**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-Q**





(Mark
      One)




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




For
      the
      quarterly period ended August 31, 2006


or


o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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
            22-3322277(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





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





(845)
      620-1212


Registrant's
      telephone number, including area code:





Indicate
      by check mark whether the Registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes
x No
o




Indicate
      by check mark whether the Registrant is 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 filero
            Accelerated
                filero
            Non-accelerated
                filer x





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




The
      number
      of shares outstanding of the Registrant's common stock is 14,359,171 (as of
      10/10/06).








**TRAFFIX,
      INC.**


**INDEX
      TO QUARTERLY REPORT ON FORM 10-Q**


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**QUARTER
      ENDED AUGUST 31, 2006**





**ITEMS
      IN FORM 10-Q**





**Page****Part
                I**
            
            **Financial
                Information**Item
                1.
            
            Financial
                StatementsConsolidated
                Balance Sheets at August 31, 2006 and November 30, 2005
            
            4Consolidated
                Statements of Income for the three and nine months ended August 31,
                2006
                and August 31, 2005
            
            5Consolidated
                Statements of Cash Flows for the nine months ended August 31, 2006
                and
                August 31, 2005
            
            7Consolidated
                Statement of Shareholders’ Equity for the nine months ended August 31,
                2006
            
            8Notes
                to Consolidated Financial Statements
            
            9Item
                2.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            35Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            NoneItem
                4.
            
            Controls
                and Procedures
            
            83**Part
                II**
            
            **Other
                Information**Item
                1.
            
            Legal
                Proceedings
            
            85Item
                1A.
            
            Risk
                Factors
            
            86Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            NoneItem
                3.
            
            Defaults
                Upon Senior Securities
            
            NoneItem
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            93Item
                5.
            
            Other
                Information
            
            94Item
                6.
            
            Exhibits
            
            94**Signatures**
            
            95





2




FORWARD
      LOOKING INFORMATION





This
      Quarterly Report on Form 10-Q includes “forward-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934. When used herein, words like “intend”,
“anticipate”, “believe”, “estimate”, “plan”, or “expect”, as they relate to us,
      are intended to identify forward-looking statements. We believe that the
      assumptions and expectations reflected in such forward-looking statements are
      reasonable, based on information available to us on the date of this Quarterly
      Report, but no assurances can be given that these assumptions and expectations
      will prove to have been correct or that we will take any action that we may
      presently be planning. We are not undertaking to publicly update or revise
      any
      forward-looking statement if we obtain new information or upon the occurrence
      of
      future events or otherwise.





3




**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
  **August
                  31,**
              
              **November
                  30,****2006**
              
              **2005****(Unaudited)****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              6,917,790
              
              $
              9,335,723Marketable
                  securities
              
              
              19,270,715
              
              
              18,908,064Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $850,168 at August 31, 2006 and $1,025,661 at November 30, 2005
              
              
              11,446,377
              
              
              11,137,275Deferred
                  income taxes
              
              
              1,068,758
              
              
              1,379,877Prepaid
                  expenses and other current assets
              
              
              874,486
              
              
              1,078,621**Total
                  current assets**
              
              
              39,578,126
              
              
              41,839,560Marketable
                  securities
              
              
              2,722,653
              
              
              2,662,905Property
                  and equipment, net
              
              
              2,116,197
              
              
              2,317,690Goodwill
              
              
              7,940,872
              
              
              6,426,336Other
                  intangibles, net
              
              
              1,509,354
              
              
              2,538,223Deferred
                  income taxes
              
              
              366,860
              
              
              478,050**Total
                  assets**
              
              $
              54,234,062
              
              $
              56,262,764**Liabilities**Current
                  liabilities:Accounts
                  payable
              
              $
              4,050,948
              
              $
              5,426,797Accrued
                  expenses
              
              
              4,233,796
              
              
              4,269,995Reserve
                  for customer chargebacks
              
              
              -
              
              
              302,175Due
                  to related parties
              
              
              105,000
              
              
              110,076Income
                  taxes payable
              
              
              857,944
              
              
              1,009,880**Total
                  current liabilities**
              
              
              9,247,688
              
              
              11,118,923Deferred
                  income taxes
              
              
              125,800
              
              
              302,465**Total
                  liabilities**
              
              
              9,373,488
              
              
              11,421,388Minority
                  interest
              
              
              361,637
              
              
              365,637Commitments
                  and contingencies**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;
                  issuedand
                  outstanding 14,359,171 shares and 14,208,486 shares,
                  respectively
              
              
              14,359
              
              
              14,208Additional
                  paid-in capital
              
              
              43,475,154
              
              
              43,584,229Retained
                  earnings
              
              
              -
              
              
              -Accumulated
                  other comprehensive income
              
              
              1,009,424
              
              
              877,302**Total
                  shareholders' equity**
              
              
              44,498,937
              
              
              44,475,739**Total
                  liabilities and shareholders' equity**
              
              $
              54,234,062
              
              $
              56,262,764


4


**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 **(UNAUDITED)**


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  revenue
              
              $
              19,698,883
              
              $
              16,372,442
              
              $
              55,685,827
              
              $
              46,258,827Cost
                  of sales
              
              
              12,576,905
              
              
              10,757,543
              
              
              35,407,074
              
              
              29,698,662**GROSS
                  PROFIT**
              
              
              7,121,978
              
              
              5,614,899
              
              
              20,278,753
              
              
              16,560,165Selling
                  expenses
              
              
              1,473,299
              
              
              1,315,640
              
              
              4,683,465
              
              
              3,656,834General
                  and administrative expenses
              
              
              3,899,851
              
              
              3,805,339
              
              
              11,982,007
              
              
              10,930,819Bad
                  debt expense
              
              
              80,028
              
              
              4,634
              
              
              174,340
              
              
              170,241**INCOME
                  FROM OPERATIONS**
              
              
              1,668,800
              
              
              489,286
              
              
              3,438,941
              
              
              1,802,271Other
                  income (expense):Interest
                  income and dividends
              
              
              277,972
              
              
              217,901
              
              
              774,344
              
              
              643,238Realized
                  gains (losses) on marketable securities
              
              
              12,854
              
              
              -
              
              
              (5,498
              )
              
              574,050Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              -
              
              
              -
              
              
              195,000Other
                  non-operating expense
              
              
              (3,005
              )
              
              (2,789
              )
              
              (25,356
              )
              
              (9,173
              )Minority
                  interest in income ofconsolidated
                  subsidiary
              
              
              (144,000
              )
              
              (125,825
              )
              
              (432,000
              )
              
              (373,999
              )**INCOME
                  BEFORE PROVISION****FOR
                  INCOME TAXES**
              
              
              1,812,621
              
              
              578,573
              
              
              3,750,431
              
              
              2,831,387Provision
                  for income taxes
              
              
              970,573
              
              
              261,906
              
              
              1,848,704
              
              
              1,183,755**NET
                  INCOME**
              
              $
              842,048
              
              $
              316,667
              
              $
              1,901,727
              
              $
              1,647,632Basic
                  earnings per shareNet
                  income
              
              $
              0.06
              
              $
              0.02
              
              $
              0.13
              
              $
              0.12Weighted
                  average shares outstanding
              
              
              14,359,171
              
              
              14,113,756
              
              
              14,286,215
              
              
              13,900,985Diluted
                  earnings per shareNet
                  income
              
              $
              0.06
              
              $
              0.02
              
              $
              0.13
              
              $
              0.12Weighted
                  average shares outstanding
              
              
              14,547,567
              
              
              14,447,285
              
              
              14,483,124
              
              
              14,291,794Cash
                  dividends declared per common share
              
              $
              0.08
              
              $
              0.08
              
              $
              0.24
              
              $
              0.24
  The
        accompanying notes are an integral part of these financial
        statements
  5


Income
      from operations for the three and nine-month periods ended August 31, 2006
      included stock-based compensation expense under Statement of Financial
      Accounting Standards (“SFAS”) 123(R) of $115,725 and $589,060, respectively,
      with such expense being included in general and administrative expenses. The
      Consolidated Financial Statements do not reflect any stock-based compensation
      expense related to employee stock options and non-employee director stock
      options under SFAS 123(R) in the three and nine-month periods ended August
      31,
      2005 because the Company did not adopt the retrospective recognition provisions
      of SFAS 123. Proforma net income was $191,128 and $1,281,327 for the three
      and
      nine-month periods ended August 31, 2005, respectively, inclusive of $125,539
      and $366,305, respectively, in proforma stock-based compensation expense, or
      $0.01 and $0.03, respectively, per proforma diluted share after the related
      respective proforma tax effect of $64,671 and $188,703. Prior to December 1,
      2005, the proforma stock-based compensation disclosure was limited to the notes
      to the consolidated Financial Statements.





The
      provision for income taxes includes the income tax benefit from stock-based
      compensation.




6


**TRAFFIX,
        INC. AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
  **Nine
                  Months Ended****August
                  31,**
              
              **August
                  31,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  income
              
              $
              1,901,727
              
              $
              1,647,632Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              1,710,832
              
              
              1,635,796Stock-based
                  compensation
              
              
              589,060
              
              
              -Reserve
                  for customer chargebacks
              
              
              -
              
              
              371,998Provision
                  for uncollectible accounts
              
              
              174,340
              
              
              170,241Deferred
                  income taxes
              
              
              249,781
              
              
              449,383Net
                  losses(gains) on sale of marketable securities
              
              
              5,498
              
              
              (574,050
              )Gain
                  on sale of subsidiary
              
              
              -
              
              
              (195,000
              )Minority
                  interest
              
              
              432,000
              
              
              373,999Changes
                  in assets and liabilities of business, net of
                  acquisitions:Accounts
                  receivable
              
              
              (785,617
              )
              
              (5,298,098
              )Prepaid
                  expenses and other current assets
              
              
              204,135
              
              
              267,627Accounts
                  payable
              
              
              (1,375,849
              )
              
              1,643,743Reserve
                  for customer chargebacks
              
              
              -
              
              
              (442,835
              )Income
                  taxes payable
              
              
              (151,936
              )
              
              703,773Due
                  to related parties
              
              
              (5,076
              )
              
              231,158Other,
                  principally accrued expenses
              
              
              186,634
              
              
              (10,199
              )**Net
                  cash provided by operating activities**
              
              
              3,135,529
              
              
              975,168Cash
                  flows from investing activities:Purchases
                  of securities
              
              
              (131,536,228
              )
              
              (172,383,778
              )Proceeds
                  from sales of securities
              
              
              131,090,897
              
              
              177,865,416Proceeds
                  from the sale of a subsidiary
              
              
              -
              
              
              195,000Payment
                  for asset acquisition, net of cash received
              
              
              (886,502
              )
              
              (3,077,714
              )Cash
                  payment for intangible asset - license agreement
              
              
              (21,416
              )
              
              (42,915
              )Capital
                  expenditures
              
              
              (369,184
              )
              
              (244,405
              )**Net
                  cash (used in) provided by investing activities**
              
              
              (1,722,433
              )
              
              2,311,604Cash
                  flows from financing activities:Dividends
                  paid
              
              
              (3,428,211
              )
              
              (3,334,408
              )Distribution
                  to minority interest holder
              
              
              (436,000
              )
              
              (128,896
              )Repayment
                  of capital lease obligation
              
              
              (222,833
              )
              
              -Proceeds
                  from stock options exercised
              
              
              219,215
              
              
              1,838,740Excess
                  tax benefits from stock-based compensation
              
              
              28,689
              
              
              -**Net
                  cash used in financing activities**
              
              
              (3,839,140
              )
              
              (1,624,564
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              8,111
              
              
              3,715Net
                  (decrease) increase in cash and cash equivalents
              
              
              (2,417,933
              )
              
              1,665,923Cash
                  and cash equivalents, beginning of period
              
              
              9,335,723
              
              
              7,553,285**Cash
                  and cash equivalents, end of period**
              
              $
              6,917,790
              
              $
              9,219,208
  See
        Notes
        (1), (2), (7) and (11) for a summary of noncash investing and financing
        activities.
  7


**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF SHAREHOLDERS' EQUITY**
 **FOR
        THE NINE MONTHS ENDED AUGUST 31, 2006**
 **(UNAUDITED)**


**Accumulated****Additional**
              
              
              
              **Other**
              
              **Total****Common
                  Stock**
              
              **Paid-in**
              
              **Retained**
              
              **Comprehensive**
              
              **Shareholders'****Shares**
              
              **Amounts**
              
              **Capital**
              
              **Earnings**
              
              **Income(Loss)**
              
              **Equity****Balance,
                  November 30, 2005**
              
              
              14,208,486
              
              $
              14,208
              
              $
              43,584,229
              
              $
              -
              
              $
              877,302
              
              $
              44,475,739Net
                  income for the nine monthsended
                  August 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              1,901,727
              
              
              
              
              
              1,901,727Unrealized
                  (losses) on available-for-sale securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,463
              )
              
              (4,463
              )Reclassification
                  adjustment for gain realizedin
                  net income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,834
              )
              
              (8,834
              )Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              145,419
              
              
              145,419Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              589,060
              
              
              
              
              
              
              
              
              589,060Dividends
                  declared
              
              
              
              
              
              
              
              
              (1,526,484
              )
              
              (1,901,727
              )
              
              
              
              
              (3,428,211
              )Stock
                  option exercises
              
              
              47,331
              
              
              47
              
              
              219,168
              
              
              
              
              
              
              
              
              219,215Tax
                  benefit from exercise ofstock
                  options
              
              
              
              
              
              
              
              
              28,689
              
              
              
              
              
              
              
              
              28,689Common
                  stock issued in connectionwith
                  terms of prior year acquisition
              
              
              103,354
              
              
              104
              
              
              580,492
              
              
              
              
              
              
              
              
              580,596**Balance,
                  August 31, 2006**
              
              
              14,359,171
              
              $
              14,359
              
              $
              43,475,154
              
              $
              -
              
              $
              1,009,424
              
              $
              44,498,937




8




**TRAFFIX,
      INC. AND SUBSIDIARIES**


**NOTES
      TO FINANCIAL STATEMENTS (UNAUDITED)**








**1.
      GENERAL**





The
      accompanying consolidated financial statements are unaudited; however,
      in the opinion of management, these financial statements are presented
      in conformity with accounting principles generally accepted in the United
      States of America. The accompanying unaudited consolidated financial statements
      reflect all adjustments which are, in the opinion of management, necessary
      for a fair presentation of the financial position and operating results
      for the interim periods presented and are of a normal and recurring nature.
      In the preparation of these financial statements, management is required
      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 revenues and expenses during the interim
      periods reported. Actual results could differ from those estimates.





