultimate
      determination of its tax is uncertain, and the Company provides for tax
      contingencies in accordance with SFAS No. 5, Accounting for Contingencies.
      As a
      result of the application of SFAS No. 5, the Company at times establishes
      reserves for the potential of additional income tax based on its best estimate
      of the potential for the probable loss of certain tax positions taken on its
      tax
      returns. The Company believes that its combined tax accruals and tax reserves
      are adequate for all tax years open to audit. All tax accruals and tax reserves
      are treated as current liabilities in their balance sheet presentation.




F-9


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**


Additionally,
      the Company has potential exposure resulting from pending and/or threatened
      litigation for which the Company currently assesses no risk. No provision for
      loss has been recorded for asserted or unasserted claims. Actual results could
      differ from estimates.




**Revenue
      Recognition, Variable Costs, Allowances and Bad Debts**





*Revenue*




The
      Company currently earns revenue from its Online Advertising and Media Services
      operations. This revenue primarily results from marketing agreements with the
      Company’s marketing partners, corporate customers and agreements with customers
      within its personals business. These agreements satisfy the “existence of
      persuasive evidence of an arrangement” required under the current revenue
      recognition rules under Staff Accounting Bulletin (SAB) 101 as modified by
      SAB
      104. The provisions of each agreement determines the (a) pricing characteristics
      of the revenue generating activity, the specific type of revenue activity (i.e.,
      Online Advertising, Search Engine Marketing, Personals or Internet game
      develpoment), and (b) the method of the Company’s delivery obligations to, and
      acceptance obligations of its clients and customers, with (a) and (b) satisfying
      the criterion of SAB 101, that “sales price is fixed or determinable” and
“delivery has occurred”. As a function of the Company’s client and customer
      acceptance process, the Company reviews bank and credit references, business
      financial statements, personal financial statements and/or obtain corporate
      officer guarantees (if appropriate), all of which satisfy the SAB 101 criteria,
      “collectibility is reasonably assured”. Based on the revenue recognition
      criterion discussed above, the Company believes it recognizes revenue when
      it is
      realizable and earned.




F-10


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**




*Deferred
      Revenue*




The
      Company’s Personals business is a membership based arrangement, with membership
      offerings ranging from one month subscriptions to plans with annual terms.
      The
      one-month membership plans form the bulk of the Company’s subscription sales.
      Deferred revenue is recorded net of estimated cancellations and is amortized
      over the life of the membership as it is earned. **




F-11


***Traffix,
        Inc. and Subsidiaries***
 Notes
        to
        Consolidated Financial Statements


*Contra
      revenue*




At
      the
      time revenue is recognized, the Company provides for an estimate for
      contractually specified data qualification allowances, when required under
      the
      governing marketing agreement. Such data qualification allowances may include
      allowances for data duplications, invalid addresses, age and country of origin
      restrictions, and are recorded in the Company’s contra-revenue accounts. The
      Company’s revenues are adjusted in later fiscal periods if actual allowances
      vary from amounts previously estimated. Historically, variances between actual
      allowances and previously estimated allowances have been immaterial. If events
      were to occur that would cause actual data qualification allowances to vary
      significantly from those originally estimated and reflected in the financial
      statements, the Company could suffer material deterioration in future fiscal
      period gross margins, and, therefore, its profitability, cash flows and capital
      resources could be adversely affected. During the past two fiscal years, the
      Company has attempted to minimize this risk by structuring the applicable
      marketing agreements with customers on a net-basis eliminating the need for
      such
      data qualification allowances.




*Cost
      of Sales*




Certain
      revenue related obligations are recorded at the time revenue is recognized.
      They
      include costs payable to other online, as well as off-line, media companies
      for
      generating registered users and consumer data for the Company, database fee
      sharing costs under third-party database use agreements, email message delivery
      costs payable to third parties, contingent-based prize indemnification coverage
      (i.e., sweepstakes payout indemnification) and all other variable costs directly
      associated with completing the Company’s obligations relative to the revenue
      being recognized, all of which satisfy the SAB 101 criteria regarding the
      concept of “other than a perfunctory, or inconsequential ongoing obligation”.




F-12


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


*Bad
      Debt Allowances*




Revenue
      recognition is also subject to provisions based on the probability of collection
      of the related trade accounts receivable. The Company continuously evaluates
      the
      potential of the collectibility of trade accounts receivable by reviewing such
      factors as deterioration in the operating results, financial condition, or
      bankruptcy filings of its customers. As a result of this review process, the
      Company records bad debt provisions to adjust the related receivable carrying
      amount to an estimated realizable value. Provisions for bad debts are also
      recorded due to the review of other factors, including the length of time the
      accounts receivable are past due, historical experience and other factors
      obtained during the conduct of collection efforts. If circumstances change
      regarding our specific customers on an individual basis, or if demand for
      Internet direct marketing softens, or if the U.S. economy stumbles, the
      Company’s estimates for bad debt provisions could be further increased, which
      could adversely affect our operating margins, profitability, cash flows and
      capital resources.





F-13


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


**Research
      and Development**





The
      Company charges all research and development costs to site development and
      maintenance expense, an account component of miscellaneous general and
      administrative expense, as incurred. Research and development costs are not
      a
      material component of our general and administrative expenses.




**Internal
      Use Software**





The
      Company accounts for the costs of internal use software in accordance with
      Statement of Position 98-01, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use* .
      Accordingly, costs other than reengineering costs are expensed or capitalized
      depending on whether they are incurred in the preliminary project stage,
      application development stage or the post-implementation/operation stage. As
      of
      November 30, 2006 and 2005, the Company had $21,000 and $59,000, respectively,
      in unamortized capitalized internal use software costs. Amortization of these
      costs was $38,000, $38,000 and $40,000 during the fiscal years ended November
      30, 2006, 2005 and 2004, respectively.




**Earnings
      per Common Share**





Basic
      earnings per common share is based on the weighted-average number of common
      shares outstanding during each reporting period and excludes the dilutive effect
      of stock options. Diluted earnings per common share calculations reflect the
      assumed exercise of stock options that have an exercise price that is less
      than
      the average market price of the common shares during each reporting period,
      in
      accordance with the treasury stock method. Dilutive stock options are excluded
      if their effect is antdilutive.





**Concentration
      of credit risk**





Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      have historically consisted of cash and cash equivalents, marketable securities
      and accounts receivable. Currently, the Company invests the majority of its
      excess cash in high-grade commercial paper, with maturities ranging from one
      month to three years. Consistent with the above, the Company maintains Board
      of
      Director established guidelines requiring diversification of investments
      yielding safety and liquidity.




F-14




*Traffix,
      Inc. and Subsidiaries*  **Notes
      to Consolidated Financial Statements**







Cash
      and
      cash equivalent balances are principally held at six financial institutions
      and
      may, at times, exceed insurable amounts. The Company believes it mitigates
      its
      risks by investing in or through major financial institutions. Recoverability
      is
      dependent upon the performance of the institutions.




**Cash
      and cash equivalents**




All
      short-term investments with an original maturity of less than one month are
      considered to be cash equivalents.




**Marketable
      securities**





The
      Company’s marketable securities have historically consisted of corporate
      commercial paper, auction rate securities and equity securities, all of which
      are held for varying and indefinite periods of time, pursuant to maturity dates,
      market conditions and other factors. It is the Company’s intent to maintain a
      liquid portfolio to take advantage of investment opportunities. Therefore,
      all
      marketable securities are considered to be available-for-sale and are classified
      as current assets. Accordingly, such securities are stated at fair value, with
      unrealized gains and losses, net of the estimated tax effects when applicable,
      being included in other comprehensive income (loss) as a separate component
      of
      shareholders’ equity, until realized. Actual sales of securities resulting in
      realized gains and losses on marketable securities are included in the statement
      of operations, as a component of “Other income (expense)” and are derived using
      the specific identification method for determining the cost of
      securities.




F-15


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**


**Foreign
      Currency Translations**




The
      Company’s foreign subsidiary uses its local currency as its functional currency.
      The related assets and liabilities are translated at exchange rates in effect
      at
      the balance sheet date, with the resulting adjustments being recorded directly
      to other comprehensive income (loss), as a separate component of shareholders’
equity; and income and expenses are translated using average exchange rates
      for
      the periods presented.




**Transactions
      With Major Customers**





Historically,
      the significant portion of the Company’s revenue was dependent on a limited
      number of major customers. For the year ended November 30, 2006 no individual
      customer relationship equaled, or exceeded the 10% revenue threshold for major
      customers. In Fiscal 2005, one customer made up 11.3%, or $7.1 million of
      consolidated revenues. In Fiscal 2004, one customer made up 11.1%, or $4.1
      million of consolidated revenue.




**Property
      and equipment**




Property
      and equipment are stated at cost and are depreciated using the straight-line
      method over a three to five year useful life depending on the nature of the
      asset. Leasehold improvements are amortized over the life of the improvement
      or
      the term of the lease, whichever is shorter. Expenditures for maintenance and
      repairs are expensed as incurred while renewals and improvements are
      capitalized.




F-16


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**







Upon
      retirement or disposal, the asset cost and related accumulated depreciation
      and
      amortization are eliminated from the respective accounts and the resulting
      gain
      or loss, if any, is included in the results of operations for the
      period.




**Goodwill
      and other purchased intangible assets**





F-17


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


Statement
      of Financial Accounting Standards No. 142, *Goodwill
      and Other Intangible Assets* (SFAS
      142), adopted by the Company in Fiscal 2003, requires goodwill to be tested
      for
      impairment on an annual basis, and more frequently as events and certain
      circumstances warrant. Under SFAS 142, the Company is required to perform a
      two-step process in its impairment assessment. Step one is to test for the
      potential of goodwill impairment. If the potential for impairment is identified
      by step one, then step two is undertaken to measure the amount of impairment
      loss. As of the fiscal year ended November 30, 2003, August 31 is the annual
      impairment assessment date for all of the Company's reporting
      units. The Company will perform more frequent impairment tests if events or
      circumstances appear to indicate that a reporting unit’s fair market value has
      fallen below its carrying amount. The Company completed step one in the third
      quarter of the fiscal year ended November 30, 2006, and determined there was
      no
      impairment to goodwill, nullifying the need for step-two
      performance.




The
      Company estimates the fair value of its reporting units using internal analysis,
      external economic and financial data, external market valuations, capitalized
      earnings and discounted cash flow models, and other comparable market valuation
      methods deemed relevant.




F-18


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**




The
      Company first acquired goodwill in an asset acquisition transaction completed
      in
      Fiscal 2002. Therefore, the Company had never amortized goodwill and no
      disclosure is required regarding a comparable exclusion of goodwill amortization
      expense.





