**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 May 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 incorporation or organization)
            (I.R.S.
                Employer Identification No.)One Blue Hill PlazaPearl River, New York
            10965(Address
              of principal executive offices)
            (Zip
              Code)




(845)
                620-1212Registrant'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 filer o
            
            Accelerated
                filer o
            
            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
      07/07/06).







**TRAFFIX,
      INC.**


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


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**QUARTER
      ENDED MAY 31, 2006**





**ITEMS
      IN FORM 10-Q**


**Page****Part
                        I**
                    **Financial
                        Information**Item
                        1.
                    Financial
                        StatementsConsolidated
                        Balance Sheets at May 31, 2006 and November 30, 2005
                    2Consolidated
                        Statements of Income for the three and six months ended May
                        31, 2006 and
                        May 31, 2005
                    3Consolidated
                        Statements of Cash Flows for the six months ended May 31,
                        2006 and May 31,
                        2005
                    5Consolidated
                        Statement of Shareholders’ Equity for the six months ended May 31,
                        2006
                    6Notes
                        to Consolidated Financial Statements
                    7Item
                        2.
                    Management's
                        Discussion and Analysis of Financial Condition and Results
                        of Operations
                    27Item
                        3.
                    Quantitative
                        and Qualitative Disclosures
                        About Market Risk
                    NoneItem
                        4.
                    Controls
                        and Procedures
                    67**Part
                        II**
                    **Other
                        Information**Item
                        1.
                    Legal
                        Proceedings
                    68Item
                        1A.
                    Risk
                        Factors
                    68Item
                        2.
                    Unregistered
                        Sales of Equity Securities and Use of Proceeds
                    72Item
                        3.
                    Defaults
                        Upon Senior Securities
                    NoneItem
                      4.
                    Submission
                      of Matters to a Vote of Security Holders
                    NoneItem
                      5.
                    Other
                      Information
                    72Item
                      6.
                    Exhibits
                    72
 **Signatures**
                    73









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.















**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
  **May
                    31,**
                
                **November
                    30,****2006**
                
                **2005****(Unaudited)****Assets**Current
                    assets:Cash
                    and cash equivalents
                
                $
                13,354,512
                
                $
                9,335,723Marketable
                    securities
                
                
                15,027,405
                
                
                18,908,064Accounts
                    receivable, trade, net of allowance for doubtful accounts of
                    $706,699 at
                    May 31, 2006 and $1,025,661 at November 30, 2005
                
                
                9,018,402
                
                
                11,137,275Deferred
                    income taxes
                
                
                1,205,571
                
                
                1,379,877Prepaid
                    expenses and other current assets
                
                
                423,878
                
                
                1,078,621**Total
                    current assets**
                
                
                39,029,768
                
                
                41,839,560Marketable
                    securities
                
                
                2,701,787
                
                
                2,662,905Property
                    and equipment, net
                
                
                2,238,374
                
                
                2,317,690Goodwill
                
                
                7,944,114
                
                
                6,426,336Other
                    intangibles, net
                
                
                1,820,033
                
                
                2,538,223Deferred
                    income taxes
                
                
                391,042
                
                
                478,050**Total
                    assets**
                
                $
                54,125,118
                
                $
                56,262,764**Liabilities**Current
                    liabilities:Accounts
                    payable
                
                $
                2,722,883
                
                $
                5,426,797Accrued
                    expenses
                
                
                4,755,510
                
                
                4,269,995Reserve
                    for customer chargebacks
                
                
                -
                
                
                302,175Due
                    to related parties
                
                
                231,517
                
                
                110,076Income
                    taxes payable
                
                
                1,251,003
                
                
                1,009,880**Total
                    current liabilities**
                
                
                8,960,913
                
                
                11,118,923Deferred
                    income taxes
                
                
                225,407
                
                
                302,465**Total
                    liabilities**
                
                
                9,186,320
                
                
                11,421,388Minority
                    interest
                
                
                217,637
                
                
                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; issued
                    and
                    outstanding 14,359,171
                    shares and 14,208,486 shares, respectively
                
                
                14,359
                
                
                14,208Additional
                    paid-in capital
                
                
                43,658,781
                
                
                43,584,229Retained
                    earnings
                
                
                -
                
                
                -Accumulated
                    other comprehensive income
                
                
                1,048,021
                
                
                877,302**Total
                    shareholders' equity**
                
                
                44,721,161
                
                
                44,475,739**Total
                    liabilities and shareholders' equity**
                
                $
                54,125,118
                
                $
                56,262,764






2




**TRAFFIX,
                    INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF INCOME****(UNAUDITED)**
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****May
                    31,**
                