Principally,
      estimates are used in reserves for uncollectible receivables, recoverability
      of
      long-lived assets, and the realizability of deferred tax assets. Additionally,
      the Company has potential exposure resulting from pending and/or threatened
      litigation for which the Company currently does not provide a loss provision.





Management’s
      estimates and assumptions are continually reviewed against actual results with
      the effects of any revisions being reflected in the results of operations at
      that time.




The
      accompanying unaudited consolidated financial statements should be read in
      conjunction with the audited consolidated financial statements and notes
      thereto, together with management's discussion and analysis of financial
      condition and results of operations, contained in the Company's Annual Report
      on
      Form 10-K for the fiscal year ended November 30, 2005. The
      consolidated balance sheet at November 30, 2005 was derived from audited
      financial statements, but does not include all disclosures required by generally
      accepted accounting principles accepted in the United States of America.
      The results of operations for the three and nine-month periods ended August
      31,
      2006 are not necessarily indicative of the results to be expected for the
      subsequent quarter or the full fiscal year ending November 30, 2006.




9





Certain
      prior year amounts in the unaudited consolidated financial statements have
      been
      reclassified to conform with the current year presentation. Specifically,
      effective December 1, 2005, 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 operated 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 inactive for Fiscal 2005 and Fiscal 2006, was collapsed
      into
      the operations of the current business for both Fiscal periods. Additionally,
      certain salaries originally reported as general and administrative salaries
      were
      reclassified based on services provided. As a result of this modification,
      certain elements of the August 31, 2005 financial statements and notes thereto
      were reclassified to correlate to the way the CODM currently receives
      information on the Company’s Online Advertising and Media Services operations.
      Revenues, gross profit, income from operations, income before provision for
      income taxes, provision for income taxes and net income for the three and
      nine-month periods ended August 31, 2005 were not affected by the
      reclassification resulting from the CODM’s re-assessment of analyzing
      operations.




10




The
      following table sets forth all of the income statement line item components
      affected by the reclassifications:


**Three
                  months ended August 31, 2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              16,372,442
              
              
              
              
              $
              16,372,442Cost
                  of sales
              
              
              10,757,543
              
              
              
              
              
              10,757,543Gross
                  Profit
              
              
              5,614,899
              
              
              -
              
              
              5,614,899Selling
                  expenses
              
              
              896,697
              
              
              418,943
              
              
              1,315,640General
                  and Administrative expenses
              
              
              4,224,282
              
              
              (418,943
              )
              
              3,805,339Bad
                  debt expense
              
              
              4,634
              
              
              -
              
              
              4,634Income
                  from operations
              
              $
              489,286
              
              $
              -
              
              $
              489,286
   **Nine
                  months ended August 31, 2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              46,258,827
              
              
              
              
              $
              46,258,827Cost
                  of sales
              
              
              29,698,662
              
              
              
              
              
              29,698,662Gross
                  Profit
              
              
              16,560,165
              
              
              -
              
              
              16,560,165Selling
                  expenses
              
              
              2,687,992
              
              
              968,842
              
              
              3,656,834General
                  and Administrative expenses
              
              
              11,899,661
              
              
              (968,842
              )
              
              10,930,819Bad
                  debt expense
              
              
              170,241
              
              
              
              
              
              170,241Income
                  from operations
              
              $
              1,802,271
              
              $
              -
              
              $
              1,802,271




The
      income statement reclassifications principally reflect selling salaries which
      were reclassified from general and administrative expenses based on a current
      and retroactive study of the respective employee services performed in all
      periods presented.





11





Certain
      reclassifications were made to the income statement presentation previously
      included in the Company’s Form 10-Q for the six-months ended May 31, 2006 and
      2005. Such reclassifications were reversions back to the cost of sale and
      overhead account allocation groupings that were originally used to report Fiscal
      2005 operations. Such revision did not impact income from operations, income
      before provision for income taxes, provision for income taxes or net income
      for
      the three and six-month periods ended May 31, 2005 and 2006.


**Six
                  months****ended
                  May 31,****2006**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              35,986,944
              
              $
              -
              
              $
              35,986,944Cost
                  of sales
              
              
              19,990,272
              
              
              2,839,897
              
              
              22,830,169Gross
                  Profit
              
              
              15,996,672
              
              
              (2,839,897
              )
              
              13,156,775Selling
                  expenses
              
              
              3,210,166
              
              
              -
              
              
              3,210,166General
                  and Administrative expenses
              
              
              9,725,850
              
              
              (1,643,694
              )
              
              8,082,156Other
                  operating (income) expense
              
              
              42,630
              
              
              (42,630
              )
              
              -Amortization
                  of intangibles
              
              
              723,792
              
              
              (723,792
              )
              
              -Depreciation
                  expense
              
              
              429,781
              
              
              (429,781
              )
              
              -Bad
                  debt expense
              
              
              94,312
              
              
              
              
              
              94,312Income
                  from operations
              
              $
              1,770,141
              
              $
              -
              
              $
              1,770,141






12






**Six
                  months ended May 31, 2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              29,182,043
              
              $
              704,342
              
              $
              29,886,385Cost
                  of sales
              
              
              16,646,481
              
              
              2,294,638
              
              
              18,941,119Gross
                  Profit
              
              
              12,535,562
              
              
              (1,590,296
              )
              
              10,945,266Selling
                  expenses
              
              
              2,341,194
              
              
              -
              
              
              2,341,194General
                  and Administrative expenses
              
              
              7,982,961
              
              
              (857,481
              )
              
              7,125,480Other
                  operating (income) expense
              
              
              (365,355
              )
              
              365,355
              
              
              -Amortization
                  of intangibles
              
              
              751,924
              
              
              (751,924
              )
              
              -Depreciation
                  expense
              
              
              346,246
              
              
              (346,246
              )
              
              -Bad
                  debt expense
              
              
              165,607
              
              
              
              
              
              165,607Income
                  from operations
              
              $
              1,312,985
              
              $
              -
              
              $
              1,312,985





During
      the nine months ended August 31, 2006 and 2005, options for 47,331 shares and
      532,477 shares of the Company’s common stock, respectively, were exercised by
      its employees and directors. Tax benefits of $28,689 and $419,384 in the nine
      months ended August 31, 2006 and 2005, respectively, resulting from the exercise
      of these options, were recorded as an increase to additional paid-in capital
      and
      a reduction of income taxes currently payable.





**Recent
      Accounting Pronouncements**





There
      have been no material changes to the pronouncements that affect the Company,
      as
      previously reported in the Company’s Annual Report on Form 10-K for the fiscal
      year ended November 30, 2005.





13




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 does not believe
      the
      adoption of FIN 48 will have a material impact on its financial statements.




During
      the nine months ended August 31, 2006, specifically 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”). See Notes 2 and 3 for additional disclosure on SFAS
      123R.




**2.
      SIGNIFICANT ACCOUNTING POLICIES**





The
      Company’s significant accounting policies are included in its Form 10-K for the
      year ended November 30, 2005. As described above in Note 1 and further described
      below in Note 3 to its Consolidated Financial Statements, the Company adopted
      SFAS 123R effective December 1, 2005. During the nine months ended August 31,
      2006, there were no other significant changes in the Company’s accounting
      policies.





**Transactions
      with Major Customers and Other Concentrations**





In
      prior
      fiscal periods a significant portion of the Company’s revenue was dependent on a
      limited number of major customers. The Company has been modifying its business
      methods and practices, including diversification of its revenue drivers, in
      an
      effort to diversify its customer base. During the three months ended August
      31,
      2006, however, a single customer accounted for revenues in excess of 12.5%
      of
      the Company’s consolidated net revenue and the Company’s relationship with that
      customer has since been terminated (See Note 11).





14




For
      revenue concentration comparison purposes, the Company’s six largest customers
      during the nine months ended August 31, 2006 accounted for 7.4%, 7.2%, 7.1%,
      3.8%, 2.4% and 2.2% of consolidated net revenues. During the three and nine
      months ended August 31, 2005, one customer accounted for approximately $2.1
      and
      $5.4 million, or 13.2% and 11.7% of consolidated net revenues, respectively.





During
      the three and nine months ended August 31, 2006, 7.8% and 9.4% of the Company’s
      revenue was derived from its proprietary Personals service, iMatchUp.com.,
      as
      compared to 13.9% and 14.1% of revenue during the comparable prior year’s
      periods.





**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 three
      and
      nine-month periods ended August 31, 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 provision 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 (the "SEC") 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 3 to the Unaudited Consolidated
      Financial Statements for a further discussion on stock-based
      compensation.





15




**Income
      Taxes**




Quarterly
      income taxes are calculated in accordance with the interim financial reporting
      requirements as set forth in the Accounting Principal Board’s Opinion 28 as
      amended by SFAS 109. The pronouncements consider interim quarterly periods
      as an
      integral part of the annual period, with interim quarterly tax periods
      reflecting the estimated annual effective tax rate. The Company believes that
      it
      has adequately provided for tax-related matters. The Company is subject to
      examination by taxing authorities in various jurisdictions. Matters raised
      upon
      audit may involve substantial amounts. Management considers it unlikely that
      resolution of any such matters would have a material adverse effect upon the
      Company’s consolidated financial statements.




**Nine
                Months Ended****August
                31, 2006**
            
            **August
                31, 2005****Supplemental
                Cash Flow Disclosures**Cash
                paid during the nine months ended for:Income
                taxes paid, net of refunds
            
            $
            1,352,155
            
            $
            23,868





16




**Non-cash
      Investing and Financing Activities**





Non-cash
      investing and financing activities are excluded from the consolidated statement
      of cash flows. For the nine months ended August 31, 2006 and August 31, 2005,
      non-cash activities included the following items:




**Investing
      Activities:**





**Stock
                Issued in connection with Acquisition (Also see notes 8 and
                9)**
            
            **August
                31,2006**
            
            **August
                31,2005**Hot
                Rocket Marketing, Inc. - January 21, 2005
            
            
            
            
            $
            682,280Hot
                Rocket Marketing, Inc. - January 31, 2006 (1)
            
            $
            580,596





(1)
      The
      shares were issued on May 10, 2006.





Non-cash
      investing activities for marketable securities relating to unrealized gains
      and
      losses were $17,454 and $574,531, for the nine months ended August 31, 2006
      and
      2005, respectively.




**3.
      Stock-Based Compensation**




The
      Company’s shareholder-approved Employee Incentive Plans (the “2006 Plans”)
      provide for the granting of incentive stock options, non-qualified stock options
      and the issuance of restricted stock for up to 6,768,430 shares of our common
      stock. As of August 31, 2006, all Plan activity was for the granting of
      non-qualified stock options. To date, no incentive stock options have been
      granted and no restricted stock has been issued. Certain grants have been issued
      that include performance-based vesting criteria. No performance-based awards
      have been granted during the nine months ended August 31, 2006. Options have
      five to ten year contractual terms and generally vest based on 0 to 3 years
      of
      continuous service.





17




The
      total
      expense related to the Plans was $115,725 and $589,060, for the three and
      nine-month periods ended August 31, 2006, respectively. The total related income
      tax benefit recognized on the income statement was $40,144 and $202,766,
      respectively.




Prior
      to
      December 1, 2005, the Company accounted for the 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.




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 three and nine-month periods
      ended August 31, 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.