Additional
      purchased intangible assets, other than goodwill, continue to be carried at
      cost
      less accumulated amortization. Amortization is computed over the intangibles’
estimated periods benefited, primarily three to five years, using straight-line
      amortization. See Note 4, “Goodwill and Identifiable intangible assets”.




**Impairment
      of other long-lived assets**




Long-lived
      assets and purchased intangible assets are reviewed for impairment if, or when,
      events or changes in circumstances indicate that their carrying amounts may
      not
      be recoverable. Determination of long-lived asset recoverability is based on
      estimated future cash flows expected to result from the use of such asset over
      its remaining useful life and the potential cash flows realizable from its
      possible disposition. If the sum of the expected future cash flows (undiscounted
      and without interest charges) is less than the carrying amount of the long-lived
      asset, an impairment loss is measured as a difference between carrying amount
      and the future discounted cash flows. See Notes 4 and 5.




F-19


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**


**Income
      taxes**




Deferred
      tax assets and liabilities are based on the expected future tax consequences
      of
      events that have been included in the financial statements or tax returns.
      Deferred tax assets and liabilities are determined based on the difference
      between the financial statement and tax basis of assets and liabilities using
      enacted tax rates in effect for the year in which the differences are expected
      to reverse. Management provides for valuation allowances against deferred tax
      assets, when events indicate that the deferred tax assets are more likely then
      not to not be realized (see Note 9).




**Dividends**




During
      the year ended November 30, 2006, the Company paid dividends in excess
      of its retained earnings, and accordingly, the excess of $2.7 million
      represents a return of capital, and has been reflected as a reduction
      to paid in capital in excess of par on the Company's Consolidated
      Statements of Shareholders’ Equity.




F-20


*Traffix,
        Inc. and Subsidiaries*
 **Notes
        to Consolidated Financial Statements**


**Advertising
      and marketing expenses**




The
      Company’s advertising and marketing costs, incurred in the advertising and
      marketing of the Company’s and its clients’ products, services and promotional
      offers, have historically been comprised of (1) costs associated with the
      transmission of email marketing messages, both from internal sources and
      external third party vendors , (2)
      costs
      associated with the purchase of online consumer data (including registered
      users
      to the Company’s websites), and (3) email and website program promotional and
      creative development costs. During the period July 1, 2004 to November 30,
      2005,
      pursuant to the acquisition of SendTraffic.com,Inc., the Company included the
      costs of its search engine marketing activities in its advertising and marketing
      cost accounts. During the period January 22, 2005 to November 30, 2005, pursuant
      to the acquisition of Hot Rocket Marketing, Inc., the Company included the
      costs
      of its direct purchases of online advertising space, which is resold on a
      performance return basis. During the prior fiscal periods, the Company incurred
      immaterial search engine marketing costs, and no costs of direct purchases
      of
      online advertising space. All above referenced costs are charged to operations
      (1) at the time of the email transmission, (2) upon receipt of the qualified
      consumer data, (3) at the time the promotional and creative services are
      provided, (4) at the time the search engine marketing media purchases are
      incurred, and/or (5) at the time the online advertising space is purchased,
      respectively, and are included as a component of cost of sales.





F-21




***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**





Total
      advertising and marketing expenses included in cost of revenue of our Online
      Advertising and Media Services Activities were $48.0, $40.3 and $19.5 million
      for fiscal years ended November 30, 2006, 2005 and 2004, respectively.




**Comprehensive
      Income (Loss)**




The
      Company presents foreign currency translation adjustments and unrealized gains
      and losses on its marketable securities (net of tax, when applicable) as a
      component of “comprehensive income (loss)” and are presented below:


**For
                  the Year Ended November 30,****2006**
              
              **2005**
              
              **2004**Net
                  income
              
              $
              1,902,843
              
              $
              2,428,157
              
              $
              1,014,214Other
                  comprehensive income (loss) , net of tax:Foreign
                  currency translation adjustment
              
              
              48,738
              
              
              25,274
              
              
              240,167Unrealized
                  gain from available-for-salesecurities,
                  arising during the period, net ofincome
                  taxes of $121,373, $66,512 and $224,684for
                  2006, 2005 and 2004, respectively
              
              
              110,062
              
              
              65,616
              
              
              59,143Add:
                  reclassification adjustments for gains realized innet
                  income, net of tax effect of $-0- and $224,684for
                  the years ended November 30, 2006 and 2005,respectively
              
              
              (8,834
              )
              
              (360,584
              )
              
              -Comprehensive
                  income
              
              $
              2,052,809
              
              $
              2,158,463
              
              $
              1,313,524


F-22


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**Stock-Based
      Compensation**




Effective
      December 1, 2005, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
      2004), "Share-Based Payment" ("SFAS 123R"), using the modified prospective
      transition method and, therefore, has not restated results for prior periods.
      Under this transition method, stock-based compensation expense for the fiscal
      year ended November 30, 2006 included compensation expense for all stock-based
      compensation awards granted prior to, but not yet vested as of December 1,
      2005, based on the grant date fair value estimated in accordance with the
      original provisions of SFAS No. 123, "Accounting for Stock-Based
      Compensation" ("SFAS 123"). Stock-based compensation expense for all
      stock-based compensation awards granted after December 1, 2005 is based on
      the
      grant-date fair value estimated in accordance with the provisions of
      SFAS 123R. The Company recognizes these compensation costs on a
      straight-line basis over the requisite service period of the award, which range
      from immediate vesting to vesting over a three year period. Prior to the
      December 1, 2005 adoption of SFAS 123R, the Company recognized stock-based
      compensation expense in accordance with Accounting Principles Board ("APB")
      Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
      In March 2005, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of
      SFAS 123R and the valuation of share-based payments for public companies.
      The Company has applied the provisions of SAB 107 in its adoption of
      SFAS 123R. See Note 13 to the Audited Consolidated Financial
      Statements for a further discussion on stock-based compensation.




F-23


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**Segment
      Information**





In
      classifying the financial information for its operating activities, the Company
      relies primarily upon the evaluations of the chief operating decision maker
      (CODM) and executive management in deciding how to allocate its resources and
      assess its performance. Disclosure is also required about products and services,
      geographic areas and major customers. The Company operates in one segment,
      Online Advertising and Media Services. During the Company's Fiscal 2006 fourth
      quarter, the CODM - a committee consisting of executive employees and
      certain Audit Committee members, reviewed the Company’s operations with
      management, and determined that it currently operates in one segment, with
      those
      operations being in the business of Online Advertising and Media Service
      Activities. As such, the LEC Billed Product segment, which was effectively
      inactive in terms of contribution to gross margin, income from operations and
      pre-tax income for the years ended November 30, 2006, 2005 and 2004, was
      collapsed into the operations of the current business for all periods presented.
      The collapsing of the inactive segment is the result of the LEC segment no
      longer being a material component of the Company’s business, and as such it was
      determined that the Company’s current financial statement presentation is better
      situated without the immaterial LEC segment disclosure. As a result of this
      modification, consolidated revenues, gross profit, income from operations,
      income before provision for income taxes, provision for income taxes and net
      income for the years ended November 30, 2005 and 2004 were not affected.




F-24


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      Company sells services and not products and, correspondingly, does not carry
      inventory.




The
      Company had revenue from its Canadian-based subsidiary of approximately
      $912,000, $647,000 and $241,000 during the fiscal years ended November 30,
      2006,
      2005 and 2004, respectively. The primary role of the Canadian subsidiary is
      to
      support back office data operations and does not directly contribute significant
      amounts to consolidated net income. The majority of the Canadian subsidiary’s
      outlays are related to the generation of the Company’s revenues. Correspondingly
      the Company classifies them within the appropriate categories of cost of
      revenue.




**Recent
      Accounting Pronouncements**




In
      September 2006, the U.S. Securities and Exchange commission (SEC) issued Staff
      Accounting Bulletin No. 108, “Qualifying Financial Statement Misstatements” (SAB
      108), which provides interpretive guidance on how registrants should qualify
      misstatements when evaluating the materiality of financial statement errors.
      SAB
      108 also provides transition accounting disclosure guidance for situations
      in
      which a material error existed in prior period financial statements by allowing
      companies to restate prior period financial statements or recognize the
      cumulative effect of initially applying SAB 108 through an adjustment to
      beginning retained earnings in the year of adoption. SAB 108 is effective for
      the Company in Fiscal 2007. The Company does not expect the adoption of SAB
      108
      will have a material impact on its consolidated financial statements.




F-25


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




In
      June
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes- an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions. FIN 48 clarifies certain provisions of SFAS No.
      109
      by prescribing a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. A tax benefit from such uncertain tax
      positions may be recognized only if it is “more likely than not” that the
      position is sustainable based on its technical merits. FIN 48 is effective
      for
      fiscal years beginning after December 15, 2006. The Company is currently
      assessing the impact of adopting FIN 48, with such adoption occurring in the
      first quarter of the fiscal year ending November 30, 2008, and has not yet
      determined the related impact the adoption will have on its financial
      statements.




F-26


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**2.
      Supplemental Cash Flows, Acquisitions and Disposals**




**Supplemental
      Cash Flow Disclosures**




**For
                the fiscal years ended November 30,****2006**
            
            **2005**
            
            **2004**Supplemental
                disclosures:Cash
                paid during the year for:Income
                taxes paid (refunds received), net
            
            $
            1,787,097
            
            $
            39,141
            
            $
            155,684




**Non-cash
      Investing and Financing Activities**





Non-cash
      investing and financing activities are excluded from the consolidated statement
      of cash flows. For the three years ended November 30, 2006, 2005 and 2004,
      non-cash activities included the following items:





Investing
      Activities:


Stock
      Issued in connection with Acquisitions (Also see notes 5 and 11)


**For
                  the fiscal years ended November 30,****2006**
              
              **2005**
              
              **2004**Hot
                  Rocket Marketing, Inc. - January 31, 2006
              
              $
              580,598
              
              $
              -
              
              $
              -Hot
                  Rocket Marketing, Inc. - January 21, 2005
              
              
              -
              
              
              682,280
              
              
              -Send
                  Traffic, Inc. - June 30, 2004
              
              
              -
              
              
              -
              
              
              1,085,453





**Fiscal
      2005 Acquisition**





On
      January 21, 2005, the Company, through its wholly owned subsidiary, Hot Rocket
      Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
      Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
      the business of buying and selling performance based online advertising space
      for third parties, as well as providing such services to the sales activities
      of
      the consolidated entity. The Hot Rocket acquisition has broadened the Company’s
      reach into the Internet direct marketing arena, which continues to allow for
      expanded client relationships and various other synergistic possibilities,
      such
      as adding value to the Company’s core operations by the enhancement of its
      current and developing marketing programs.