18




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 uses an estimated forfeiture rate in the valuation model for the
      nine-month period ended August 31, 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 three and nine-month
      periods ended August 31, 2006 on income before income taxes and on net income
      for the three and nine-month periods ended August 31, 2006 were reductions
      of
      $115,725 and $589,060 and $75,581 and $386,294, 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 three and nine-month periods ended August 31, 2006 was less
      than $0.01 and $0.03 per share, respectively. 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.





19




*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 three and nine-month periods ended August 31, 2005, had the
      Company applied the fair value recognition provisions of SFAS No. 123, are
      as
      follows:


**Three
                  months ended**
              
              **Nine
                  months ended****August
                  31,**
              
              **August
                  31,****2005**
              
              **2005**Net
                  income
              
              $
              316,667
              
              $
              1,647,632Less:
                  Total stock-based compensation expense determinedunder
                  fair value based method, net of related tax effects
              
              
              (125,539
              )
              
              (366,305
              )Pro
                  forma Net income, as adjusted
              
              $
              191,128
              
              $
              1,281,327Basic
                  earnings per share:As
                  reported
              
              $
              0.02
              
              $
              0.12Pro
                  forma
              
              $
              0.01
              
              $
              0.09Diluted
                  earnings per share:As
                  reported
              
              $
              0.02
              
              $
              0.12Pro
                  forma
              
              $
              0.01
              
              $
              0.09






20




*Stock
      Option Valuation and Expense Information under SFAS No. 123(R)*




The
      Company calculated the fair value of each option grant on the date of the grant
      using the Black-Scholes option-pricing model as prescribed by SFAS No. 123(R)
      using the following assumptions:


**Nine
                  Months Ended****August
                  31,**
              
              **August
                  31,****2006
                  (1)**
              
              **2005**Expected
                  life (years)
              
              
              4.82
              
              
              4.00Risk-free
                  interest rate
              
              
              4.47
              %
              
              3.40
              %Expected
                  volatility
              
              
              109.00
              %
              
              54.00
              %Dividend
                  yield
              
              
              6.17
              %
              
              10.70
              %




(1)
      The
      fair value calculation was based on stock options granted during the period.
      No
      options were granted during the three months ended August 31, 2006.




The
      volatility assumption is based on the weighted average for the most recent
      five-year term volatility measurements of the Company’s stock. Prior to December
      1, 2005, the Company had used its historical stock price volatility in
      accordance with SFAS No. 123 for purposes of its pro forma information. 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 August 31, 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 three and nine-month periods ended August 31, 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 no. 123 for the periods prior to December 1, 2005, the
      Company had established estimates for forfeitures.




21




During
      the three and nine-month periods ended August 31, 2006, stock-based compensation
      expense, net, related to the Plans was allocated as follows:


**Three
                  Months**
              
              **Nine
                  Months****Ended**
              
              **Ended****August
                  31,**
              
              **August
                  31,****2006**
              
              **2006**General
                  and administrative expenses
              
              $
              115,725
              
              $
              589,060Stock-based
                  compensation expense before income taxes
              
              
              115,725
              
              
              589,060Income
                  tax benefit
              
              
              (40,144
              )
              
              (202,766
              )Total
                  stock-based compensation expense after income taxes
              
              $
              75,581
              
              $
              386,294




*Stock
      Options*




The
      status of the Plans during the nine months ended August 31, 2006 was as
      follows:


**August
                  31, 2006****Average****Weighted**
              
              **Remaining****Average**
              
              **Contractual**
              
              **Average****Number
                  of**
              
              **Exercise**
              
              **Term**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **(in
                  years)**
              
              **Value**Options
                  outstanding,beginning
                  of period
              
              
              3,140,359
              
              $
              5.65Granted
              
              
              142,500
              
              
              5.41Exercised
              
              
              (47,331
              )
              
              4.63Forfeited
              
              
              (51,167
              )
              
              5.82Options
                  outstanding,end
                  of period
              
              
              3,184,361
              
              
              5.65
              
              
              5.5
              
              $
              1,483,059Vested
                  and expected tovest
                  at August 31, 2006
              
              
              3,174,536
              
              
              5.65
              
              
              5.5
              
              $
              1,478,483Exercisable
                  at August 31, 2006
              
              
              2,761,181
              
              $
              5.49
              
              
              5.5
              
              
              1,484,725





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between the Company’s closing stock price on
      August 31, 2006, the last trading day of the third quarter 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 August 31, 2006. This amount changes based on the fair market value
      of the Company’s stock. Total intrinsic value of options exercised for the nine
      months ended August 31, 2006 was $62,782. Total fair value of options vested
      and
      expensed was $386,294, net of tax, for the nine months ended August 31, 2006.
      The weighted-average grant-date fair value of options granted during the nine
      months ended August 31, 2006 was $3.14.




22





A
      summary
      of the status of the Corporation’s nonvested shares as of August 31, 2006, and
      changes during the nine months ended August 31, 2006 is set forth
      below:


**August
                  31, 2006****Weighted****Average****Nonvested**
              
              **Number
                  of**
              
              **Grant-date****Shares**
              
              **Shares**
              
              **Fair
                  Value**Nonvested
                  Options outstanding,beginning
                  of period
              
              
              568,852
              
              $
              1.39Granted
              
              
              142,500
              
              
              3.14Vested
              
              
              (280,169
              )
              
              2.07Forfeited
              
              
              (8,003
              )
              
              1.39Nonvested
                  Options outstanding,end
                  of period
              
              
              423,180
              
              
              1.58





As
      of
      August 31, 2006, there was $301,140 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
      7.5 months, to be expensed through the first quarter of the fiscal year ending
      November 30, 2009.





The
      following table summarizes information about the Company’s stock options
      outstanding at August 31, 2006:


**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
              
              
              4.5
              
              $
              2.34
              
              
              219,797
              
              $
              2.34$2.63-$3.85
              
              
              288,083
              
              
              5.4
              
              
              3.15
              
              
              288,083
              
              
              3.15$4.22-$6.22
              
              
              1,792,481
              
              
              5.3
              
              
              5.62
              
              
              1,605,969
              
              
              5.60$6.35-$9.38
              
              
              846,500
              
              
              5.9
              
              
              7.12
              
              
              609,832
              
              
              7.07$11.31-15.57
              
              
              37,500
              
              
              .1
              
              
              12.67
              
              
              37,500
              
              
              12.67$1.72-$15.57
              
              
              3,184,361
              
              
              5.4
              
              $
              5.65
              
              
              2,761,181
              
              $
              5.49






23





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)”.





**4.
      Earnings Per Share**





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


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Denominator:Denominator
                  for basic earnings per share-weighted
                  average shares
              
              
              14,359,171
              
              
              14,113,756
              
              
              14,286,215
              
              
              13,900,985Effect
                  of dilutive securities:Stock
                  options
              
              
              188,396
              
              
              333,529
              
              
              196,909
              
              
              390,809Denominator
                  for diluted earnings per share-adjusted
                  weighted average shares
              
              
              14,547,567
              
              
              14,447,285
              
              
              14,483,124
              
              
              14,291,794




Options
      to purchase 2,212,650 and 2,017,651 shares of common stock for the three months
      ended August 31, 2006 and 2005, respectively, and 2,212,650 and 1,652,101 for
      the nine months ended August 31, 2006 and 2005, respectively, were outstanding
      but were not included in the computation of diluted earnings per share because
      their effect would be anti-dilutive.




24




**5.** **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:


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,**
              
              **August
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  income
              
              $
              842,048
              
              $
              316,667
              
              $
              1,901,727
              
              $
              1,647,632Other
                  comprehensive income (loss) , net of tax:Foreign
                  currency translation adjustment
              
              
              (11,287
              )
              
              136,779
              
              
              145,419
              
              
              (10,312
              )Unrealized
                  (loss) gain from available-for-salesecurities,
                  arising during the period, net ofincome
                  taxes of ($4,135) and ($14,066) for August 31, 2006 and$-0-
                  for August 31, 2005
              
              
              (23,910
              )
              
              70,759
              
              
              (4,463
              )
              
              10,735Add:
                  reclassification adjustments for gains realized innet
                  income, net of tax effect of $-0- for thenine
                  months ended August 31, 2006, and$224,684
                  for the nine months endedAugust
                  31, 2005
              
              
              -
              
              
              -
              
              
              (8,834
              )
              
              (360,584
              )Comprehensive
                  income
              
              $
              806,851
              
              $
              524,205
              
              $
              2,033,849
              
              $
              1,287,471




25





**6.
      Advertising and Marketing**





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 the costs associated with the
      purchase of online consumer data (including registered users to the Company’s
      websites), the costs associated with the transmission of email marketing
      messages by external third-party vendors, and all other costs of sales incurred
      in the our marketing activities. During the period July 1, 2004 to August 31,
      2006, pursuant to the acquisition of SendTraffic.com, Inc., the Company included
      the costs of its search engine marketing optimization activities in its
      advertising and marketing cost accounts. Furthermore, during the period January
      21, 2005 to August 31, 2006, pursuant to the acquisition of Hot Rocket
      Marketing, Inc., the Company included the costs of direct purchases of online
      advertising space, which is resold on a performance return basis. 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 search engine marketing optimization liability is incurred, and/or (4)
      at
      the time the online advertising space is purchased, respectively, and all are
      included as components of the Company’s cost of sale accounts.




Total
      advertising and marketing costs included in cost of sales for the three months
      ended August 31, 2006 and 2005 were approximately $12.6 million and $10.8
      million, respectively, and for the nine months ended August 31, 2006 and 2005
      were approximately $35.4 million and $29.7 million, respectively.





26




**7.
      Recent Asset Acquisitions**





**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.




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 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.




27




At
      August
      31, 2006, the Company was not able to determine if it is probable that the
      second anniversary tier of contingent payment will be attained within the second
      measurement period, which ends January 31, 2007. As of August 31, 2006,
      based on the lack of absolute certainty as to the second anniversary additional
      purchase price liability, the Company has not recorded any additional contingent
      payments at this time.





Goodwill
      is not amortized, but it is reviewed for impairment on an annual basis (August
      31 being our annual measurement date, with the possibility of other measurement
      dates arising from specific events directly effecting Goodwill). 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.




28




**8.
      Goodwill and Identifiable Intangibles Assets**




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


As
                  of August 31, 2006
              
              As
                  of November 30, 2005Gross
              
              
              
              GrossCarrying
              
              Accumulated
              
              Carrying
              
              AccumulatedAmount
              
              Amortization
              
              Amount
              
              AmortizationUnamortized
                  intangible assets:Goodwill
              
              $
              7,940,872
              
              
              
              
              $
              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
              
              
              259,415
              
              
              118,444
              
              
              252,915
              
              
              80,590*Infiknowledge
                  identifiable intangibles:*Internet
                  Game Suite
              
              
              277,612
              
              
              261,002
              
              
              263,241
              
              
              207,717Intellectual
                  Property Assets
              
              
              208,206
              
              
              195,748
              
              
              197,430
              
              
              155,788Market
                  Position Acquired
              
              
              231,340
              
              
              217,498
              
              
              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
              
              
              372,359
              
              
              523,109
              
              
              221,609Software
              
              
              963,951
              
              
              642,534
              
              
              963,951
              
              
              420,118*Hot
                  Rocket identifiable intangibles*Restrictive
                  Covenants
              
              
              569,394
              
              
              183,788
              
              
              569,394
              
              
              98,379Software
              
              
              1,012,257
              
              
              544,557
              
              
              1,012,257
              
              
              291,492Total
                  amortizable intangible assets
              
              $
              5,551,129
              
              $
              4,041,775
              
              $
              5,507,509
              
              $
              2,969,286





29




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.


30





The
      future Online Media and Advertising Service activities intangible amortization
      expense for the next five fiscal years is estimated to be as
      follows:




**2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010***GroupLotto
                Identifiable *Intangible
                amortization:**Site
                Brand Recognition
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Database
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Intellectual
                Property Assets
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Licenses
            
            
            18,521
            
            
            66,645
            
            
            45,805
            
            
            10,000
            
            
            -*Total
                Group's amortization*
            
            $
            18,521
            
            $
            66,645
            
            $
            45,805
            
            $
            10,000
            
            $
            -*Infiknowledge
                Identifiable *Intangible
                amortization:**Internet
                Game Suite
            
            
            13,880
            
            
            1,787
            
            
            525
            
            
            418
            
            $
            -Intellectual
                Property Assets
            
            
            10,410
            
            
            1,341
            
            
            394
            
            
            313
            
            
            -Market
                Position Acquired
            
            
            11,567
            
            
            1,489
            
            
            437
            
            
            349
            
            
            -*Total
                Group's amortization*
            
            $
            35,857
            
            $
            4,617
            
            $
            1,356
            
            $
            1,080
            
            $
            -*ThanksMuch
                Identifiable *Intangible
                amortization:**Restrictive
                Covenants
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -*Total
                Group's amortization*
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -*SendTraffic
                Identifiable *Intangible
                amortization:**Restrictive
                Covenants
            
            $
            50,249
            
            $
            100,501
            
            $
            -
            
            $
            -
            
            $
            -Software
            
            
            74,139
            
            
            234,897
            
            
            12,380
            
            
            -
            
            
            -$
            124,388
            
            $
            335,398
            
            $
            12,380
            
            $
            -
            
            $
            -*Hot
                Rocket Identifiable *Intangible
                amortization:**Restrictive
                Covenants
            
            $
            28,471
            
            $
            113,879
            
            $
            113,879
            
            $
            113,879
            
            $
            15,498Software
            
            
            84,355
            
            
            337,419
            
            
            45,927
            
            
            -
            
            
            -$
            112,826
            
            $
            451,298
            
            $
            159,806
            
            $
            113,879
            
            $
            15,498**Summary
                of Identifiable **Intangibles:*****GroupLotto:*
            
            $
            18,521
            
            $
            66,645
            
            $
            45,805
            
            $
            10,000
            
            $
            -*Infiknowledge:*
            
            $
            35,857
            
            $
            4,617
            
            $
            1,356
            
            $
            1,080
            
            $
            -*ThanksMuch:*
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -*SendTraffic:*
            
            $
            124,388
            
            $
            335,398
            
            $
            12,380
            
            $
            -
            
            $
            -*Hot
                Rocket:*
            
            $
            112,826
            
            $
            451,298
            
            $
            159,806
            
            $
            113,879
            
            $
            15,498*Totals*
            
            $
            291,592
            
            $
            857,958
            
            $
            219,347
            
            $
            124,959
            
            $
            15,498


31





**9.
      Income Taxes**





The
      Company’s income tax provision for the three and nine months ended August 31,
      2006 was approximately $971,000 and $1,849,000, respectively, and includes
      $1,029,000 and $1,838,000 of expense related to the current year’s three and
      nine month operations and approximately ($58,000) and $11,000 of period tax
      (benefit) expense related to (decreases) increases in the Company’s estimates
      related to tax audits.





The
      Company’s income tax provision for the three and nine months ended August 31,
      2005 was approximately $262,000 and $1,184,000, respectively, and includes
      $213,000 and $1,044,000 of expense related to the current year’s three and nine
      month operations and approximately $47,000 and $140,000 of period expense
      related to an increase in the Company’s estimates related to tax audits.





The
      effective income tax rate for the three and nine months ended August 31, 2006
      was 53.5% and 49.3%. This differs from the Company’s estimated annual effective
      income tax rate of 30.0% as recognized in the fiscal year ended November 30,
      2005, due primarily to permanent differences between book and taxable income
      and
      adjustments to our tax audit reserves during the three and nine months ended
      August 31, 2006, and other items described below. During the fiscal year ended
      November 30, 2005, the Company closed out certain state tax audits, where the
      final settlement was less than that which was accrued, and the effective rate
      for Fiscal 2005 reflected such benefit.





*Estimated
      Annual Effective Income Tax Rate.* The
      estimated annual effective income tax rate for 2006 differs from the U.S.
      federal statutory income tax rate of 34% as follows:





**Fiscal Year**
              **2006 (1)**
            
            **Fiscal Year**
              **2005 (2)**Income
                tax expense at U.S. federal statutory rate
            
            
            34.0
            %
            
            34.0
            %State
                income taxes, net of U.S. federal impact
            
            
            3.0
            %
            
            0.6
            %Impact
                of foreign operations
            
            
            -3.0
            %
            
            0.3
            %Change
                in valuation allowance
            
            
            12.8
            %
            
            0.0
            %Increase
                (decrease) in tax contingencies
            
            
            0.3
            %
            
            -7.7
            %Other,
                including non-deductible expenses
            
            
            2.2
            %
            
            2.8
            %49.3
            %
            
            30.0
            %





(1)
            Estimated
                annual effective income tax rate for the year ending November 30,
                2006.




(2)
            Annual
                  effective income tax rate for the year ended November 30, 2005.






32





The
      “State income taxes, net of U.S. federal impact” item above primarily reflects
      state income-based taxes, and to a lesser degree franchise tax and minimum
      tax
      expense, net of related federal benefit which the Company expects for the year.
      The Company currently has a significant valuation allowance against state net
      operating loss carryforwards.





**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, if any, should not have a material adverse effect on our
      consolidated financial position, results of operations or cash
      flows.




*Nasco
      Corporate Finance Consultants, LLC, Todd Cook et al* ***.***





In
      December 2004, we filed an action, *Traffix,
      Inc. v. Nasco Corporate Finance Consultants, LLC, Todd Cook et
      al,* Supreme
      Court of the State of New York, County of New York, Index No. 604348/04. In
      the
      action, we seek to recover approximately $600,000, plus interest and attorneys’
fees, from certain entities and from the principals of such entities, for their
      failure to pay us for customer leads which we sold and delivered to them. The
      claims include breach of contract, fraud, unjust enrichment and piercing the
      corporate veil. Defendants brought a motion to dismiss the complaint, which
      motion was denied in part by the Court and otherwise withdrawn by defendants,
      except with respect to one of the defendants’ principals against whom the case
      was dismissed without prejudice, for lack of personal jurisdiction.




In
      late
      2005, defendants asserted counterclaims against us for, *inter
      alia,* breach
      of
      contract, breach of certain alleged implied warranties, quantum meruit, goods
      sold and delivered, account stated and unjust enrichment, and alleged damages
      of
      $8,000,000.




The
      case
      was settled in June 2006. Pursuant to the settlement agreement, the claims
      against us are being dismissed with prejudice, with us making no payments and
      our claims being dismissed with prejudice after completion of agreed-upon
      payments by the defendants of a portion of our claim.


33




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 related 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.





Dada
      also
      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
      letter of credit, and Dada has withdrawn the request for a preliminary
      injunction.





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





*Hatton
      v. Prize America/Prize Distributors*





It
      has
      come to our attention that 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 alleges that sometime between June 2002 and July 2004 the plaintiff
      won a prize, that defendant failed to pay/deliver, and claimed damages of $91
      million. The request for relief was later amended to $391 million.





On
      October 3, 2006 a docket entry reading “Summons Returned Unexecuted by Brandon
      D. Hatton as to Prize America/Prize distributors” was made by the clerk of the
      court.





We
      believe that there is no merit in this claim and, in the event process in this
      case is properly served, we intend vigorously to defend the action.





**11.
      Subsequent Events**




On
      October 9, 2006, the Company’s Board of Directors declared a dividend of $0.08
      per share on the outstanding shares of the Company’s common stock for the
      quarter ended August 31, 2006. Such dividend is payable on or about November
      10,
      2006 to holders of record of such shares at the close of business on November
      1,
      2006. The Company can give no assurance that its Board will declare any
      dividends in future fiscal periods. Any further declarations will depend upon
      the Company’s performance, the level of its then current and retained earnings,
      if any, available capital and projected capital requirements necessary for
      operations, and other pertinent factors. You should not rely on any prior
      approvals of the Company’s Board as an indicator of its intent to approve the
      declaration of any dividends in the future.


34





In
      September 2006, Dada, a wireless customer of the Company since February 2006,
      terminated its relationship with the Company and commenced an action against
      the
      Company (see Note 10, above). Sales to Dada represented 12.5% and 7.3% of our
      consolidated revenues for the three and nine-month periods ended August 31,
      2006, respectively. Although the Company is optimistic that the development
      of
      its own mobile service offerings will strengthen its revenues in this area,
      there is no assurance that the Company will be able to replace such revenues
      in
      the next fiscal quarter which, when coupled with carrier imposed marketing
      and
      advertising restrictions, may result in a decrease in net revenues and income
      from operations in such quarter when compared, sequentially, to the quarter
      ended August 31, 2006.





**ITEM
      2. 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 contains forward-looking
      statements and information relating to the Company that are based on the current
      beliefs, expectations and estimations of Management, as well as assumptions
      made
      by and information currently available to the Company. When used in this
      Management's Discussion and Analysis, and elsewhere in this Form 10-Q, the
      words
“anticipate", “believe", “estimate", “continue”, and “expect", and variations of
      such words and similar expressions, as they relate to the Company, are intended
      to identify forward-looking statements. Such statements are not guarantees
      of
      future performance, but reflect the current views of the 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. These forward-looking
      statements are made pursuant to the safe harbor provisions of the Private
      Securities Litigation Reform Act of 1995.


35





**Overview**





We
      are a
      leading Interactive media and marketing company that provides complete
      end-to-end marketing solutions for our clients, which include advertisers,
      direct marketers, and agencies, seeking to increase sales and customer contact
      through online and mobile marketing channels. The services we offer include;
      Search Engine Marketing, Search Engine Optimization email marketing, affiliate
      marketing, lead generation, creative, development and hosting solutions. We
      own
      and operate customized websites and/or web pages to facilitate consumer
      transactions for our clients. We generate revenue for our clients primarily
      on a
      performance-based model, under which we record revenue upon the successful
      delivery to our client of a qualifying lead, customer, survey, completed
      application, ultimate sale or the delivery of some other measurable marketing
      benefit.





In
      addition to generating customers, sales and leads for our advertising clients;
      we use this media platform for our own services. We also generate revenue
      directly from consumers through our “direct-to-consumer” business, which
      includes our online personals websites as well as our mobile services.





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.


36





The
      initial purchase price for the Hot Rocket acquisition 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 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, 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, that for the period February 1, 2005 to January
      31,
      2006, we are 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.





At
      August
      31, 2006, we determined that at the current rate of growth recognized by Hot
      Rocket, it is probable that the second anniversary tier of contingent payment
      will be attained within the second measurement period, which ends January 31,
      2007. As of August 31, 2006, based on the lack of absolute certainty as to
      the
      second anniversary additional purchase price liability, we have not recorded
      any
      additional contingent payments at this time.


37





We
      made
      one asset acquisition in each of Fiscal 2004 and 2005. The productive assets
      acquired through these asset acquisitions accounted for approximately $6.9
      million and $21.3 million of our consolidated
      revenue s,
      and
      approximated 38% and 35% of consolidated revenues during the three and nine
      months ended August 31, 2006 when compared to $4.6 million and $11.1 million
      during the prior year’s comparable periods, which approximated 25% and 29% of
      consolidated revenues. Such asset acquisitions are described in more detail
      below, and further described in the preceding notes to the August 31, 2006
      unaudited consolidated financial statements included herein.





**Background**





From
      our
      inception in 1993 (under the name "Quintel Communications, Inc.") through 1999,
      we generated the bulk of our revenue from direct marketing using the traditional
      media of television, postal mail and telemarketing. In 2000, we repositioned
      our
      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 online marketing. During December 1995, we completed
      our initial public offering of common stock, which is publicly traded and is
      reported on the NASDAQ National Market under the symbol “TRFX”.





**Online
      Advertising and Media Services**





We
      own
      and operate a variety of Internet websites featuring specialized content such
      as
      online dating, downloadable ring-tones, wall-paper 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.


38





*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 customer
      to
      serve the advertisement.





The
      websites feature content ranging from music for downloads to sweepstakes. We
      launched EZ-Tracks.com in Fiscal 2004, a 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.


39





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.





*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 on-line marketing
      industry.


40





*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.





*Online
      Advertising - Internet Media Performance Based Sales*





Pursuant
      to our January 21, 2005 acquisition of Hot Rocket Marketing, Inc., we generate
      revenues from the resale, on a performance basis, of fixed price Internet Media
      Advertising space.





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





We
      also
      generate revenues from the sales, rentals and management (for use both on-line
      and off-line) of our proprietary, profiled databases. Such revenue is included
      in our On-line Advertising and Media Services segment revenue in the On-line
      Advertising revenue line item component.




*Search
      Engine Marketing*





Our
      search engine marketing company, SendTraffic develops and manages search engine
      marketing (SEM) campaigns for our third party advertising clients, as well
      as
      for our own proprietary websites. 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 search engine
      costs, plus a marketing services fee to the advertising client. We also perform
      search engine optimization (SEO) services, for which advertising clients are
      billed a monthly retainer fee.


41





*Personals*





We
      introduced several new business units during the past three fiscal years, and
      continued to expand a portion of these new business units in Fiscal 2005,
      specifically our online Personals program conducted over the Internet. The
      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.





*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 years’ historical results, in evaluating
      the potential for our future operations, cash flows, and financial
      position.





**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.


42





**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**





In
      classifying the financial information for our operating activities, we rely
      primarily upon the evaluations of the chief operating decision maker (CODM)
      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. We operate in one segment, Online Advertising and
      Media Services. At December 1, 2005, management realigned the way we view
      operations 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 from the period December 1,
      2004 to present, was removed as a separate segment from its CODM reporting
      and,
      therefore, our financial disclosure. For the August 31, 2006 and 2005 three
      and
      nine-month periods, the terminated LEC segment’s operating-activity was included
      on our Online Advertising and Media Services Activities, specifically as a
      component of Online Advertising in the unaudited consolidated statements of
      income for all periods presented. The three-month and nine-month periods ended
      August 31, 2006, included $505,000 of legacy revenue from reserve releases
      from
      our LEC service bureaus, we do not anticipate future reserve releases, if any,
      will represent material amounts.