F-27


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      initial purchase price was approximately $3.8 million and was comprised of
      $3.1
      million in cash, $0.7 million (or 113,821 shares) of the Company’s common stock
      and transaction fees approximating $0.1 million. Pursuant to an independent
      third party valuation, the reported purchase price was allocated as follows:
      approximately $2.2 million of goodwill and $1.6 million of identifiable
      intangibles. There were no tangible assets acquired.




In
      addition to the initial purchase price of the acquisition, the Company agreed
      to
      pay Hot Rocket a contingent purchase price of up to $12.5 million if Hot Rocket
      generates an aggregate of $27 million in EBITDA (as quantified in the Agreement)
      over the four year period following the closing. In accordance with the terms
      of
      the acquisition agreement, for the period February 1, 2005 to January 31, 2006,
      the Company was liable for a combined additional purchase price payment of
      $1.467 million, which has been settled by a cash payment of approximately $0.886
      million made on May 9, 2006, and an issuance of 103,354 shares issued on May
      10,
      2006 (then having a fair market value of approximately $0.581 million). Future
      contingent payments made, if any, will be treated as additional purchase price
      and included as an addition to goodwill.




F-28


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      terms
      of the acquisition agreement also provide for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      August 1, 2006 through January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the Agreement. Hot Rocket did not reach the $1.35
      million EBITDA threshold for the period ended July 31, 2006, and the possibility
      exists that the EBITDA threshold will not be attained for the period ended
      January 31, 2007. Therefore, as of November 30, 2006, based on the lack of
      absolute certainty regarding the EBITDA threshold as it relates to the
      additional payment period ended January 31, 2007, the Company has not accrued
      any additional contingent payments at this time. Future contingencies, if any,
      will be recorded when the contingency has been satisfied and the additional
      consideration is issued or becomes issuable.




The
      identifiable intangibles acquired from Hot Rocket consist of non-compete
      covenants within employment agreements and internally developed software, which
      is being amortized on a straight-line basis over estimated useful lives of
      five
      and three years, respectively. It is expected that the entire goodwill value
      will be deductible for tax purposes based on the nature of the asset
      acquisition.




**3.** **Related
        Party Transactions**





The
      Company incurred approximately $300,000, $871,000 and $695,000 during Fiscal
      2006, 2005 and 2004, respectively, in legal fees to a firm whose member was
      a
      director of the Company from inception to August 25, 2006, at which time he
      chose not to stand for re-election. The fees charged by such firm were at rates
      no less favorable to the Company than rates obtainable from other firms for
      similar services.




F-29


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**4.** **Marketable
        Securities**




The
      carrying amount of the Company’s marketable securities is shown in the table
      below:


**November
                  30,****2006**
              
              **2005****Cost**
              
              **Market
                  Value**
              
              **Cost**
              
              **Market
                  Value**Available-for-sale
                  securities:Equity
                  securities
              
              $
              1,608,986
              
              $
              1,965,983
              
              $
              1,759,066
              
              $
              1,936,022Certificates
                  of deposit
              
              
              5,675,015
              
              
              5,675,000
              
              
              400,606
              
              
              397,042Annuity
              
              
              2,742,792
              
              
              2,742,792
              
              
              2,662,905
              
              
              2,662,905Corporate
                  commercial paper
              
              
              11,050,000
              
              
              11,050,000
              
              
              16,575,000
              
              
              16,575,000Total
              
              $
              21,076,793
              
              $
              21,433,775
              
              $
              21,397,577
              
              $
              21,570,969Classified
                  as:Current
              
              $
              21,076,793
              
              $
              21,433,775
              
              $
              18,734,672
              
              $
              18,908,064Non-current
              
              
              -
              
              
              -
              
              
              2,662,905
              
              
              2,662,905Total
              
              $
              21,076,793
              
              $
              21,433,775
              
              $
              21,397,577
              
              $
              21,570,969




Marketable
      securities shown in the above table are carried at the stated fair value. The
      cost basis of the marketable securities with scheduled maturities within one
      year was $21,076,793 and $18,734,672 for Fiscal 2006 and 2005,
      respectively.




F-30


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




Proceeds,
      realized/unrealized gains and realized/unrealized losses from sales of
      securities classified as available-for-sale for Fiscal years ended November
      30,
      consisted of the following:




**2006**
              
              **2005**
              
              **2004**Proceeds
                  from sales of securities
              
              $
              168,043,546
              
              $
              232,537,892
              
              $
              301,137,877Gross
                  realized gains
              
              
              51,514
              
              
              600,626
              
              
              35,873Gross
                  realized losses
              
              
              (34,679
              )
              
              (39,267
              )
              
              (10,383
              )Net
                  realized gains
              
              
              16,835
              
              
              561,359
              
              
              25,490Comprehensive
                  income gains (losses):Unrealized
                  gains, net of tax
              
              
              235,978
              
              
              331,897
              
              
              200,107Unrealized
                  losses, net of tax
              
              
              (125,916
              )
              
              (266,281
              )
              
              (140,964
              )Total
                  unrealized gains (losses), net of tax
              
              $
              110,062
              
              $
              65,616
              
              $
              59,143
  F-31




***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**


**5.** **Goodwill
      and identifiable intangible assets**




The
      gross
      carrying value and accumulated amortization of goodwill and other intangibles
      are as follows:




As
                  of November 30, 2006
              
              
              As
                  of November 30, 2005Gross
              
              
              
              
              
              GrossCarrying
              
              
              Accumulated
              
              
              Carrying
              
              
              AccumulatedAmount
              
              
              Amortization
              
              
              Amount
              
              
              AmortizationUnamortized
                  intangible assets:Goodwill
              
              $
              7,913,007
              
              
              
              
              $
              6,426,336Amortizable
                  Intangible Assets:*GroupLotto
                  identifiable intangibles:*GroupLotto
                  Site Brand Recognition
              
              $
              722,922
              
              $
              722,922
              
              $
              722,922
              
              $
              630,808GroupLotto
                  Database
              
              
              433,754
              
              
              433,754
              
              
              433,754
              
              
              378,486Intellectual
                  Property Assets
              
              
              289,169
              
              
              289,169
              
              
              289,169
              
              
              252,323Marketing
                  Right License Fee
              
              
              246,915
              
              
              131,756
              
              
              252,915
              
              
              80,590*Infiknowledge
                  identifiable intangibles:*Internet
                  Game Suite
              
              
              269,169
              
              
              266,523
              
              
              263,241
              
              
              207,717Intellectual
                  Property Assets
              
              
              201,876
              
              
              199,891
              
              
              197,430
              
              
              155,788Market
                  Position Acquired
              
              
              224,307
              
              
              222,102
              
              
              219,367
              
              
              173,098*Thanksmuch
                  identifiable intangibles:*Profiled
                  customer data
              
              
              50,000
              
              
              50,000
              
              
              50,000
              
              
              50,000Restrictive
                  Covenants
              
              
              10,000
              
              
              10,000
              
              
              10,000
              
              
              8,878*SendTraffic
                  identifiable intangibles:*Restrictive
                  Covenants
              
              
              523,109
              
              
              422,609
              
              
              523,109
              
              
              221,609Software
              
              
              963,951
              
              
              716,672
              
              
              963,951
              
              
              420,118*Hot
                  Rocket identifiable intangibles*Restrictive
                  Covenants
              
              
              569,394
              
              
              212,257
              
              
              569,394
              
              
              98,379Software
              
              
              1,012,257
              
              
              628,911
              
              
              1,012,257
              
              
              291,492Total
                  amortizable intangible assets
              
              $
              5,516,823
              
              $
              4,306,566
              
              $
              5,507,509
              
              $
              2,969,286




F-32


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


The
      Infiknowledge identifiable intangibles and unamortizable goodwill carrying
      value
      changes as a result of the effects of foreign currency exchange translation.





The
      amortizable intangibles listed above are deemed to have a finite life of five
      years, or less, from the date of acquisition, with the weighted average life
      being 4.1 years.




The
      acquisition identifiable intangibles related amortization expense has been
      recorded from the dates of the respective acquisitions. Acquired intangibles
      are
      generally amortized on a straight-line basis over their weighted average useful
      lives with intangible asset amortization expense of $1.3, $1.5 and $0.6 million
      being recorded in fiscal 2006, 2005 and 2004, respectively.




F-33


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      future intangible amortization expense for the next five fiscal years is
      estimated to be as follows:


**2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **2011***GroupLotto
                  Identifiable**Intangible
                  amortization:*Site
                  Brand Recognition
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Database
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Intellectual
                  Property Assets
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Licenses
              
              
              59,353
              
              
              45,806
              
              
              10,000
              
              
              -
              
              
              -*Total
                  Group's amortization*
              
              
              59,353
              
              
              45,806
              
              
              10,000
              
              
              -
              
              
              -*Infiknowledge
                  Identifiable**Intangible
                  amortization:*Internet
                  Game Suite
              
              
              1,733
              
              
              509
              
              
              404
              
              
              -
              
              
              -Intellectual
                  Property Assets
              
              
              1,300
              
              
              382
              
              
              303
              
              
              -
              
              
              -Market
                  Position Acquired
              
              
              1,444
              
              
              424
              
              
              337
              
              
              -
              
              
              -*Total
                  Group's amortization*
              
              
              4,477
              
              
              1,315
              
              
              1,044
              
              
              -
              
              
              -*SendTraffic
                  Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              
              100,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -Software
              
              
              234,898
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -335,398
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -*Hot
                  Rocket Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              
              113,879
              
              
              113,879
              
              
              113,879
              
              
              15,500
              
              
              -Software
              
              
              337,419
              
              
              45,927
              
              
              -
              
              
              -
              
              
              -451,298
              
              
              159,806
              
              
              113,879
              
              
              15,500
              
              
              -**Summary
                  of Identifiable****Intangibles:***GroupLotto:*
              
              
              59,353
              
              
              45,806
              
              
              10,000
              
              
              -
              
              
              -*Infiknowledge:*
              
              
              4,477
              
              
              1,315
              
              
              1,044
              
              
              -
              
              
              -*SendTraffic:*
              
              
              335,398
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -*Hot
                  Rocket:*
              
              
              451,298
              
              
              159,806
              
              
              113,879
              
              
              15,500
              
              
              -*Totals*
              
              $
              850,526
              
              $
              219,308
              
              $
              124,923
              
              $
              15,500
              
              $
              -




F-34
 
 ***Traffix,
          Inc. and Subsidiaries***
 **Notes
          to Consolidated Financial Statements**


**6.** **Property
        and Equipment**




Property
      and equipment as of November 30 consist of the following:


**2006**
              
              **2005**Furniture
                  and fixtures
              
              $
              564,658
              
              $
              448,395Computers
                  and equipment
              
              
              5,450,211
              
              
              5,110,240Land
                  and Building
              
              
              728,612
              
              
              712,566Leasehold
                  improvements
              
              
              338,555
              
              
              242,5367,082,036
              
              
              6,513,737Less:
                  accumulated depreciation and amortization
              
              
              5,116,853
              
              
              4,196,047$
              1,965,183
              
              $
              2,317,690




The
      Company acquired $343,000 (cost basis) computers and equipment, under capital
      leases, during Fiscal 2005. Depreciation and amortization expense on
      property, equipment and leasehold improvements for the years ended November
      30,
      2006, 2005 and 2004 was approximately $885,000, $733,000 and $764,000,
      respectively.