43





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





We
      had
      revenue from our Canadian-based subsidiary of approximately $774,000 and
      $432,000 during the nine months ended August 31, 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
      appropriate categories of cost of sales.





**RESULTS
      OF OPERATIONS**





The
      following is a discussion of our results of operations for the three and
      nine-month periods ended August 31, 2006 and August 31, 2005. It should be
      read
      in conjunction with our Form 10-K as filed for the year ended November 30,
      2005,
      the notes thereto and other financial information included elsewhere in this
      report.





THREE
      MONTHS ENDED AUGUST 31, 2006 AND 2005





Our
      net
      revenues, and the disclosure of our revenue components, for each of the three
      months ended August 31, 2006 and August 31, 2005, are detailed in the following
      table:




***Net
      Revenue Components***


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


**Three
                  Months Ended**
              
              **Change**
              
              **Change****August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              13,688,990
              
              $
              11,296,434
              
              $
              2,392,556
              
              
              21
              %Search
                  Engine Marketing
              
              
              4,117,887
              
              
              2,586,971
              
              
              1,530,916
              
              
              59
              %Personals
              
              
              1,531,465
              
              
              2,282,112
              
              
              (750,647
              )
              
              -33
              %Internet
                  game development
              
              
              360,541
              
              
              206,925
              
              
              153,616
              
              
              74
              %**Consolidated
                  totals**
              
              $
              19,698,883
              
              $
              16,372,442
              
              $
              3,326,441
              
              
              20
              %


44





Net
      Revenue increased approximately $3.3 million, or 20%, to $19.7 million for
      the
      three months ended August 31, 2006, from $16.4 million in the prior year’s
      comparable period. The Online Advertising and Media Service activities’ core
      business grew organically, primarily driven by increased revenues from Search
      Engine Marketing services ($1.5 million increase, or 59%) and increased revenues
      from Online Advertising ($2.4 million increase, or 21%), which included an
      increase in our resale on a performance basis of Internet Media Advertising
      ($2.6 million, or 23%), and a combined increase in our Web Advertising, Email
      Marketing Programs and Data sales and rentals of approximately $1.8 million,
      or
      20%. Approximately $2.2 million of the net revenue for the Online Advertising
      activities in the third quarter was derived from one customer which terminated
      its relationship with the Company in the fourth quarter and, while the Company
      is optimistic that the development of its own mobile service offerings will
      strengthen its revenues from these activities, there is no assurance that the
      Company will be able to replace those revenues in the fourth quarter which,
      coupled with carrier imposed marketing and advertising restrictions, may result
      in a decrease in net revenues and income from operations in such quarter when
      compared, sequentially, to the quarter ended August 31, 2006.





Internet
      Game Development revenues approximated $0.4 million, for an approximate $0.153
      million increase, or 74%. Search Engine Marketing service revenue increased
      as a
      result of our increased focus on our Online Advertising and Media revenue source
      and is a result of our 2004 acquisition of SendTraffic, Inc. Increases in costs
      and overhead for the Search Engine Marketing business has caused decreased
      contributions from such activity to consolidated income from operations. The
      increased revenue from Online Advertising includes the performance based resale
      of Internet Media, and is the result of our January 2005 acquisition of Hot
      Rocket Marketing, Inc. (“Hot Rocket”) and our post acquisition focus on
      expanding that subsidiary’s contribution to increased consolidated revenues. The
      above referenced increases were offset by declines in: (a) email marketing
      program revenue, which declined approximately $0.5 million, or 21%, resulting
      from declines in the delivery rates of our email marketing offers; and (b)
      data
      sale and rental revenue declines of $0.6 million, or 62%, which resulted from
      the shift in our business, where our increased reliance on Search Engine
      Marketing and Internet Advertising Revenue generates a smaller amount of data
      that would otherwise become available for sale and rental
      purposes.


45





Our
      Personals business, the iMatchUp.com dating sites, recognized a revenue decline
      of approximately $0.7 million, or 33%, as a result of declining customer
      enrollments.





The increase in Internet game development was attributable to several successful
      games brought to market by our development partners.





Revenues
      were positively impacted by $0.5 million in collections from the release of
      LEC
      reserves during the three months ended August 31, 2006. These reserves were
      held
      by unrelated third party service bureaus and were recorded as contra revenue
      when withheld in prior fiscal periods. The LEC reserve release was included
      as a
      component of Online Advertising revenue shown above. We do not anticipate future
      reserve releases, if any, will represent material amounts.


46





Our
      cost
      of sales during the three months ended August 31, 2006 and August 31, 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.





The
      cost
      of sales, and the disclosure of the components of cost of sales, for each of
      the
      three-month periods ended August 31, 2006 and August 31, 2005, are set forth
      below:




***Cost
      of Sale Components***


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





**Three
                Months Ended**
            
            **Change**
            
            **Change****August
                31,**
            
            **August
                31,**
            
            **Inc
                (Dec)**
            
            **Inc
                (Dec)****2006**
            
            **2005**
            
            $$$
            
            ****%%%Online
                Advertising
            
            $
            7,939,783
            
            $
            6,837,396
            
            $
            1,102,387
            
            
            16
            %Search
                Engine Marketing
            
            
            3,290,616
            
            
            2,152,705
            
            
            1,137,911
            
            
            53
            %Personals
            
            
            1,233,344
            
            
            1,702,441
            
            
            (469,097
            )
            
            -28
            %Internet
                game development
            
            
            113,162
            
            
            65,001
            
            
            48,161
            
            
            74
            %**Consolidated
                totals**
            
            $
            12,576,905
            
            $
            10,757,543
            
            $
            1,819,362
            
            
            17
            %





Cost
      of
      sales on a consolidated basis increased $1.8 million, or 17%, to $12.6 million
      for the three months ended August 31, 2006, from $10.8 million in the comparable
      prior year period.


47





The
      significant factor contributing to the increase in consolidated costs of sales
      was related to a net increase of approximately $1.1 million in costs incurred
      in
      the generation of increased Search Engine Marketing revenues. The Online
      Advertising component recognized a net increase of approximately $1.1 million,
      or 16%, and was comprised of: increases in purchases of online advertising
      space
      of $1.2 million, or 91%, as a result of our January 2005 acquisition of our
      Hot
      Rocket subsidiary (which makes direct purchases of online advertising space,
      that is resold on a performance basis), and increases in website advertising
      registrations ($0.7 million or, 59%), offset by a decline in third party email
      vendor costs of approximately $0.1 million, or 34%.





In
      our
      Personals business, costs incurred in the acquisition of new customer profiles
      decreased $0.5 million, or 28%. The decrease in customer profile cost correlates
      to our decreased emphasis on the acquisition of new enrollments during the
      three
      months ended August 31, 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.





The
      increase in Search Engine Marketing cost correlates to our increased focus
      on
      growing our search engine marketing business, as well as using our in-house
      search engine marketing firm to generate revenues for our other Online
      Advertising and Media Service activity revenue components.


48





Our
      gross
      profit in terms of dollars, and our gross profit percentage, for each of the
      three-month periods ended August 31, 2006 and 2005, are set forth
      below:





***Gross
      Profit Components***


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





**Three
                Months Ended**
            
            **Change**
            
            **Change****August
                31,**
            
            **August
                31,**
            
            **Inc
                (Dec)**
            
            **Inc
                (Dec)****2006**
            
            **2005**
            
            $$$
            
            %%%Online
                Advertising
            
            $
            5,749,207
            
            $
            4,459,038
            
            $
            1,290,169
            
            
            29
            %Search
                Engine Marketing
            
            
            827,271
            
            
            434,266
            
            
            393,005
            
            
            90
            %Personals
            
            
            298,121
            
            
            579,671
            
            
            (281,550
            )
            
            -49
            %Internet
                game development
            
            
            247,379
            
            
            141,924
            
            
            105,455
            
            
            74
            %**Consolidated
                totals**
            
            $
            7,121,978
            
            $
            5,614,899
            
            $
            1,507,079
            
            
            27
            %





***Gross
      Profit Components***


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


**Absolute**
              
              **Relative****Three
                  Months Ended**
              
              **Change**
              
              **Change****August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              %%%
              
              %%%Online
                  Advertising
              
              
              42.0
              %
              
              39.5
              %
              
              2.5
              %
              
              6.4
              %Search
                  Engine Marketing
              
              
              20.1
              %
              
              16.8
              %
              
              3.3
              %
              
              19.7
              %Personals
              
              
              19.5
              %
              
              25.4
              %
              
              -5.9
              %
              
              -23.4
              %Internet
                  game development
              
              
              68.6
              %
              
              68.6
              %
              
              0.0
              %
              
              0.0
              %**Consolidated
                  totals**
              
              
              36.2
              %
              
              34.3
              %
              
              1.9
              %
              
              5.4
              %





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 36.2% during
      the three months ended August 31, 2006, compared to 34.3% in the prior year’s
      comparable period, representing 1.9% absolute improvement and a relative
      improvement of 5.4% when compared to the prior year’s comparable
      period.


49


Gross
      margin was positively impacted by the $0.5 million in LEC reserve collections
      previously mentioned in the revenue discussion above, and accounted for 1.7%
      of
      the consolidated absolute margin improvement. This was an isolated event and
      is
      not expected to reoccur in future fiscal periods. After adjustment for the
      LEC
      reserve benefit, included in reported gross margin, we recognized a relatively
      stable consolidated gross profit percentage which is primarily attributable
      to
      the increased margins recognized in our Search Engine Marketing businesses,
      based on higher key-word productivity recognized in the third quarter (the
      current nine month period recognized a decline), offset by declines in the
      gross
      margin realized on our Personals business. The Personals business gross margin
      declined as a result of the combination of declining rates and increased costs
      of new customer acquisitions and declining rates of retention of existing
      customers. Both of these factors more than offset the benefits recognized from
      declines in marketing costs expended for new customers, when comparing the
      two
      periods.




Our
      Selling Expenses for each of the three months ended August 31, 2006 and August
      31, 2005 are presented in the tables set forth below:




***Selling
        Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              633,994
              
              $
              607,587
              
              $
              26,407
              
              
              4
              %Selling
                  salaries and related costs
              
              
              793,159
              
              
              651,912
              
              
              141,247
              
              
              22
              %Travel,
                  entertainment, shows, other
              
              
              46,146
              
              
              56,141
              
              
              (9,995
              )
              
              -18
              %**Consolidated
                  totals**
              
              $
              1,473,299
              
              $
              1,315,640
              
              $
              157,659
              
              
              12
              %






50





Selling
      expenses, on a consolidated basis, increased approximately $0.2 million, or
      12%,
      to $1.5 million during the three months ended August 31, 2006 from $1.3 million
      during the three months ended August 31, 2005. The primary increase in selling
      expenses was related to increases in selling salaries and related costs of
      $0.141 million as a result of increased sales commissions earned during the
      three months ended August 31, 2006 (on total revenues of $19.7 million) when
      compared to the three months ended August 31, 2005 (on total revenues of $16.4
      million). Additionally, the increase resulted from an approximate $26,400,
      or 4%
      increase in fee share commissions correlating to a slight increase in the
      reliance on third party databases used to generate our email marketing program
      revenues. We are the primary obligor to the third party list owner and bear
      the
      responsibility of payment to the list owner regardless of whether our client
      pays us in the case of email marketing program based fee share arrangements.




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) site development, maintenance and modification
      costs
      related to our Online Advertising and Media Service activities, and (vi) all
      other general and miscellaneous overhead expense items.




51




Our
      General and Administrative Expenses for the three months ended August 31, 2006
      and 2005 are presented in the table set forth below:


***General
        and Administrative Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              2,420,645
              
              $
              2,351,486
              
              $
              69,159
              
              
              3
              %Professional
                  fees
              
              
              293,222
              
              
              452,109
              
              
              (158,887
              )
              
              -35
              %Insurance
                  costs
              
              
              240,367
              
              
              231,173
              
              
              9,194
              
              
              4
              %Occupancy
                  and equipment costs
              
              
              119,474
              
              
              102,429
              
              
              17,045
              
              
              17
              %Depreciation
                  and amortization
              
              
              357,108
              
              
              368,223
              
              
              (11,115
              )
              
              -3
              %All
                  other miscellanous G&A expenses
              
              
              469,035
              
              
              299,919
              
              
              169,116
              
              
              56
              %**Consolidated
                  totals**
              
              $
              3,899,851
              
              $
              3,805,339
              
              $
              94,512
              
              
              2
              %






52


General
        and Administrative expenses ("G&A") on a consolidated basis increased
        approximately $0.1 million, or 2%, when comparing G&A of $3.9 million for
        the three months ended August 31, 2006 to G&A of $3.8 million incurred
        during the three months ended August 31, 2005. The net increase was attributable
        to combined increases in compensation costs and miscellaneous G&A of
        approximately $0.2 million, offset by a decline in professional fees of
        approximately $0.1 million.
  The
        increase in compensation costs was primarily attributable to stock-based
        compensation costs of approximately $0.1 million resulting from our December
        1,
        2005 adoption of SFAS 123R.
  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, was a member of our Board of Directors from
        inception through August 25, 2006. We incurred approximately $30,000 in legal
        fees (exclusive of disbursements) from FKIWSBR during the three months ended
        August 31, 2006. We incurred approximately $377,000 in legal fees (exclusive
        of
        disbursements) from FKIWSBR during the three months ended August 31,
        2005.
 ***Bad
          Debt Expense Components***
 ***Online
          Advertising and Media Services***
  **Three
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                66,580
                
                $
                4,634
                
                $
                61,946
                
                
                1337
                %Search
                    Engine Marketing
                
                
                13,420
                
                
                -
                
                
                13,420
                
                
                100
                %Personals
                
                
                -
                
                
                -
                
                
                -
                
                
                0
                %Internet
                    game development
                
                
                28
                
                
                -
                
                
                28
                
                
                100
                %**Consolidated
                    totals**
                
                $
                80,028
                
                $
                4,634
                
                $
                75,394
                
                
                1627
                %
 
 53
 
 Bad
        Debt
        expense increased by approximately $75,000 when comparing the three months
        ended
        August 31, 2006 with the three months ended August 31, 2005. The current
        quarter’s bad debt expense includes a $70,000 reduction in bad debt attributable
        to a favorable litigation settlement reached in the second quarter which
        resulted in a recoup of previously written off receivables. Additionally,
        we
        increased our bad debt reserves for a percentage of the balance of the
        uncollected receivable related to the significant customer mentioned in our
        Subsequent Event Note (approximately $100,000) included in our unaudited
        financial statements, as well as other smaller receivable balances
        (approximately $50,000) as of August 31, 2006. Our allowance for bad debts
        results from our assessment of the risk of collection embedded in our customer
        base as described below.
  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 detailed financial information.
        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/(recaptures and 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/ (recaptures and recoveries) could be further increased or
        decreased in future fiscal periods.
  54
  **OTHER
        NON-OPERATING INCOME (EXPENSE)**
 
 The
        components of our "Other non-operating income (expense)" are set forth
        below:
 ***OTHER
          NON-OPERATING INCOME (EXPENSE)***
 **Three
                    Months Ended**
                
                **Change**
                
                **Change****Other
                    non-operating**
                
                **August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****income
                    (expense):**
                
                **2006**
                
                **2005**
                
                $$$
                
                %%%Interest
                    income and dividends
                
                $
                277,972
                
                $
                217,901
                
                $
                60,071
                
                
                28
                %Realized
                    gains on sale ofmarketable
                    securities
                
                
                12,854
                
                
                -
                
                
                12,854
                
                
                100
                %Other
                    non-operating income:Other
                    miscellaneousincome
                    (expense)
                
                
                2,821
                
                
                (1,041
                )
                
                3,862
                
                
                371
                %Foreign
                    Currency Exchange RateFees
                    and interest expense
                
                
                (5,826
                )
                
                (1,748
                )
                
                (4,078
                )
                
                233
                %Minority
                    interest (income)
                
                
                (144,000
                )
                
                (125,825
                )
                
                (18,175
                )
                
                14
                %**Total
                    other non-operating****income:**
                
                $
                143,821
                
                $
                89,287
                
                $
                54,534
                
                
                61
                %
 
 Consolidated
        Other Non-operating Income (Expense) increased approximately $54,000, from
        approximately $89,000 for the three months ended August 31, 2005, to
        approximately $143,000 for the three months ended August 31, 2006.
  The
        material factors contributing to the net increase are set forth in the above
        table are as follows:
  (a)
            Interest
                income increased approximately $60,000, or 28%, as the result of
                more
                favorable rates available during Fiscal 2006 as compared to Fiscal
                2005.  (b)
            Realized
                gains on the sale of marketable securities were approximately $13,000
                while the three months ended August 31, 2005 did not include any
                dispositions of marketable securities.  (c)
            The
                above-referenced increases were offset by a decrease of $18,000 in
                the
                Minority Interest resulting from our EZTracks partnership with Madacy
                Entertainment.   55
 **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
        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 are 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 three months ended August 31, 2006 and August 31, 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.
  ***The
          following table summarizes the results of EZTracks for the periods indicated
          below:***
 **Three
                    Months**
                
                
                
                **Three
                    Months****Ended**
                
                
                
                **Ended**
                
                
                
                **Change**
                
                **Change****August
                    31,**
                
                
                
                **August
                    31,**
                
                
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                
                
                **2005**
                
                
                
                $$$
                
                %%%Net
                    Revenues
                
                $
                2,749,151
                
                
                
                
                $
                2,267,880
                
                
                
                
                $
                481,271
                
                
                21
                %Cost
                    of Sales
                
                
                2,424,109
                
                
                
                
                
                2,010,840
                
                
                
                
                
                413,269
                
                
                21
                %Gross
                    Profit
                
                
                325,042
                
                
                
                
                
                257,040
                
                
                
                
                
                68,002
                
                
                26
                %General
                    andAdministrative
                    Expenses
                
                
                32,952
                
                
                
                
                
                218
                
                
                
                
                
                32,734
                
                
                100
                %Net
                    Income
                
                $
                292,090
                
                
                (1)
                
                $
                256,822
                
                
                (1)
                
                $
                35,268
                
                
                14
                %Minority
                    interest
                
                $
                144,000
                
                
                (2)
                
                $
                125,825
                
                
                (2)
                
                $
                18,175
                
                
                14
                %
 (1)
            All
            items are included in our Online Advertising and Media Service
            activities
 (2)
          Represents Madacy Entertainment's 49.3% minority interest
  56
 **PROVISION
        FOR INCOME TAXES**
 
 Quarterly
        income taxes are calculated in accordance with the interim financial reporting
        requirements as set forth in the Accounting Principal Board’s Opinion 28, as
        amended by SFAS 109. The pronouncements consider interim quarterly periods
        as an
        integral part of the annual period, with interim quarterly tax periods
        reflecting the estimated annual effective tax rate. We believe that we have
        adequately provided for tax-related matters. We are subject to examination
        by
        taxing authorities in various jurisdictions. Matters raised upon audit may
        involve substantial amounts of tax. Management considers it unlikely that
        future
        audits of any open audit year (if at all) would have a material adverse effect
        upon our consolidated financial statements.
  Our
        income tax provision for the three months ended August 31, 2006 was
        approximately $971,000, which includes $1,029,000 of tax expense related
        to
        current year operations and approximately ($58,000) of period benefit related
        to
        a decrease in our estimates for potential tax audits.
  The
        effective rate relationship of 53.5% differs from our effective rate of 45.3%
        recognized during the three months ended August 31, 2005. The rate
        reconciliation is attributable to the impact of taxes related to foreign
        operations. During the three and nine-month periods ended August 31, 2006,
        we
        changed our estimate as to how certain foreign taxes are to be expensed
        domestically that were previously treated as being available for foreign
        tax
        credit treatment.
  57
 
 NINE
        MONTHS ENDED AUGUST 31, 2006 AND 2005
 
 Our
        net
        revenues, and the disclosure of our revenue components, for each of the nine
        months ended August 31, 2006 and August 31, 2005, are detailed in the following
        table:
 ***Net
          Revenue Components***
 ***Online
          Advertising and Media Service Activities***
 **Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                37,348,813
                
                $
                33,095,325
                
                $
                4,253,488
                
                
                13
                %Search
                    Engine Marketing
                
                
                12,334,262
                
                
                6,230,260
                
                
                6,104,002
                
                
                98
                %Personals
                
                
                5,228,331
                
                
                6,500,927
                
                
                (1,272,596
                )
                
                -20
                %Internet
                    game development
                
                
                774,421
                
                
                432,315
                
                
                342,106
                
                
                79
                %**Consolidated
                    totals**
                
                $
                55,685,827
                
                $
                46,258,827
                
                $
                9,427,000
                
                
                20
                %
  Net
        Revenue increased approximately $9.4 million, or 20%, to $55.7 million for
        the
        nine months ended August 31, 2006, from $46.3 million in the prior year’s
        comparable period. The Online Advertising and Media Services activities’ core
        business grew organically, primarily driven by increased revenues from Search
        Engine Marketing services ($6.1 million, or 98%) and increased revenues from
        Online Advertising ($4.3 million, or 13%), which included increases in
        performance basis revenues from Internet Media Advertising ($4.1 million,
        or
        83%) and increases in Web Advertising ($2.0 million, or 11%), offset by a
        combined decline in our Email Marketing Programs and Data sales and rentals
        of
        approximately $1.8 million, or 19%. Internet Game Development revenues
        approximated $0.7 million, for an approximate $0.3 million increase, or 79%.
        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 increases include the
        performance-based resale of Internet Media, and is the result of recent
        acquisitions. The above-referenced increases were offset by declines in:
        (a)
        email marketing program revenue, which declined approximately $0.8 million,
        or
        12%, resulting from declines in the delivery rates of our email marketing
        offers; and (b) data sale, rental and list management revenue declines of
        $1.0
        million, or 36%, 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 Web Advertising.
  58
  Our
        Personals business, the iMatchUp.com dating sites, recognized a revenue decline
        of approximately $1.3 million, or 20%, as a result of declining customer
        enrollments.
  The
        increase in Internet game development was attributable to several successful
        games brought to market by our development partners.
  Our
        cost
        of sales during the nine months ended August 31, 2006 and August 31, 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.
  59
 
 The
        cost
        of sales, and the disclosure of the components, for each of the nine-month
        periods ended August 31, 2006 and August 31, 2005, are set forth
        below:
 ***Cost
          of Sale Components***
 ***Online
          Advertising and Media Service Activities***
  **Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                21,178,886
                
                $
                19,438,146
                
                $
                1,740,740
                
                
                9
                %Search
                    Engine Marketing
                
                
                10,281,307
                
                
                5,048,670
                
                
                5,232,637
                
                
                104
                %Personals
                
                
                3,703,704
                
                
                5,075,940
                
                
                (1,372,236
                )
                
                -27
                %Internet
                    game development
                
                
                243,177
                
                
                135,906
                
                
                107,271
                
                
                79
                %**Consolidated
                    totals**
                
                $
                35,407,074
                
                $
                29,698,662
                
                $
                5,708,412
                
                
                19
                %
 
 Cost
        of
        sales on a consolidated basis increased $5.7 million, or 19%, to $35.4 million
        for the nine months ended August 31, 2006, from $29.7 million in the comparable
        prior year period.
  The
        significant factor contributing to the increase in consolidated costs of
        sales
        was a net increase of approximately $5.2 million, or 104%, in costs incurred
        in
        the generation of increased Search Engine Marketing service revenues. The
        Online
        Advertising component recognized a net increase of approximately $1.7 million,
        or 9%, and was comprised of increases in purchases of online advertising
        space
        of $1.9 million, or 58%, 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 combined declines in website
        advertising registrations and third party email vendor costs of $0.2
        million.
  60
  In
        our
        Personals business, costs incurred in the acquisition of new customer profiles
        decreased $1.4 million, or 27%. The decrease in customer profile cost correlates
        to our decreased emphasis on the acquisition of new enrollments during the
        nine
        months ended August 31, 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
        nine-month periods ended August 31, 2006 and August 31, 2005, are set forth
        below:
 ***Gross
          Profit Components***
 ***Online
          Advertising and Media Service Activities***
  **Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                16,169,927
                
                $
                13,657,179
                
                $
                2,512,748
                
                
                18
                %Search
                    Engine Marketing
                
                
                2,052,955
                
                
                1,181,590
                
                
                871,365
                
                
                74
                %Personals
                
                
                1,524,627
                
                
                1,424,987
                
                
                99,640
                
                
                7
                %Internet
                    game development
                
                
                531,244
                
                
                296,409
                
                
                234,835
                
                
                79
                %**Consolidated
                    totals**
                
                $
                20,278,753
                
                $
                16,560,165
                
                $
                3,718,588
                
                
                22
                %
   61
  ***Gross
          Profit Components***
 ***Online
          Advertising and Media Service Activities***
  **Absolute**
                
                **Relative****Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                %%%
                
                %%%Online
                    Advertising
                
                
                43.3
                %
                
                41.3
                %
                
                2.0
                %
                
                4.9
                %Search
                    Engine Marketing
                
                
                16.6
                %
                
                19.0
                %
                
                -2.3
                %
                
                -12.2
                %Personals
                
                
                29.2
                %
                
                21.9
                %
                
                7.2
                %
                
                33.0
                %Internet
                    game development
                
                
                68.6
                %
                
                68.6
                %
                
                0.0
                %
                
                0.1
                %**Consolidated
                    totals**
                
                
                36.4
                %
                
                35.8
                %
                
                0.6
                %
                
                1.7
                %
 
 Consolidated
        Gross Profit ("gross margin") as a percentage of net revenue was 36.4% during
        the nine months ended August 31, 2006, compared to 35.8% in the prior year’s
        comparable period, representing a 0.6% absolute improvement and a relative
        improvement of 1.7% when compared to the prior year’s comparable
        period.
  The
        relatively stable consolidated gross profit percentage is primarily attributable
        to the increased margins recognized in our Personals businesses, the
        iMatchUp.com dating sites, during the nine months ended August 31, 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 is
        not encumbered by acquisition costs. Additionally, our Online Advertising
        activities had a 4.9% relative increase in gross margin resulting from a
        greater
        reliance on Search Marketing in its advertising efforts, partially replacing
        prior reliance on marginally less profitable website registrations. Offsetting
        such gross margin improvements were a relative decline of 12% in the gross
        margin recognized in our Search Engine Marketing services. 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.
  62
  Our
        Selling Expenses for each of the nine months ended August 31, 2006 and August
        31, 2005 are presented in the tables set forth below:
 ***Selling
          Expense Components***
 ***Online
          Advertising and Media Service Activities***
  **Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Fee
                    share commissions
                