F-35


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**7.** **Accrued
      expenses**




Accrued
      expenses as of November 30 are comprised of the following at:


**2006**
              
              **2005**Accrued
                  payroll and bonuses
              
              $
              1,553,107
              
              $
              972,280Advances
                  from customers
              
              
              634,353
              
              
              623,847Accrued
                  fee share liabilities
              
              
              309,494
              
              
              327,511Capital
                  lease obligations
              
              
              6,844
              
              
              237,417Accrued
                  marketing media costs
              
              
              690,729
              
              
              1,376,053Accrued
                  search engine marketing costs
              
              
              119,153
              
              
              9,411Accrued
                  professional fees
              
              
              289,244
              
              
              380,696Accrued
                  service bureau fees
              
              
              -
              
              
              85,058Accrued
                  property taxes
              
              
              30,380
              
              
              29,237Accrued
                  straight-line rent concession
              
              
              82,705
              
              
              29,660Other
                  accrued liabilities
              
              
              115,214
              
              
              198,825Total
                  accrued liabilities
              
              $
              3,831,223
              
              $
              4,269,995




The
      accrued expense category includes a capital lease obligation of $6,844 and
      $237,417 at November 30, 2006 and 2005, respectively. The consolidated statement
      of cash flows for Fiscal 2006 and 2005 reflects $231,583 and $105,583,
      respectively, as financing activities related to repayments under the capital
      lease obligation.




F-36


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**8.** **Other
      Income (expense)**




Other
      Income (expense) consisted of the following for the fiscal years ended November
      30:


**Other
                  income (expense):**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**Interest
                  income and dividends
              
              $
              1,068,538
              
              $
              957,069
              
              $
              544,153Realized
                  gains on sale ofmarketable
                  securities
              
              
              16,835
              
              
              561,359
              
              
              25,490Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              195,000
              
              
              784,900Other
                  non-operating income:Vendor
                  settlement on prior yearmarketing
                  fee
              
              
              -
              
              
              -
              
              
              350,000Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (51,192
              )
              
              (21,244
              )
              
              (20,793
              )Interest
                  and penalties - taxaudits
                  and settlements
              
              
              (13,902
              )
              
              -
              
              
              (69,581
              )Reduction
                  to prior year'sLEC
                  reserve
              
              
              -
              
              
              -
              
              
              34,181Other
                  miscellaneous
              
              
              .income
                  (expense)
              
              
              23,996
              
              
              (6,832
              )
              
              104,311Minority
                  interest income
              
              
              (576,000
              )
              
              (494,533
              )
              
              -**Total
                  consolidated Other **Income,
                  net****
              
              $
              468,275
              
              $
              1,190,819
              
              $
              1,752,661




**Minority
      Interest**




During
      January 2005, the Company entered into an agreement with Madacy Entertainment,
      through a newly created partnership, EZTracks LP, to market and promote
      EZTracks.com, a web destination consisting of approximately 30,000 downloadable
      songs covering a wide array of musical genres. The Company, through a
      wholly-owned subsidiary, owns 50.7% of the partnership and is responsible for
      managing the operations of the business, including generating traffic to the
      website, as well as selling advertising on the site. Madacy Entertainment,
      through its wholly-owned subsidiary, owns 49.3% of the partnership and provides
      its inventory of music and an extensive library of music licensed from other
      parties. Madacy has limited involvement with certain aspects of operations.
      The
      results of operations for the year ended November 30, 2006 and for the period
      January 21, 2005 to November 30, 2005, include the fully consolidated results
      of
      EZTracks LP with minority interest established to reflect Madacy’s ownership
      share of the partnership’s operating results for such periods.


F-37


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




*The
      following table summarizes the results of EZ Tracks for the periods
      indicated:*


**Year**
                  
                  **January
                      21,****Ended**
                  
                  **2005
                      to****November
                      30,**
                  
                  **November
                      30,****2006**
                  
                  **2005**Net
                      Revenues
                  
                  $
                  10,262,347
                  
                  $
                  8,369,797Cost
                      of Sales
                  
                  
                  8,913,489
                  
                  
                  7,286,976Gross
                      Profit
                  
                  
                  1,348,858
                  
                  
                  1,082,821General
                      andAdministrative
                      Expenses
                  
                  
                  180,501
                  
                  
                  79,712Net
                      Income
                  
                  $
                  1,168,357
                  (1)
                  $
                  1,003,109
                  (1)Minority
                      interest
                  
                  $
                  576,000
                  (2)
                  $
                  494,533
                  (2)Distributions
                      toMinority
                      Interest
                  
                  $
                  628,000
                  
                  $
                  128,896




(1)
              All
                  items included in the Company's Online Advertising and Media Services
                  activities





(2)
              Represents
                  Madacy Entertainment's 49.3% minority
                  interest




F-38


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**9.** **Income
      Taxes**




The
      provision (benefit) for income taxes consists of the following:




**Year
                  ended November 30,****2006**
              
              **2005**
              
              **2004**Current
                  tax provision (benefit):U.S
                  federal taxes
              
              $
              888,732
              
              $
              1,124,355
              
              $
              243,732Foreign
                  taxes
              
              
              472,057
              
              
              (26,088
              )
              
              191,694U.S.
                  state taxes
              
              
              75,836
              
              
              157,034
              
              
              21,5981,436,625
              
              
              1,255,301
              
              
              457,024Deferred
                  tax provision (benefit):U.S
                  federal taxes
              
              
              498,281
              
              
              (120,766
              )
              
              (40,057
              )Foreign
                  taxes
              
              
              (231,436
              )
              
              35,809
              
              
              (20,968
              )U.S.
                  state taxes
              
              
              (66,909
              )
              
              (127,707
              )
              
              8,604199,936
              
              
              (212,664
              )
              
              (52,421
              )**Total
                  provision**
              
              $
              1,636,561
              
              $
              1,042,637
              
              $
              404,603





F-39


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      domestic and foreign components of income before taxes are as
      follows:


**Year
                  ended November 30,****2006**
              
              **2005**
              
              **2004**Domestic
              
              $
              1,197,292
              
              $
              2,598,603
              
              $
              993,402Foreign
              
              
              2,342,112
              
              
              872,191
              
              
              425,415Total
                  Income before taxes
              
              $
              3,539,404
              
              $
              3,470,794
              
              $
              1,418,817




The
      following is a reconciliation of the income tax expense computed using the
      statutory federal income tax rate to the actual income tax expense and its
      effective income tax rate:


**Year
                  ended November 30,****2006**
              
              **2005**
              
              **2004**Income
                  tax expense computedat
                  statutory rate
              
              $
              1,203,397
              
              $
              1,180,070
              
              $
              482,398State
                  income taxes, net of federalincome
                  tax benefit
              
              
              5,892
              
              
              19,356
              
              
              19,933Foreign
                  tax statutory rate excess overU.S.
                  statutory rate
              
              
              -
              
              
              10,005
              
              
              46,581Foreign
                  tax expense, net of federaltax
                  benefit
              
              
              346,895
              
              
              -
              
              
              -Change
                  in valuation allowance
              
              
              (56,534
              )
              
              (26,628
              )
              
              (500,218
              )Increase
                  in tax contingencies
              
              
              68,998
              
              
              (268,271
              )
              
              243,733Nondeductible
                  items
              
              
              92,552
              
              
              122,298
              
              
              106,223Net
                  Foreign Tax Credits reclassified to expense
              
              
              211,270
              
              
              -
              
              
              -U.S.
                  federal tax benefit from Foreign TaxCredit
                  reclassification to expense
              
              
              (250,168
              )
              
              -
              
              
              -Other
                  differences, net
              
              
              14,259
              
              
              5,807
              
              
              5,953Effective
                  income tax expense
              
              $
              1,636,561
              
              $
              1,042,637
              
              $
              404,603




F-40


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      components of net deferred tax assets are as follows:


**November
                  30,****2006**
              
              **2005**Deferred
                  tax assets:Current:Accrued
                  expenses and reserves not currently deductible
              
              $
              650,358
              
              $
              899,639Prepaid
                  expenses
              
              
              (198,449
              )
              
              -Marketable
                  securities
              
              
              -
              
              
              (66,511
              )Realized
                  capital losses on marketable securitiesand
                  long term investments
              
              
              -
              
              
              68,121Valuation
                  allowance on realized capital losses
              
              
              -
              
              
              (1,610
              )Foreign
                  Income Tax Credit carryforward
              
              
              -
              
              
              536,772Valuation
                  allowance - foreign tax credits
              
              
              -
              
              
              (56,534
              )**Total
                  current assets**
              
              
              451,909
              
              
              1,379,877Non-current:Stock-based
                  compensation
              
              
              176,358
              
              
              -Fixed
                  assets and intangibles
              
              
              669,865
              
              
              478,050State
                  net operating losses
              
              
              3,150,584
              
              
              3,148,778Valuation
                  allowance
              
              
              (3,150,584
              )
              
              (3,148,778
              )**Total
                  noncurrent assets**
              
              
              846,223
              
              
              478,050**Total
                  assets**
              
              
              1,298,132
              
              
              1,857,927Deferred
                  tax liabilities:Fixed
                  assets and intangibles
              
              
              -
              
              
              (267,258
              )Other
              
              
              -
              
              
              (35,207
              )**Total
                  noncurrent liabilities**
              
              
              -
              
              
              (302,465
              )**Net
                  deferred tax assets**
              
              $
              1,298,132
              
              $
              1,555,462




At
      November 30, 2006 and 2005, valuation allowances of $3,150,584 and $3,148,778,
      respectively, were established, primarily for state tax net operating losses,
      which can not be carried back by statute, and have reduced the deferred tax
      assets to an amount which the Company believes is more likely than not to be
      realized.




The
      Company has approximately $59.6 million of state net operating losses expiring
      through 2016.




F-41







***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**







**10.     Litigation**




We
      are
      subject to legal proceedings, lawsuits and other claims, brought by:
      (1) consumers of our products and services; (2) our clients;
      (3) consumers of our clients' products and services; and (4) others
      bringing claims that arise in the normal course of our business. Legal
      proceedings are subject to numerous uncertainties rendering the prediction
      of
      their outcome difficult. As a result of such uncertainty, we are unable to
      estimate the ultimate outcome of any of the subsequently mentioned claims,
      and,
      accordingly, no provision for loss has been recorded. We believe that
      individually, and in the aggregate, the ultimate settlement of the subsequently
      mentioned claims should not have a material adverse effect on our consolidated
      financial position, results of operations or cash flows.