                $
                2,336,336
                
                $
                1,643,791
                
                $
                692,545
                
                
                42
                %Selling
                    salaries and related costs
                
                
                2,185,096
                
                
                1,836,032
                
                
                349,064
                
                
                19
                %Travel,
                    entertainment, shows, other
                
                
                162,033
                
                
                177,011
                
                
                (14,978
                )
                
                -8
                %**Consolidated
                    totals**
                
                $
                4,683,465
                
                $
                3,656,834
                
                $
                1,026,631
                
                
                28
                %
 
 Selling
        expenses, on a consolidated basis, increased approximately $1.0 million,
        or 28%,
        to $4.7 million during the nine months ended August 31, 2006 from $3.7 million
        during the nine months ended August 31, 2005. The increase resulted from
        an
        approximate $0.7 million increase in fee share commissions correlating to
        our
        increased use of third-party databases used to generate our email marketing
        program revenues. 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 $0.3 million, or 19%, during the nine months ended
        August 31, 2006 as a result of increased sales commissions (on total revenues
        of
        $55.7 million for the nine months ended August 31, 2005 compared to the nine
        months ended August 31, 2005 total revenues of $46.3 million).
 63
  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) site development, maintenance and modification
        costs
        related to our Online Advertising and Media Service activities, and (vi)
        all
        other general and miscellaneous overhead expense items.
  Our
        General and Administrative Expenses for the nine months ended August 31,
        2006
        and August 31, 2005 are presented in the table set forth below:
 ***General
          and Administrative Expense Components***
 ***Online
          Advertising and Media Service Activities***
  **Nine
                    Months Ended**
                
                **Change**
                
                **Change****August
                    31,**
                
                **August
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Compensation
                    and related costs
                
                $
                7,432,187
                
                $
                6,621,393
                
                $
                810,794
                
                
                12
                %Professional
                    fees
                
                
                1,053,807
                
                
                1,291,674
                
                
                (237,867
                )
                
                -18
                %Insurance
                    costs
                
                
                719,473
                
                
                705,553
                
                
                13,920
                
                
                2
                %Occupancy
                    and equipment costs
                
                
                339,967
                
                
                297,621
                
                
                42,346
                
                
                14
                %Depreciation
                    and amortization
                
                
                1,132,104
                
                
                1,138,470
                
                
                (6,366
                )
                
                -1
                %All
                    other miscellanous G&A expenses
                
                
                1,304,469
                
                
                876,108
                
                
                428,361
                
                
                49
                %**Consolidated
                    totals**
                
                $
                11,982,007
                
                $
                10,930,819
                
                $
                1,051,188
                
                
                10
                %
 64





General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $1.1 million, or 10%, when comparing G&A of $12.0 million for
      the nine months ended August 31, 2006 to G&A of $10.9 million incurred
      during the nine months ended August 31, 2005. The net increase was principally
      attributable to combined increases in Compensation costs and miscellaneous
      G&A of approximately $1.2 million, or 17%, offset by a decline in
      Professional fees of $0.2 million. The significant increase in compensation
      costs was attributable to stock-based compensation costs of approximately $0.6
      million resulting from our December 1, 2005 adoption of SFAS 123R.




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, was a member of our Board of Directors from
      inception to August 25, 2006. We incurred approximately $256,000 in legal fees
      (exclusive of disbursements) from FKIWSBR during the nine months ended August
      31, 2006. We incurred approximately $768,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the nine months ended August 31, 2005, of
      which $169,000 was capitalized in the Hot Rocket acquisition and $599,000 was
      expensed in our G&A accounts.





65




***Bad
        Debt Expense Components***
 ***Online
        Advertising and Media Services***
  **Nine
                  Months Ended**
              
              **Change**
              
              **Change****August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              116,575
              
              $
              150,616
              
              $
              (34,041
              )
              
              -23
              %Search
                  Engine Marketing
              
              
              54,131
              
              
              19,625
              
              
              34,506
              
              
              100
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              3,634
              
              
              -
              
              
              3,634
              
              
              0
              %**Consolidated
                  totals**
              
              $
              174,340
              
              $
              170,241
              
              $
              4,099
              
              
              2
              %




Bad
        Debt
        expense increased approximately $4,000 when comparing the nine months ended
        August 31, 2006 with the nine months ended August 31, 2005. The fiscal period’s
        bad debt expense included a $120,000 reduction in bad debt attributable to
        a
        favorable litigation settlement resulting in a recoup of previously written-off
        receivables. Additionally, we increased our bad debt reserves for a percentage
        of the balance of the uncollected receivable related to the significant customer
        mentioned in our Subsequent Event note (approximately $100,000) included
        in our
        unaudited financial statements, as well as other smaller receivable balances
        as
        of August 31, 2006. Our allowance for bad debt results from our assessment
        of
        the risk of collection embedded in our customer base as described below.
  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. 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 and (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 and (recoveries) could be further increased or decreased in future
        fiscal periods.




66




**OTHER
        NON-OPERATING INCOME (EXPENSE)**
 
 The
        components of our "Other non-operating income (expense)" are set forth
        below:





***OTHER
        NON-OPERATING INCOME (EXPENSE)***
  **Nine
                  Months Ended**
              
              **Change**
              
              **Change****Other
                  non-operating**
              
              **August
                  31,**
              
              **August
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****income
                  (expense):**
              
              **2006**
              
              **2005**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              774,344
              
              $
              643,238
              
              $
              131,106
              
              
              20
              %Realized
                  (losses) gains on sale ofmarketable
                  securities
              
              
              (5,498
              )
              
              574,050
              
              
              (579,548
              )
              
              -101
              %Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              195,000
              
              
              (195,000
              )
              
              -100
              %Other
                  non-operating income:Other
                  miscellaneous
              
              
              10,054
              
              
              5,877
              
              
              4,177
              
              
              100
              %income
                  (expense)Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (35,410
              )
              
              (15,050
              )
              
              (20,360
              )
              
              135
              %Minority
                  interest (income)
              
              
              (432,000
              )
              
              (373,999
              )
              
              (58,001
              )
              
              16
              %**Total
                  other non-operating****income:**
              
              $
              311,490
              
              $
              1,029,116
              
              $
              (717,626
              )
              
              -70
              %





67
 
  Consolidated
          Other Non-operating Income (Expense) decreased approximately $0.7 million,
          from
          approximately $1.0 million for the nine months ended August 31, 2005, to
          approximately $0.3 million for the nine months ended August 31, 2006.
  The
          material factors contributing to the net decline set forth in the above
          table
          are as follows:
  (a)
                Interest
                    income increased approximately $131,000, or 20%, as the result
                    of mare
                    favorable rates available during Fiscal 2006 as compared to Fiscal
                    2005.
  (b)
                Realized
                    gains on the sale of marketable securities decreased by $0.6
                    million when
                    compared to the prior year’s comparable nine month 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)
                The
                    nine months ended August 31, 2005 included $0.2 million in installment
                    payments from a prior year’s sale of a subsidiary. The final installments
                    were collected in the first nine months of 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
          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 are 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 nine months ended August 31, 2006, and for the period
          January
          21, 2005 to August 31, 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.


68
 
  ***The
          folllowing table summarizes the results of EZTracks for the periods indicated
          below:***
  **Nine
                    Months**
                
                
                
                **January
                    21,****Ended**
                
                
                
                **2005
                    to**
                
                
                
                **Change**
                
                **Change****August
                    31,**
                
                
                
                **August
                    31,**
                
                
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                
                
                **2005**
                
                
                
                $$$
                
                %%%Net
                    Revenues
                
                $
                8,737,347
                
                
                
                
                $
                4,667,710
                
                
                
                
                $
                4,069,637
                
                
                87
                %Cost
                    of Sales
                
                
                7,697,968
                
                
                
                
                
                3,879,090
                
                
                
                
                
                3,818,878
                
                
                98
                %Gross
                    Profit
                
                
                1,039,379
                
                
                
                
                
                788,620
                
                
                
                
                
                250,759
                
                
                32
                %General
                    andAdministrative
                    Expenses
                
                
                163,111
                
                
                
                
                
                30,000
                
                
                
                
                
                133,111
                
                
                444
                %Net
                    Income
                
                $
                876,268
                
                
                (1
                )
                $
                758,620
                
                
                (1
                )
                $
                117,648
                
                
                16
                %Minority
                    interest
                
                $
                432,000
                
                
                (2
                )
                $
                373,999
                
                
                (2
                )
                $
                58,001
                
                
                16
                %





**PROVISION
        FOR INCOME TAXES**
 
 Quarterly
        income taxes are calculated in accordance with the interim financial reporting
        requirements as set forth in the Accounting Principal Board’s Opinion 28, as
        amended by SFAS 109. The pronouncements consider interim quarterly periods
        as an
        integral part of the annual period, with interim quarterly tax periods
        reflecting the estimated annual effective tax rate. We believe that we have
        adequately provided for tax-related matters. We are subject to examination
        by
        taxing authorities in various jurisdictions. Matters raised upon audit may
        involve substantial amounts of tax. Management considers it unlikely that
        future
        audits of any open audit years (if at all) would have a material adverse
        effect
        upon our consolidated financial statements.


69




Our
        income tax provision for the nine months ended August 31, 2006 was approximately
        $1,849,000, which includes $1,838,000 of tax expense related to current year
        operations and approximately $11,000 of period expense related to an increase
        in
        our estimates for potential tax audits.
  The
        effective rate relationship of 49.3% differs from our annual effective rate
        of
        30.0% recognized during the year ended November 30, 2005. The rate
        reconciliation is attributable to the impact of taxes related to foreign
        operations. During the nine months ended August 31, 2006, we had changed
        our
        estimate as to how certain foreign taxes are to be expensed domestically
        that
        were previously treated as being available for foreign tax credit treatment.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 As
        of
        August 31, 2006, we had aggregate working capital of $30.3 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 $26.2 million as of August 31, 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 $1.8 million at August 31, 2006 and $1.9 million at November
        30,
        2005.




70




Cash
        provided by operating activities was approximately $3.1 million for the nine
        months ended August 31, 2006, compared to approximately $1.0 million during
        the
        nine months ended August 31, 2005, representing an increase of $2.1 million
        in
        cash provided by operating activities. Changes in assets and liabilities
        of the
        business, net of acquisitions, provided $1.0 million more in cash when comparing
        the nine months ended August 31, 2006 with the nine months ended August 31,
        2005. Additionally, there were combined increases in amortization and
        depreciation of approximately $75,000 and (as a result of our December 1,
        2005
        SFAS 123R adoption) stock-based compensation charge of $589,000 when comparing
        the nine months ended August 31, 2006 to the nine months ended August 31,
        2005.
  Cash
        used
        in investing activities was approximately $1.7 million during the nine months
        ended August 31, 2006, compared to $2.3 million of cash provided by investing
        activities during the prior year’s comparable fiscal period. The primary use of
        cash in investing activities in the nine months ended August 31, 2006 was
        related to net cash of approximately $0.9 million expended on the Hot Rocket
        additional purchase price payment, $0.4 million expended on fixed asset
        acquisitions and $0.4 million expended on security purchases exceeding net
        proceeds from the sale of securities. During the nine months ended August
        31,
        2005, net proceeds from the sale of securities and subsidiary sales exceeded
        cash used in security purchases by approximately $5.7 million and was offset
        by
        approximately $3.1 million expended in the Hot Rocket asset acquisition on
        January 21, 2005 and $0.3 million in cash paid for capital expenditures and
        licenses.
  Cash
        used
        in financing activities was approximately $3.8 million for the nine months
        ended
        August 31, 2006, compared to $1.6 million used in financing activities for
        the
        nine months ended August 31, 2005. Fiscal 2006 financing net cash outflows
        were
        attributable to: (a) a distribution of $0.436 million to a minority interest
        holder; and (b) $0.2 million in capital lease obligation payments, both offset
        by $0.219 million in financing proceeds from stock option exercises. The
        first
        nine months of Fiscal 2005 had a financing cash flow of $1.8 million from
        stock
        option exercise proceeds. Dividends of $3.4 and $3.3 million were paid during
        the nine-months ended August 31, 2006 and August 31, 2005, respectively.




71




Our
        days-sales-outstanding ("DSO") in accounts receivable at August 31, 2006
        was 56
        days, compared to 46 days at May 31, 2006, compared to 54 days at February
        28,
        2006, 65 days at November 30, 2005, and 58 days at August 31, 2005. The 10
        day,
        or 21% increase in the current quarter’s DSO compared to the second quarter of
        this fiscal year relates to extended credit terms granted to the significant
        customer mentioned in our Subsequent Event and Significant Customer notes
        included in our unaudited financial statements. This customer accounted for
        approximately $2.5 million, or 12.5% of the current quarter’s revenues. From
        these sales approximately $2.2 million was receivable at August 31, 2006,
        and as
        of September 30, 2006 $2.0 million had been collected.
  Our
        DSO
        in future fiscal periods may rise above the 56 days recognized during the
        three
        months ended August 31, 2006 as a result of changes in the components of
        our
        client mix or other potential factors not currently identifiable.
  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 attaining, and then maintaining a
        DSO in
        the low 40-day range. Future fiscal periods might not reflect this DSO goal,
        and
        might exceed the 56-day DSO recognized in the three-month period ended August
        31, 2006.
  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
        subsidiaries, organized or acquired during the prior six fiscal
        years.




72


During
          these prior six fiscal years, we identified our mission and executed on
          our
          online direct marketing strategy implementation. 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
          three
          and nine-month periods ended August 31, 2006 and 2005. Our cash demands
          for
          capital expenditures and equipment lease obligations have increased to
          $.614
          million during the nine months ended August 31, 2006 compared to $.287
          million
          during the nine months ended August 31, 2005. Our capital expenditures
          and
          capital lease obligation payments during the fiscal years ended November
          30,
          2002 to 2005 were as follows (in millions): $1.9, $1.5, $0.141 and $0.519,
          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.
  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 on-line, and/or off-line, business acquisitions,
          or
          (e) costs associated with developing alternative means of email promotion
          delivery.


73




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 on-line 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 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, we agreed to pay
        Hot
        Rocket a contingent purchase price of up to $12.5 million if Hot Rocket
        generated an aggregate of $27 million in EBITDA (as quantified in the Agreement)
        over the four year period following the closing. We have determined, in
        accordance with the terms of the acquisition agreement, that 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 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.
  At
        August
        31, 2006, we were not able to determine if it is probable that the second
        anniversary tier of contingent payment will be attained within the second
        measurement period, which ends February 28, 2007. As of August 31, 2006,
        based
        on the lack of absolute certainty as to the second anniversary additional
        purchase price liability, we did not record any additional contingent
        payments.




74




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
        August 31, 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.




75




**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, and other
        contractually binding agreements, as of August 31, 2006, are set forth below:


Operating
                  Leases
              
              Employment
                  agreements
              
              Other
              
              Total
                    Contractual
                  ObligationsDomestic
              
              Foreign
              
              Domestic
              
              Foreign
              
              Domestic
              
              Domestic
              
              Foreign2006
              
              $
              39,674
              
              
              -
              
              $
              477,501
              
              $
              75,000
              
              
              -
              
              
              517,175
              
              
              75,0002007
              
              
              416,225
              
              
              -
              
              
              1,866,445
              
              
              306,250
              
              
              -
              
              
              2,282,670
              
              
              306,2502008
              
              
              419,540
              
              
              -
              
              
              364,574
              
              
              331,250
              
              
              
              
              
              784,114
              
              
              331,2502009
              
              
              388,176
              
              
              -
              
              
              212,714
              
              
              350,000
              
              
              
              
              
              600,890
              
              
              350,0002010
              
              
              373,261
              
              
              -
              
              
              31,208
              
              
              350,000
              
              
              -
              
              
              404,469350,000$
              1,636,876
              
              $
              -
              
              $
              2,952,442
              
              $
              1,412,500
              
              $
              -
              
              $
              4,589,318
              
              $
              1,412,500






76




**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 $377,000 in legal fees (exclusive of
        disbursements) from FKIWSBR during the nine months ended August 31, 2006.
        We
        incurred approximately $768,000 in legal fees (exclusive of disbursements)
        from
        FKIWSBR during the nine months ended August 31, 2005, of which $169,000 was
        capitalized in the Hot Rocket acquisition and $599,000 was expensed in our
        G&A accounts.
  **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.




77




**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.


78




**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.




79





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, than that currently utilized during the nine months ended August 31,
      2006; (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.


80





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.




**Major
      Customers and Disposition of Majority-owned Subsidiary**





During
      the nine month period ended August 31, 2006, we had six customers in our Online
      Advertising and Media Services segment accounting for approximately $16.8
      million or 30.2% of consolidated net revenues and approximately $4.4 million,
      or
      38.8% of consolidated net accounts receivable as of August 31, 2006.





During
      the nine month period ended August 31, 2005, we had seven customers in our
      Online Advertising and Media Service business accounting for approximately
      $13.6
      million or 29.6% of consolidated net revenue and approximately $4.6 million
      or
      48.1% of consolidated net accounts receivable as of August 31, 2005. The seven
      customers accounted for 11.1%, 4.8%, 3.1%, 2.8%, 2.7%, 2.6% and 2.5% of
      consolidated net revenue for that nine month period.


81





In
      the
      nine months ended August 31, 2006, 9.4% of our revenue was derived from our
      proprietary online Personals products compared to 14.1% of our revenue for
      the
      nine month period ended August 31, 2005.





In
      September 2006, Dada, a wireless customer of the Company since February 2006,
      terminated its relationship with the Company and commenced an action against
      the
      Company (see Note 10, above). Sales to Dada represented 12.5% and 7.3% of our
      consolidated revenues for the three and nine-month periods ended August 31,
      2006, respectively. Although the Company is optimistic that the development
      of
      its own mobile service offerings will strengthen its revenues in this area,
      there is no assurance that the Company will be able to replace such revenues
      in
      the next fiscal quarter which, when coupled with market conditions, may result
      in a decrease in net revenues and income from operations in such quarter when
      compared, sequentially, to the quarter ended August 31, 2006.





**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 August
      31,
      2006, we preformed our annual review of goodwill and determined there to be
      no
      impairment.


82





**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 August 31, 2006 amounted to approximately $1.8 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.





**Item
      4.**  **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
      Quarterly 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.


83





(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 Quarterly Report that
      has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.




84


**PART
      II**





**OTHER
      INFORMATION**





**Item
      1.**  **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.




*Nasco
      Corporate Finance Consultants, LLC, Todd Cook et al* ***.***





In
      December 2004, we filed an action, *Traffix,
      Inc. v. Nasco Corporate Finance Consultants, LLC, Todd Cook et
      al,* Supreme
      Court of the State of New York, County of New York, Index No. 604348/04. In
      the
      action, we seek to recover approximately $600,000, plus interest and attorneys’
fees, from certain entities and from the principals of such entities, for their
      failure to pay us for customer leads which we sold and delivered to them. The
      claims include breach of contract, fraud, unjust enrichment and piercing the
      corporate veil. Defendants brought a motion to dismiss the complaint, which
      motion was denied in part by the Court and otherwise withdrawn by defendants,
      except with respect to one of the defendants’ principals against whom the case
      was dismissed without prejudice, for lack of personal jurisdiction.




In
      late
      2005, defendants asserted counterclaims against us for, *inter
      alia,* breach
      of
      contract, breach of certain alleged implied warranties, quantum meruit, goods
      sold and delivered, account stated and unjust enrichment, and alleged damages
      of
      $8,000,000.




The
      case
      was settled in June 2006. Pursuant to the settlement agreement, the claims
      against us are being dismissed with prejudice, with us making no payments and
      our claims being dismissed with prejudice after completion of agreed-upon
      payments by the defendants of a portion of our claim.





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


85





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 related 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.





Dada
      also
      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 has withdrawn the request for a
      preliminary injunction.





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





*Hatton
      v. Prize America/Prize Distributors*





It
      has
      come to our attention that 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 alleges that sometime between June 2002 and July 2004 the plaintiff
      won a prize, that defendant failed to pay/deliver, and claimed damages of $91
      million. The request for relief was later amended to $391 million.





On
      October 3, 2006 a docket entry reading “Summons Returned Unexecuted by Brandon
      D. Hatton as to Prize America/Prize distributors” was made by the clerk of the
      court.





We
      believe that there is no merit in this claim and, in the event process in this
      case is properly served, we intend vigorously to defend the action.





**Item
      1A. Risk Factors**





From
      time
      to time, including in this Quarterly Report on Form 10-Q, we publish
      forward-looking statements, as disclosed in our Disclosure Regarding
      Forward-Looking Statements, beginning immediately following the Table of
      Contents of this Quarterly 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
      Quarterly Report on Form 10-Q to reflect events or circumstances occurring
      after the date of the filing of this report.


86





*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 each of the last
      thirteen fiscal quarters and have declared a dividend payable on or about
      November 10, 2006 to holders of record of our common stock at the close of
      business on November 1, 2006. The declaration of each of such dividends 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.*





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.


87





*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 described forth in our
      periodic reports filed pursuant to the Securities Exchange Act of 1934 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.*





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.





*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.*


88




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.





*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.


89





*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 And Product Providers.*





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 existing, profitable advertising and joint marketing
      arrangements, we may suffer substantial adverse consequences to our financial
      condition and results of operations.


90





*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.*





From
      time
      to time 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 any potential claims,
      each and all future litigation matters to which we become a party, will be
      contested vigorously and no assurances can be given that any potential result
      will be favorable to us. A materially adverse resolution of any lawsuit could
      have a material adverse affect on our financial position and results of
      operations.





*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.*


91





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.*





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 16% 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.


92





**Item
      4.****SUBMISSION
      OF MATTERS TO A VOTE OF SECURITYHOLDERS**





A
      proxy
      statement was mailed on or about July 19, 2006 to our stockholders of record
      as
      of July 17, 2006 in connection with our 2006 Annual Meeting of Stockholders,
      which was held on August 25, 2006 at our executive offices, One Blue Hill Plaza,
      Pearl River, New York. At the meeting, the stockholders voted on three matters,
      all of which were approved.




The
      first
      matter was the election of the members of the Board of Directors. The five
      directors elected and the tabulation of the votes (both in person and by proxy)
      was as follows:





**Nominees
                For Directors**
            
            **For**
            
            **Against**
            
            **Withheld**Jeffrey
                L Schwartz
            
            
            11,555,081
            
            
            -0-
            
            
            726,716Andrew
                Stollman
            
            
            11,428,233
            
            
            -0-
            
            
            853,564Lawrence
                Burstein
            
            
            11,296,225
            
            
            -0-
            
            
            985,572Mark
                Gutterman
            
            
            11,299,133
            
            
            -0-
            
            
            982,564Robert
                Machinist
            
            
            11,427,214
            
            
            -0-
            
            
            854,583





There
      were no broker held non-voted shares represented at the Meeting with respect
      to
      this matter.




The
      second matter upon which the stockholders voted was the proposal to ratify
      the
      appointment by the Board of Directors of Goldstein Golub Kessler LLP as our
      independent certified public accountants for 2005. The tabulation of the votes
      (both in person and by proxy) was as follows:




**For**
            
            **Against**
            
            **Abstentions**11,821,157
            
            419,082
            
            41,558





There
      were no broker held non-voted shares represented at the Meeting with respect
      to
      this matter.




The
      third
      matter upon which the stockholders voted was the proposal to adopt our 2006
      Employee Incentive Plan. The tabulation of the votes (both in person and by
      proxy) was as follows:





**For**
            
            **Against**
            
            **Abstentions**4,620,903
            
            1,541,249
            
            55,950





There
      were 6,063,695 broker held non-voted shares represented at the Meeting with
      respect to this matter.


93





**Item
      5.**  **Other
      Information**





On
      October 9, 2006, our Board of Directors declared a dividend of $.08 per share
      to
      shareholders of record as of November 1, 2006, payable on or about November
      10,
      2006.




**Item
      6.**  **Exhibits**




**Exhibit****Number**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
            
            By-Laws
                of the Company (3)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive Officer
                *31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial Officer
                *32.1
            
            Section
                1350 Certification of Chief Executive Officer *32.2
            
            Section
                1350 Certification of Chief Financial Officer
                *







*
            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
                (the
                "S-1 Registration Statement"), dated September 6, 1995 (File No.
                33-96632), and incorporated herein by
                reference.


94




SIGNATURES





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




TRAFFIX,
      INC.


By:
            /s/
              Jeffrey L. SchwartzJeffrey
              L. SchwartzChairman
                and CEO Chairman and CEODate:October
              16, 2006
            (Principal
                Executive
                Officer)




By:
            /s/
              Daniel HarveyDaniel
                HarveyChief
                Financial OfficerDate: October
              16, 2006
            (Principal
              Financial Officer)




95


Exhibit
      Index





**Exhibit
Number**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
            
            By-Laws
                of the Company.(3)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive Officer
                *31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial Officer
                *32.1
            
            Section
                1350 Certification of Chief Executive Officer *32.2
            
            Section
                1350 Certification of Chief Financial Officer
                *







*
            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
                (the
                "S-1 Registration Statement"), dated September 6, 1995 (File No.
                33-96632), and incorporated herein by
                reference.




96