*DADA
        USA INC. f/k/a DADAMobile Inc. v.**Q121
        Inc. d/b/a MSFOCUS and Banca Intesa SpA*
  In
        September 2006, DADA USA Inc. (“Dada”) filed this action in Supreme Court of the
        State of New York, New York County (Index No. 603365/06).
  The
        action relates to a marketing agreement between Dada and Q121 Inc., our
        subsidiary. Dada alleges, *inter alia,* that
        Q121 Inc. breached the agreement by using unapproved advertisements or failing
        to prevent sub-publishers from using approved ads in an unapproved manner
        or
        misappropriating confidential information or diverting customers; and that
        it
        engaged in unfair competition. The complaint seeks damages in an amount which
        the plaintiff alleges it believes to be in excess of ten million
        dollars.




F-42








***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**







Dada
        sought to enjoin Q121 Inc. from drawing down on a letter of credit which
        had
        secured Dada's performance under the agreement. The court denied Dada's
        application for a temporary restraining order, the issuing bank paid the
        full
        amount of the letter of credit, and Dada withdrew the request for a preliminary
        injunction. Limited discovery has taken place; the matter has been referred
        to
        mediation, which is expected to occur as early as March 2007.
  We
        believe that there is no merit to Dada's claims and intend vigorously to
        defend
        the action.
  *Hatton
        v. Prize America/Prize Distributors*
  In
        or
        about October 2005 Brandon Hatton filed a *pro
        se* action
        in the U.S. District Court, Middle District of Tennessee (No. 05 CV 00073)
        and
        was also granted permission to proceed *in
        forma pauperis.* The
        complaint, as amended, alleges that sometime between June 2002 and July 2004
        the
        plaintiff won a prize, that defendant failed to pay/deliver, and claims damages
        of $391 million.
  In
        December, 2006 we learned that plaintiff had attempted to serve process;
        our
        counsel has made a special appearance and has moved to dismiss the action
        on
        jurisdictional grounds. That application is pending.
 
 We
        believe that there is no merit to this claim and, in the event our application
        is denied, we intend vigorously to defend the action.
  *Nicherie
        v. Pellicano et al, CV 06-6434**United
        States District Court; Central District of California*
 
 We
        were
        recently served with a Second Amended Complaint in this action, which alleges
        twenty causes of action variously directed against forty-seven individuals
        and
        entities as well as against Does 1 - 200. The plaintiff alleges that he is
        an
        inmate at the Metropolitan Detention Center in Los Angeles, that he was
        President and CEO of Federal Transtel, Inc. and that through a trust he owns
        or
        controls an interest in that company. The third cause of action is directed
        at a
        number of defendants, including us, and purports to state a RICO claim;
        plaintiff also purports to bring the twentieth cause of action on behalf
        of the
        United States of America against a number of individuals and entities including
        us pursuant to the False Claim Act, 31 USC 3730(b), alleging, among other
        things, what he describes as “’small increment billing’ frauds ... which targeted
        the United States government and its employees who had authority to use
        government credit cards . . ..” and seeks unspecified damages and attorneys
        fees. In some of the other causes of action, the plaintiff purports to bring
        the
        claim against “all defendants” but fails to allege any act by
        us.




F-43





***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**







Portions
        of the Second Amended Complaint, including the causes of action directed
        at us,
        were dismissed by the court on motion of some of the other defendants, and
        plaintiff was granted leave to replead by February 13, 2007. We are named
        as a
        defendant in the Third Amended Complaint, for the same claims, but the
        substantive allegations or wrongdoing, or the lack thereof, remain the same.
 
 We
        believe that there is no merit to the claims and intend vigorously to defend
        the
        action.




**11.
      Commitments and Contingencies**




**Leases**




The
      Company is obligated under four real property lease agreements that expire
      through fiscal 2011. Future minimum rental payments consist of the following
      at
      November 30, 2006:




F-44





***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**







2007
              
              $
              489,9102008
              
              
              450,5002009
              
              
              351,6252010
              
              
              353,0012011
              
              
              292,142$
              1,937,178




The
      leases contain escalation clauses with respect to real estate taxes and related
      operating costs. The accompanying financial statements reflect rent expense
      on a
      straight-line basis over the term of the lease as required by accounting
      principles generally accepted in the United States of America. Rent expense
      for
      all leases was $436,000, $409,000 and $346,000 for Fiscal 2006, 2005 and 2004,
      respectively.




**Employment
      Agreements**




*Jeffrey
      L. Schwartz*




The
      Company entered into an employment agreement on March 10, 2006, effective as
      of
      December 1, 2005, with Jeffrey L. Schwartz (the “Schwartz Employment
      Agreement”), which expires on November 30, 2007; provided, however, that if
      the Company’s Pre-Tax Income (as defined in the Schwartz Employment Agreement)
      for the 21 months ending August 31, 2007 is at least $4.2 million, Mr. Schwartz
      has the right to extend the term to November 30, 2008 (provided he exercises
      that option no later than November 1, 2007).




F-45


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


Pursuant
      to the Schwartz Employment Agreement, (i) Mr. Schwartz is employed as
      Chairman and Chief Executive Officer; (ii) Mr. Schwartz will be paid a
      base salary of $605,000 per annum; (iii) Mr. Schwartz will receive
      bonuses upon the Company’s achievement of certain pre-tax income milestones, as
      well as discretionary bonuses subject to approval of its Board of Directors;
      (iv) Mr. Schwartz was issued on March 10, 2006 a 10-year option to acquire
      60,000 shares of the Company’s Common Stock at an exercise price of $5.44 per
      share, which option vested as follows:




(x)
            30,000
                shares vested immediately; and




(y)
            30,000
                shares vested on December 1, 2006;





(vi)
      the
      Company will pay for all expenses reasonably incurred by Mr. Schwartz in
      connection with the performance of his duties, including paying up to $25,000
      per year towards the total per annum costs of an automobile; (vii)
      Mr. Schwartz agreed not to compete or engage in a business competitive with
      the Company’s business during the term of the Schwartz Employment Agreement and
      for a period of one year thereafter; (viii) if Mr. Schwartz’s employment is
      terminated other than as a result of a “For Cause Event” (as defined in the
      Schwartz Employment Agreement) or if he resigns for “Good Reason” (as defined in
      the Schwartz Employment Agreement), he will be entitled to receive additional
      compensation and other consideration, all as more fully described in the
      Schwartz Employment Agreement; and (ix) at any time after September 2, 2006,
      Mr.
      Schwartz may terminate the Schwartz Employment Agreement, whereupon he will
      receive additional compensation and other consideration, as summarized below
      (and as more fully described in the Schwartz Employment Agreement).




F-46








***Traffix,
      Inc. and Subsidiaries***


**Notes
      to Consolidated Financial Statements**







The
      Schwartz Employment Agreement provides that, if the Schwartz Employment
      Agreement terminates due to the scheduled expiration of the term, or if Mr.
      Schwartz voluntarily terminates his employment after September 2, 2006, Mr.
      Schwartz will (i) in partial consideration for agreeing to assume consulting
      obligations for the Company (as set forth in clause (iii), below), be entitled
      to receive a one-time, lump-sum payment of $250,000; (ii) be entitled to receive
      those bonuses which he was otherwise entitled to receive for the last bonus
      period ending before the termination of the Schwartz Employment Agreement;
      (iii)
      become a consultant to the Company for a period of three years, for which he
      will be paid a consulting fee of $108,334 per annum; and (iv) be entitled to
      receive additional consideration and compensation, all as more fully described
      in the Schwartz Employment Agreement.





*Andrew
      Stollman*





The
      Company entered into an employment agreement, effective December 1, 2001,
      with Andrew Stollman, which agreement was orally amended on June 3, 2004
      (the “First Amendment”).  On May 10, 2005, the First Amendment was
      reduced to writing and the Company executed a second amendment to
      Mr. Stollman’s employment agreement (the “Second Amendment”).  The
      employment agreement, as amended by the First Amendment and Second Amendment,
      now expires on November 30, 2007 and further provides that
      Mr. Stollman (i) is employed as the Company’s President and Secretary;
      (ii) was paid for the fiscal year ended November 30, 2005, and will be
      paid for all fiscal years remaining under the term, $544,500 per annum;
      (iii) will receive bonuses upon the Company’s achievement of certain
      pre-tax income milestones and (as added by the Second Amendment) certain EBITDA
      (as defined) milestones, as well as discretionary bonuses subject to approval
      of
      the Company’s Board of Directors; (iv) upon the commencement of the
      agreement on December 1, 2001, was issued a ten-year option to acquire
      105,000 shares of the Company’s Common Stock at an exercise price of $5.70 per
      share; (v) upon the execution of the First Amendment, was issued a ten-year
      option to acquire 405,000 shares of the Company’s Common Stock at an exercise
      price of $7.34 per share, the shares of which vest as follows:




F-47


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


(a)
            75,000
                shares vested immediately;




(b)
            110,000
                shares vested upon the determination that the Company had Operating
                Cash
                Flow (as defined in the Second Amendment) for Fiscal 2005 equal to
                or
                greater than $4.0 million;




F-48


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


(c)
            110,000
                shares vested upon the determination that the Company had Operating
                Cash
                Flow (as defined in the Second Amendment) for Fiscal 2006 equal to
                or
                greater than $4.65 million; and(d)
            110,000
                shares will vest if the Company has Operating Cash Flow for Fiscal
                2007
                equal to or greater than
                $5.29 million;





(vi)  agreed
      not to compete or engage in a business competitive with the Company’s business
      during the term of the agreement and for a period of one year thereafter;
      (vii) if his employment is terminated other than as a result of a “For
      Cause Event” (as defined in the original 2001 employment agreement), will be
      entitled to receive additional compensation and other consideration, all as
      more
      fully described in the original 2001 employment agreement; and (viii) if
      his employment is terminated as a result of a “Change in Control” (as defined in
      the original 2001 employment agreement), will be entitled to receive a one-time
      payment in an amount equal to 2.99 times his “base amount” determined in
      accordance with the applicable provisions of the Internal Revenue
      Code.




F-49


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


The
      foregoing is only a summary of the material terms of the employment agreements
      with the Named Officers. For a complete description, copies of such agreements
      are annexed hereto in their entirety as exhibits or are otherwise incorporated
      herein by reference.




**Acquisition
      related Additional Contingent Purchase Price Consideration**





The
      Company is liable under certain acquisition agreements (see Note 2) regarding
      the potential of additional payment of purchase price consideration arising
      out
      of the attainment of post acquisition operating milestones as defined in the
      acquisition agreements.





**Continuing
      Obligations under Fixed Asset and Service Agreements**





During
      June 2005, the Company entered into a combined fixed asset acquisition and
      service agreement, for the purchase of computer server equipment used in its
      email marketing business and a service agreement related to the maintenance,
      storage and usage of such equipment. Under the terms of the agreement, the
      Company was obligated to pay $63,000 per month, for twelve consecutive months,
      commencing on August 1, 2005. As of November 30, 2006, this obligation was
      fully
      satisfied.





F-50


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


**12.** **Earnings
      Per Share**




The
      following table sets forth the reconciliation of the weighted average shares
      used for basic and diluted earnings per share:


**Year
                  Ended November 30,****2006**
              
              **2005**
              
              **2004**Denominator:Denominator
                  for basic earnings pershare
                  - weighted average shares
              
              
              14,332,598
              
              
              13,973,899
              
              
              13,257,869Effect
                  of dilutive securities:Stock
                  options
              
              
              181,634
              
              
              370,685
              
              
              670,505Denominator
                  for diluted earnings pershare
                  - adjusted weighted averageshares
              
              
              14,514,232
              
              
              14,344,584
              
              
              13,928,374




Options
      to purchase 2,211,850, 2,083,601 and 1,344,350 shares of common stock that
      were
      outstanding at November 30, 2006, 2005 and 2004, respectively, were not included
      in the computation of diluted earnings per share because their effect would
      have
      been anti-dilutive.




**13.** **Stock
      Option Plan and Warrants**




The
      Company’s shareholder-approved 2006 Employee Incentive Plan (the “2006 Plan”)
      provides for the granting of incentive stock options, non-qualified stock
      options and the issuance of restricted stock for up to 1,086,564 shares of
      our
      common stock. There are also 1,087,364 shares underlying options issued under
      the Company’s Sixth Amended and Restated 1995 Employee Stock Option Plan (the
“1995 Plan” and, with the 2006 Plan, the “Plans”). As of November 30, 2006, all
      Plan activity was for the granting of non-qualified stock options. To date,
      no
      incentive stock options have been granted. On December 1, 2006, restricted
      stock
      was issued to non-employee directors in accordance with the terms of the 2006
      Plan. Certain grants had been issued that include performance-based vesting
      criteria. No performance-based awards were granted during the year ended
      November 30, 2006. Options have five to ten year contractual terms and generally
      vest based on 0 to 3 years of continuous service.




F-51


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




The
      total
      expense related to the Plans was $517,717 for the year ended November 30, 2006.
      The total related income tax benefit recognized on the income statement was
      $179,247.




Prior
      to
      December 1, 2005, the Company accounted for the 1995
      Plan under the recognition, measurement and pro forma disclosure provisions
      of
      APB 25, the original provisions of SFAS No. 123, and SFAS No. 148,
“Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS
      148”). In accordance with APB 25, the Company generally would have recognized
      compensation expense only when it granted options with a discounted exercise
      price, or modified the terms, and would have recognized the related compensation
      expense ratably over the associated service period, which was generally the
      option vesting term.




F-52


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


Effective
      December 1, 2005, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R, using the modified prospective transition method and,
      therefore, has not restated results for prior periods. Under this transition
      method, stock-based compensation expense for the year ended November 30, 2006
      included compensation expense for all stock-based compensation awards granted
      prior to but remained unvested as of, December 1, 2005. Compensation
      expense was based on the grant date fair value estimated in accordance with
      the
      original provision of SFAS No. 123.




Stock-based
      compensation expense for all stock-based compensation awards granted after
      December 1, 2005 is based on the grant-date fair value estimated on that date
      using the Black-Scholes option-pricing model with assumptions noted on the
      table
      set forth below under the header “Stock option Valuation and Expense information
      under SFAS No. 123(R)”. The Company recognizes these compensation costs net of a
      forfeiture rate and recognizes the compensation costs for only those shares
      expected to vest on a straight-line basis over the requisite service period
      of
      the award, for which the Company uses the related weighted-average vesting
      term.
      The Company used an estimated forfeiture rate in the valuation model for the
      year ended November 30, 2006. The estimate is based on historical employee
      option exercise and employee termination experience. The Company has identified
      separate groups of optionees that exhibit similar option exercise behavior
      and
      has considered them as separate groups in the valuation model.




As
      a
      result of the Company’s December 1, 2005 adoption of SFAS 123R, the impact
      to the Company’s Consolidated Financial Statements for the year ended November
      30, 2006 on income before income taxes and on net income were reductions of
      $517,717 and $338,471, respectively, when comparing what results would have
      been
      had it continued to account for stock-based compensation under APB 25. The
      impact on both basic and diluted earnings per share for the year ended November
      30, 2006 was $0.02 per share. In addition, prior to the adoption of
      SFAS 123R, the Company presented the tax benefit of stock option exercises
      as operating cash flows. Upon the adoption of SFAS 123R, tax benefits
      resulting from tax deductions in excess of the compensation cost recognized
      for
      those options are classified as financing cash flows.




F-53


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




*Pro
      Forma Information under SFAS No, 123*




Pro
      forma
      information regarding the effect on the net income and basic and diluted income
      per share for the years ended November 30, 2005 and 2004, had the Company
      applied the fair value recognition provisions of SFAS No. 123, are as
      follows:




F-54


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


**For
                  the Years Ended November 30,****2005**
              
              **2004**Net
                  income
              
              $
              2,428,157
              
              $
              1,014,214Add:
                  Total stock-based compensation expense included inreported
                  net income, net of related tax effects
              
              
              -
              
              
              -Less:
                  Total stock-based compensation expense determinedunder
                  fair value based method, net of related tax effects
              
              
              (682,013
              )
              
              (651,982
              )Pro
                  forma Net income, as adjusted
              
              $
              1,746,144
              
              $
              362,232Basic
                  earnings per share:As
                  reported
              
              $
              0.17
              
              $
              0.08Pro
                  forma
              
              $
              0.12
              
              $
              0.03Diluted
                  earnings per share:As
                  reported
              
              $
              0.17
              
              $
              0.07Pro
                  forma
              
              $
              0.12
              
              $
              0.03





*Stock
      Option Valuation and Expense Information*




The
      Company calculated the fair value of each option grant on the date of the grant
      using the Black-Scholes option-pricing model using the following
      assumptions:


**Year
                  Ended November 30,****2006
                  (1)**
              
              **2005**
              
              **2004**Expected
                  life (years)
              
              
              4.82
              
              
              4.00
              
              
              4.00Risk-free
                  interest rate
              
              
              4.47
              %
              
              3.92
              %
              
              3.18
              %Expected
                  volatility
              
              
              50.25
              %
              
              54.00
              %
              
              54.00
              %Dividend
                  yield
              
              
              6.17
              %
              
              10.70
              %
              
              10.70
              %




F-55


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


(1)
      The
      fair value calculation was based on stock options granted during the period.




The
      volatility assumption is based on the weighted average for the expected term
      of
      the options volatility measurements of the Company’s stock. The risk-free
      interest rate assumption is based upon various short term U.S. Treasury rates,
      as of the month of the grants.




The
      expected life of employee and director stock options represents the weighted
      average of the result of the “simplified” method applied to “plain vanilla”
options granted during the period December 1, 2005 to November 30, 2006, all
      as
      provided for in Staff Accounting Bulletin No. 107 (“SAB 107”).




The
      stock-based compensation expense recognized in the consolidated statement of
      operations for the year ended November 30, 2006 is based on awards ultimately
      expected to vest, and accordingly has been adjusted by the amount of estimated
      forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time
      of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. Forfeitures were estimated based partially on
      historical experience. In the Company’s pro forma information required under
      SFAS 123 for the periods prior to December 1, 2005, the Company had established
      estimates for forfeitures.




During
      the year ended November 30, 2006, stock-based compensation expense is included
      in general and administrative expense.




*Stock
      Options*




The
      status of the Plans during the three years ended November 30, 2006, 2005 and
      2004 is as follows:




F-56


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**
 
 **2006**
                
                **2005**
                
                **2004****Weighted**
                
                
                
                **Weighted**
                
                
                
                **Weighted****Average**
                
                
                
                **Average**
                
                
                
                **Average****Exercise**
                
                
                
                **Exercise**
                
                
                
                **Exercise****Shares**
                
                **Price**
                
                **Shares**
                
                **Price**
                
                **Shares**
                
                **Price**Options
                    outstanding,beginning
                    of year
                
                
                3,140,359
                
                $
                5.65
                
                
                3,222,585
                
                $
                5.22
                
                
                2,643,640
                
                $
                4.60Granted
                
                
                142,500
                
                
                5.41
                
                
                821,500
                
                
                5.82
                
                
                1,016,250
                
                
                6.35Exercised
                
                
                (53,831
                )
                
                4.61
                
                
                (584,060
                )
                
                3.52
                
                
                (411,640
                )
                
                4.20Cancelled
                    or lapsed
                
                
                (51,967
                )
                
                6.49
                
                
                (319,666
                )
                
                5.43
                
                
                (25,665
                )
                
                4.04Options
                    outstanding,end
                    of year
                
                
                3,177,061
                
                $
                5.65
                
                
                3,140,359
                
                $
                5.65
                
                
                3,222,585
                
                $
                5.22Options
                    exercisable,end
                    of year
                
                
                2,880,548
                
                
                
                
                
                2,572,507
                
                
                
                
                
                2,444,758Options
                    available forgrant,
                    end of year
                
                
                1,087,364
                
                
                
                
                
                1,177,897
                
                
                
                
                
                1,679,731Weighted
                    average fair valueof
                    options grantedduring
                    the year
                
                $
                1.51
                
                
                
                
                $
                1.25
                
                
                
                
                $
                1.46




The
      weighted-average remaining contractual life (in years) for options outstanding
      at November 30, 2006, 2005, and 2004, were 7.3, 6.0, and 5.1 years,
      respectively. The aggregate intrinsic value represents the difference between
      the Company’s closing stock price on November 30, 2006, the last trading day of
      Fiscal 2006, and the exercise price, multiplied by the number of in-the-money
      options that would have been received by the option holders had all option
      holders exercised their options on November 30, 2006, this amounted to
      $1,448,613. This amount changes based on the fair market value of the Company’s
      stock. Total intrinsic value of options exercised for the year ended November
      30, 2006 was $67,623. Total fair value of options vested and expensed was
      $338,471, net of tax, for the year ended November 30, 2006. The weighted-average
      grant-date fair value of options granted during the year ended November 30,
      2006
      was $1.51.





A
      summary
      of the status of the Company’s nonvested shares as of November 30, 2006, and
      changes during the year ended November 30, 2006 is set forth below:




F-57


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**
 
  **November
                  30, 2006****Weighted****Average****Nonvested**
              
              **Number
                  of**
              
              **Grant-date****Shares**
              
              **Shares**
              
              **Fair
                  Value**Nonvested
                  Options outstanding,beginning
                  of period
              
              
              568,852
              
              $
              1.39Granted
              
              
              142,500
              
              
              1.51Vested
              
              
              (401,169
              )
              
              1.82Forfeited
              
              
              (13,670
              )
              
              1.36Nonvested
                  Options outstanding,end
                  of period
              
              
              296,513
              
              
              1.74





As
      of
      November 30, 2006, there was $170,805 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      Plans. That cost is expected to be recognized over a weighted-average period
      of
      7.72 months, to be expensed through the first quarter of the fiscal year ending
      November 30, 2009.




The
      following table summarizes information for options currently outstanding and
      exercisable at November 30, 2006:




F-58


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**




**Weighted****Average**
              
              **Weighted**
              
              
              
              **Weighted****Range
                  of**
              
              **Number**
              
              **Remaining**
              
              **Average**
              
              **Number**
              
              **Average****Exercise**
              
              **of
                  shares**
              
              **Contractual**
              
              **Exercise**
              
              **of
                  shares**
              
              **Exercise****Prices**
              
              **Outstanding**
              
              **Life**
              
              **Price**
              
              **Exercisable**
              
              **Price**$1.72-$2.50
              
              
              219,797
              
              
              4.2
              
              $
              2.34
              
              
              219,797
              
              $
              2.34$2.63-$3.85
              
              
              288,083
              
              
              5.1
              
              
              3.15
              
              
              288,083
              
              
              3.15$4.22-$6.23
              
              
              1,785,181
              
              
              5.1
              
              
              5.62
              
              
              1,615,336
              
              
              5.61$6.35-$9.38
              
              
              846,500
              
              
              5.6
              
              
              7.12
              
              
              719,832
              
              
              7.10$11.13-15.57
              
              
              37,500
              
              
              .5
              
              
              12.67
              
              
              37,500
              
              
              12.67$1.72-$15.57
              
              
              3,177,061
              
              
              5.1
              
              $
              5.65
              
              
              2,880,548
              
              $
              5.58


The
      fair
      value of each stock option was estimated on the date of grant using the
      Black-Scholes option-pricing model with the weighed average assumptions included
      on the table above, under the header “Stock Based Option Valuation and Expense
      Information under SFAS 123(R)”.




**14.** **Quarterly
      Results of Operations (Unaudited)**


The
          following is a summary of the unaudited quarterly results of operations
          for
          Fiscal 2006 and 2005:
  **Quarter
                        ended****November
                        30,**
                    
                    **August
                        31, (2)**
                    
                    **May
                        31, (2)**
                    
                    **February
                        28, (2)****2006:**Net
                        revenues
                    
                    $
                    17,158,116
                    
                    $
                    19,698,883
                    
                    $
                    18,964,132
                    
                    $
                    17,022,812Gross
                        profit
                    
                    
                    4,580,063
                    
                    
                    7,121,978
                    
                    
                    5,702,603
                    
                    
                    7,454,172Income
                        (loss) before income taxes
                    
                    
                    (211,027
                    )
                    
                    1,812,621
                    
                    
                    1,219,023
                    
                    
                    718,787Net
                        income (loss)
                    
                    
                    1,116
                    
                    
                    842,048
                    
                    
                    636,961
                    
                    
                    422,718Basic
                        income (loss) per share
                    
                    $
                    0.00
                    
                    $
                    0.06
                    
                    $
                    0.04
                    
                    $
                    0.03Diluted
                        income (loss) per share
                    
                    $
                    0.00
                    
                    $
                    0.06
                    
                    $
                    0.04
                    
                    $
                    0.03**2005:**
                    
                    
                    **November
                        30, (1)**
                    
                    
                    **August
                        31, (1)**
                    
                    
                    **May
                        31, (1)**
                    
                    
                    **February
                        28, (1)**Net
                        revenues
                    
                    $
                    16,598,155
                    
                    $
                    16,372,442
                    
                    $
                    16,610,569
                    
                    $
                    13,275,816Gross
                        profit
                    
                    
                    5,244,557
                    
                    
                    5,614,899
                    
                    
                    6,083,820
                    
                    
                    4,861,446Income
                        before income taxes
                    
                    
                    639,407
                    
                    
                    578,573
                    
                    
                    1,193,277
                    
                    
                    1,059,537Net
                        income
                    
                    
                    780,525
                    
                    
                    316,667
                    
                    
                    707,684
                    
                    
                    623,281Basic
                        income per share
                    
                    $
                    0.05
                    
                    $
                    0.02
                    
                    $
                    0.05
                    
                    $
                    0.05Diluted
                        income per share
                    
                    $
                    0.05
                    
                    $
                    0.02
                    
                    $
                    0.05
                    
                    $
                    0.04
 (1)
                As
                    described elsewhere in this Notes to Consolidated Financial Statements,
                    the Quarterly Reports on Form 10-Q for the first and second quarters
                    of
                    Fiscal 2005 were filed on a different basis than that included
                    above. The
                    amounts as reported in our Form 10-Q’s, as filed in Fiscal 2006, are
                    listed in the first table below (table (1)). The second table
                    (table (2))
                    provides the information that agrees to the condensed information
                    detailed
                    above, which also agrees to the basis of presentation as included
                    in the
                    Form’s 10-Q, as filed in Fiscal 2005. The third table provides the
                    variance between table (1) and table (2), effectively providing
                    the
                    variance between the filings. A fourth table is provided detailing
                    the
                    percentage variance between table (3) and table (2), effectively
                    providing
                    the percentage variance between the
                    filings.
 F-59
 (2)
                  The
                      first and second quarter of Fiscal 2006, were reported on a
                      different
                      basis then the third and fourth quarters, relative to account
                      classifications as they related to our preliminary interim
                      CODM reporting
                      (see Note 1 to the Consolidated Financial Statements) and our
                      final
                      reporting determinations, and due to the correction of an immaterial
                      allocation classification error between selling salaries and
                      general and
                      administrative salaries (also see Note 1 to the Consolidated
                      Financial
                      Statements), all of such classification adjustments had no
                      impact on
                      Income from Operations, Pre-tax Income, or Net-income. Table
                      (5), included
                      below, provides the details of the our Fiscal 2006 first, second
                      and third
                      quarter, three-month results, as included in our three-month
                      sections of
                      our consolidated statements of income, included in our Form
                      10-Q’s as
                      filed. Table (6) compares the nine months, as accumulated in
                      table (5),
                      with the nine months as included in our Form 10-Q filed for
                      our third
                      quarter ended August 31, 2006. Table (6) also includes the
                      change,
                      expressed in dollars, and as a percentage. We again note that
                      the
                      classification adjustments had no impact on Income from Operations,
                      Pre-tax Income, or Net-income, and as such have been deemed
                      immaterial.
  **Table
                      1**
                  
                  
                  **As
                      reported in Fiscal 2006 Form 10-Q's - Quarter
                      ended****2005:**
                  
                  
                  **November
                      30,**
                  
                  
                  **August
                      31,**
                  
                  
                  **May
                      31,**
                  
                  
                  **February
                      28,**Net
                      revenues
                  
                  $
                  16,598,155
                  
                  $
                  16,372,442
                  
                  $
                  16,257,112
                  
                  $
                  12,924,931Cost
                      of revenues
                  
                  
                  11,353,598
                  
                  
                  10,757,543
                  
                  
                  9,360,005
                  
                  
                  7,286,476Gross
                      profit
                  
                  
                  5,244,557
                  
                  
                  5,614,899
                  
                  
                  6,897,107
                  
                  
                  5,638,455Selling
                      expenses
                  
                  
                  1,576,524
                  
                  
                  1,315,640
                  
                  
                  1,281,345
                  
                  
                  817,175General
                      and administrative expenses
                  
                  
                  3,763,756
                  
                  
                  3,805,339
                  
                  
                  3,961,684
                  
                  
                  4,263,951Other
                      operating (income) expense
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (189,550
                  )
                  
                  (175,805
                  )Amortization
                      of intangibles
                  
                  
                  -
                  
                  
                  -
                  
                  
                  476,762
                  
                  
                  275,162Depreciation
                      expense
                  
                  
                  -
                  
                  
                  -
                  
                  
                  171,300
                  
                  
                  174,946Bad
                      debt expense
                  
                  
                  (573,427
                  )
                  
                  4,634
                  
                  
                  80,382
                  
                  
                  85,225Income
                      from operations
                  
                  $
                  477,704
                  
                  $
                  489,286
                  
                  $
                  1,115,184
                  
                  $
                  197,801
 **Table
                          2**
                      
                      **As
                          reported in Fiscal 2005 Form 10-Q's - Quarter
                          ended****2005:**
                      
                      **November
                          30,**
                      
                      **August
                          31,**
                      
                      **May
                          31,**
                      
                      **February
                          28,**Net
                          revenues
                      
                      $
                      16,598,155
                      
                      $
                      16,372,442
                      
                      $
                      16,610,569
                      
                      $
                      13,275,816Cost
                          of revenues
                      
                      
                      11,353,598
                      
                      
                      10,757,543
                      
                      
                      10,526,749
                      
                      
                      8,414,370Gross
                          profit
                      
                      
                      5,244,557
                      
                      
                      5,614,899
                      
                      
                      6,083,820
                      
                      
                      4,861,446Selling
                          expenses
                      
                      
                      1,328,611
                      
                      
                      896,697
                      
                      
                      974,120
                      
                      
                      817,175General
                          and administrative expenses
                      
                      
                      4,011,669
                      
                      
                      4,224,282
                      
                      
                      3,914,134
                      
                      
                      3,761,245Other
                          operating (income) expense
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Amortization
                          of intangibles
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Depreciation
                          expense
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Bad
                          debt expense
                      
                      
                      (573,427
                      )
                      
                      4,634
                      
                      
                      80,382
                      
                      
                      85,225Income
                          from operations
                      
                      $
                      477,704
                      
                      $
                      489,286
                      
                      $
                      1,115,184
                      
                      $
                      197,801
  F-60
 
 **Table
                          3**
                        
                        **$$$
                            Variance between Reported Filings - Quarter ended****2005:**
                        
                        **November
                            30,**
                        
                        **August
                            31,**
                        
                        **May
                            31,**
                        
                        **February
                            28,**Net
                            revenues
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        (353,457
                        )
                        $
                        (350,885
                        )Cost
                            of revenues
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (1,166,744
                        )
                        
                        (1,127,894
                        )Gross
                            profit
                        
                        
                        -
                        
                        
                        -
                        
                        
                        813,287
                        
                        
                        777,009Selling
                            expenses
                        
                        
                        247,913
                        
                        
                        418,943
                        
                        
                        307,225
                        
                        
                        -General
                            and administrative expenses
                        
                        
                        (247,913
                        )
                        
                        (418,943
                        )
                        
                        47,550
                        
                        
                        502,706Other
                            operating (income) expense
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (189,550
                        )
                        
                        (175,805
                        )Amortization
                            of intangibles
                        
                        
                        -
                        
                        
                        -
                        
                        
                        476,762
                        
                        
                        275,162Depreciation
                            expense
                        
                        
                        -
                        
                        
                        -
                        
                        
                        171,300
                        
                        
                        174,946Bad
                            debt expense
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -Income
                            from operations
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        -
  **Table
                              4**
                          
                          **%%%
                              Variance between Reported Filings - Quarter ended****2005:**
                          
                          **November
                              30,**
                          
                          **August
                              31,**
                          
                          **May
                              31,**
                          
                          **February
                              28,**Net
                              revenues
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          -2.13
                          %
                          
                          -2.64
                          %Cost
                              of revenues
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          -11.08
                          %
                          
                          -13.40
                          %Gross
                              profit
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          13.37
                          %
                          
                          15.98
                          %Selling
                              expenses
                          
                          
                          18.66
                          %
                          
                          46.72
                          %
                          
                          31.54
                          %
                          
                          0.00
                          %General
                              and administrative expenses
                          
                          
                          -6.18
                          %
                          
                          -9.92
                          %
                          
                          1.21
                          %
                          
                          13.37
                          %Other
                              operating (income) expense
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          100.00
                          %
                          
                          100.00
                          %Amortization
                              of intangibles
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          100.00
                          %
                          
                          100.00
                          %Depreciation
                              expense
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          100.00
                          %
                          
                          100.00
                          %Bad
                              debt expense
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          0.00
                          %Income
                              from operations
                          
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          0.00
                          %
                          
                          0.00
                          %
   F-61
  **Table
                            5**
                        
                        **As
                            reported in Fiscal 2006 (three month reported basis)
                            Form 10-Q's - Quarter
                            ended****Nine
                            Months****(per
                            attached>)**
                        
                        **Three
                            Months****2006:**
                        
                        **August
                            31,**
                        
                        **August
                            31,**
                        
                        **May
                            31,**
                        
                        **February
                            28,**Net
                            revenues
                        
                        $
                        55,685,827
                        
                        $
                        19,698,883
                        
                        $
                        18,964,132
                        
                        $
                        17,022,812Cost
                            of revenues
                        
                        
                        32,567,177
                        
                        
                        12,576,905
                        
                        
                        10,421,632
                        
                        
                        9,568,640Gross
                            profit
                        
                        
                        23,118,650
                        
                        
                        7,121,978
                        
                        
                        8,542,500
                        
                        
                        7,454,172Selling
                            expenses
                        
                        
                        4,303,604
                        
                        
                        1,473,299
                        
                        
                        1,826,296
                        
                        
                        1,004,009General
                            and administrative expenses
                        
                        
                        14,005,562
                        
                        
                        3,899,851
                        
                        
                        5,031,628
                        
                        
                        5,074,083Other
                            operating (income) expense
                        
                        
                        42,630
                        
                        
                        -
                        
                        
                        18,517
                        
                        
                        24,113Amortization
                            of intangibles
                        
                        
                        723,792
                        
                        
                        -
                        
                        
                        361,817
                        
                        
                        361,975Depreciation
                            expense
                        
                        
                        429,781
                        
                        
                        -
                        
                        
                        215,200
                        
                        
                        214,581Bad
                            debt expense
                        
                        
                        174,340
                        
                        
                        80,028
                        
                        
                        10,026
                        
                        
                        84,286Income
                            from operations
                        
                        $
                        3,438,941
                        
                        $
                        1,668,800
                        
                        $
                        1,079,016
                        
                        $
                        691,125
 **Table
                              6**
                          
                          **Comparison
                              of Table (5), nine month column with Fiscal 2006**
                            **nine
                              months as reported in Fiscal 2006 third quarter Form
                              10-Q****Nine
                              Months**
                          
                          **Nine
                              Months**
                          
                          **Change**
                          
                          **Change****(per
                              table (5))**
                          
                          **per
                              Form 10-Q**
                          
                          **Inc(Dec)**
                          
                          **Inc(Dec)****2006:**
                          
                          **August
                              31,**
                          
                          **August
                              31,**
                          
                          **$$$**
                          
                          **%%%**Net
                              revenues
                          
                          $
                          55,685,827
                          
                          $
                          55,685,827
                          
                          $
                          -
                          
                          
                          0.00
                          %Cost
                              of revenues
                          
                          
                          32,567,177
                          
                          
                          35,407,074
                          
                          
                          (2,839,897
                          )
                          
                          -8.72
                          %Gross
                              profit
                          
                          
                          23,118,650
                          
                          
                          20,278,753
                          
                          
                          2,839,897
                          
                          
                          12.28
                          %Selling
                              expenses
                          
                          
                          4,303,604
                          
                          
                          4,683,465
                          
                          
                          (379,861
                          )
                          
                          -8.83
                          %General
                              and administrative expenses
                          
                          
                          14,005,562
                          
                          
                          11,982,007
                          
                          
                          2,023,555
                          
                          
                          14.45
                          %Other
                              operating (income) expense
                          
                          
                          42,630
                          
                          
                          -
                          
                          
                          42,630
                          
                          
                          100.00
                          %Amortization
                              of intangibles
                          
                          
                          723,792
                          
                          
                          -
                          
                          
                          723,792
                          
                          
                          100.00
                          %Depreciation
                              expense
                          
                          
                          429,781
                          
                          
                          -
                          
                          
                          429,781
                          
                          
                          100.00
                          %Bad
                              debt expense
                          
                          
                          174,340
                          
                          
                          174,340
                          
                          
                          -
                          
                          
                          0.00
                          %Income
                              from operations
                          
                          $
                          3,438,941
                          
                          $
                          3,438,941
                          
                          $
                          -
                          
                          
                          0.00
                          %


F-62


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


During
      the fourth quarter of Fiscal 2006, the Company adjusted the volatility rate
      in
      its SFAS 123R Stock Based Compensation expense calculation, effectively
      decreasing after-tax SFAS 123R expense by $119,464, correspondingly increasing
      fourth quarter net income by the same amount.




During
      the fourth quarter of Fiscal 2005, the Company realized $600,000 in bad debt
      recapture and $68,000 of interest income pursuant to a settlement of an
      arbitration matter.




During
      the fourth quarter of Fiscal 2004, the Company adjusted certain accrued expenses
      related to year-end bonus accruals. The total of such adjustment effectively
      reduced fourth quarter costs and expenses by approximately $180,000,
      correspondingly improving fourth quarter income before income taxes by the
      same
      amount. During the fourth quarter of Fiscal 2004, the Company recorded the
      final
      purchase price allocation between goodwill and amortizable identifiable
      intangibles, as they related to a current year acquisition. This final
      allocation effectively increased fourth quarter amortization expense by
      approximately $130,000, pursuant to the final purchase price allocation
      differing from the preliminary allocation estimate recorded at August 31, 2004.
      This adjustment effectively reduced fourth quarter income before taxes by the
      same amount, and served to offset the benefit of the fourth quarter accrued
      year-end bonus adjustment.




F-63


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


**15.** **Subsequent
      Events (Unaudited)**




On
      February 26, 2007, the Company’s Board of Directors declared a dividend of $0.08
      per share to shareholders of record as of March 1, 2007, payable on or about
      March 10, 2007.




**SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**


**Col.
                  A**
              
              **Col.
                  B**
              
              **Col.
                  C**
              
              
              
              **Col.
                  D**
              
              
              
              **Col.
                  E****Additions****Balance
                  at**
              
              **Charged
                  to**
              
              **Charged
                  to**
              
              
              
              
              
              
              
              **Balance
                  at****Beginning**
              
              **costs
                  and**
              
              **other**
              
              
              
              **Deductions
                  -**
              
              
              
              **end
                  of****Description**
              
              **of
                  period**
              
              **expenses**
              
              **accounts**
              
              
              
              **Describe**
              
              
              
              **period****Year
                  ended November 30, 2006**Reserve
                  for customer chargebacks
              
              $
              302,174
              
              $
              -
              
              $
              -
              
              
              
              
              $
              302,174
              
              
              (6
              )
              $
              -Allowance
                  for doubtful accounts
              
              $
              1,025,660
              
              $
              -
              
              $
              766,912
              
              
              (4
              )
              $
              712,911
              
              
              (5
              )
              $
              1,079,661Allowance
                  for data qualifications
              
              $
              258,314
              
              $
              -
              
              $
              97,800
              
              
              (1
              )
              $
              114,956
              
              
              (1A
              )
              $
              241,158
              
              
              (7
              )**Year
                  ended November 30, 2005**Reserve
                  for customer chargebacks
              
              $
              377,534
              
              $
              -
              
              $
              208,089
              
              
              (1
              )
              $
              283,449
              
              
              (3
              )
              $
              302,174Reserve
                  for fulfillment costs
              
              $
              48,016
              
              $
              -
              
              $
              -
              
              
              
              
              $
              48,016
              
              
              (2
              )
              $
              -Allowance
                  for doubtful accounts
              
              $
              691,228
              
              $
              -
              
              $
              196,814
              
              
              (4
              )
              $
              (137,618
              )
              
              (5
              )
              $
              1,025,660Allowance
                  for data qualifications
              
              $
              266,644
              
              $
              -
              
              $
              1,347,704
              
              
              (1
              )
              $
              1,356,034
              
              
              (1A
              )
              $
              258,314**Year
                  ended November 30, 2004**Reserve
                  for customer chargebacks
              
              $
              406,352
              
              $
              -
              
              $
              2,252,289
              
              
              (1
              )
              $
              2,281,107
              
              
              (3
              )
              $
              377,534Reserve
                  for fulfillment costs
              
              $
              -
              
              $
              -
              
              $
              48,016
              
              
              (2
              )
              $
              -
              
              
              
              
              $
              48,016Allowance
                  for doubtful accounts
              
              $
              872,603
              
              $
              -
              
              $
              406,698
              
              
              (4
              )
              $
              588,073
              
              
              (5
              )
              $
              691,228Allowance
                  for data qualifications
              
              $
              93,498
              
              $
              -
              
              $
              1,249,805
              
              
              (1
              )
              $
              1,076,659
              
              
              (1A
              )
              $
              266,644





F-64


***Traffix,
        Inc. and Subsidiaries***
 **Notes
        to Consolidated Financial Statements**


(1)
      Charges against revenues.




(1A)
      Charges to revenues.




(2)
      Charges against cost of sales.




(3)
      Chargebacks refunded to consumers.




(4)
      Charges to allowance.




(5)
      Charges against the allowance.




(6) Charges
      against accounts receivable




(7)
      Netted against accounts receivable





F-65