                **May
                    31,**
                
                **May
                    31,**
                
                **May
                    31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Net
                    revenue
                
                $
                18,964,132
                
                $
                16,257,112
                
                $
                35,986,944
                
                $
                29,182,043Cost
                    of sales
                
                
                10,421,632
                
                
                9,360,005
                
                
                19,990,272
                
                
                16,646,481**GROSS
                    PROFIT**
                
                
                8,542,500
                
                
                6,897,107
                
                
                15,996,672
                
                
                12,535,562Selling
                    expenses
                
                
                1,826,296
                
                
                1,281,345
                
                
                3,210,166
                
                
                2,341,194General
                    and administrative expenses
                
                
                5,031,628
                
                
                3,961,684
                
                
                9,725,850
                
                
                7,982,961Other
                    operating (income) expense
                
                
                18,517
                
                
                (189,550
                )
                
                42,630
                
                
                (365,355
                )Amortization
                    of intangibles
                
                
                361,817
                
                
                476,762
                
                
                723,792
                
                
                751,924Depreciation
                    expense
                
                
                215,200
                
                
                171,300
                
                
                429,781
                
                
                346,246Bad
                    debt expense
                
                
                10,026
                
                
                80,382
                
                
                94,312
                
                
                165,607**INCOME
                    FROM OPERATIONS**
                
                
                1,079,016
                
                
                1,115,184
                
                
                1,770,141
                
                
                1,312,985Other
                    income (expense):Interest
                    income and dividends
                
                
                254,380
                
                
                237,514
                
                
                496,372
                
                
                425,337Realized
                    (losses) gains on marketable securities
                
                
                -
                
                
                (11,218
                )
                
                (18,352
                )
                
                574,050Realized
                    gain on sale of subsidiary
                
                
                -
                
                
                -
                
                
                -
                
                
                195,000Other
                    non-operating income (expense)
                
                
                (26,468
                )
                
                2,326
                
                
                (22,351
                )
                
                (6,384
                )Minority
                    interest in income ofconsolidated
                    subsidiary
                
                
                (87,905
                )
                
                (150,529
                )
                
                (288,000
                )
                
                (248,174
                )**INCOME
                      BEFORE PROVISION FOR INCOME TAXES**
                
                
                1,219,023
                
                
                1,193,277
                
                
                1,937,810
                
                
                2,252,814Provision
                    for income taxes
                
                
                582,062
                
                
                485,593
                
                
                878,131
                
                
                921,849**NET
                    INCOME**
                
                $
                636,961
                
                $
                707,684
                
                $
                1,059,679
                
                $
                1,330,965Basic
                    earnings per share (Note 4):Net
                    income
                
                $
                0.04
                
                $
                0.05
                
                $
                0.07
                
                $
                0.10Weighted
                    average shares outstanding
                
                
                14,271,369
                
                
                13,986,127
                
                
                14,249,337
                
                
                13,794,009Diluted
                    earnings per share (Note 4):Net
                    income
                
                $
                0.04
                
                $
                0.05
                
                $
                0.07
                
                $
                0.09Weighted
                    average shares outstanding
                
                
                14,487,693
                
                
                14,233,711
                
                
                14,451,079
                
                
                14,245,027Cash
                    dividends declared per common share
                
                $
                0.08
                
                $
                0.08
                
                $
                0.16
                
                $
                0.16
  The
                    accompanying notes are an integral part of these financial
                    statements
  3





Net
      income for the three and six-month periods ended May 31, 2006 included
      stock-based compensation expense under Statement of Financial Accounting
      Standards (“SFAS”) 123(R) of $301,095 and $473,335, 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 six-month periods ended May 31, 2005 because the Company
      did not adopt the retrospective recognition provisions of SFAS 123. Proforma
      net
      income was $559,440 and $1,064,431 for the three and six-month periods ended
      May
      31, 2005, respectively, inclusive of $224,612 and $403,839, respectively, in
      proforma stock-based compensation expense, or $0.01 and $0.02, respectively,
      per
      proforma diluted share after the related respective proforma tax effect of
      $76,368 and $137,305 .
      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.














4


**TRAFFIX,
                    INC. AND SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****(UNAUDITED)**
  **Six
                    Months Ended****May
                    31,**
                
                **May
                    31,****2006**
                
                **2005**Cash
                    flows from operating activities:Net
                    income
                
                $
                1,059,679
                
                $
                1,330,965Adjustments
                    to reconcile net income to net cash provided by (used
                    in) operating activities:Depreciation
                    and amortization
                
                
                1,153,573
                
                
                1,098,170Stock-based
                    compensation
                
                
                473,335
                
                
                -Reserve
                    for customer chargebacks
                
                
                -
                
                
                (58,580
                )Provision
                    for uncollectible accounts
                
                
                94,312
                
                
                165,607Deferred
                    income taxes
                
                
                149,322
                
                
                448,585Net
                    losses(gains) on sale of marketable securities
                
                
                18,352
                
                
                (574,050
                )Gain
                    on sale of subsidiary
                
                
                -
                
                
                (195,000
                )Minority
                    interest
                
                
                288,000
                
                
                248,174Changes
                    in assets and liabilities of business, net of
                    acquisitions:Accounts
                    receivable
                
                
                1,722,387
                
                
                (4,919,792
                )Prepaid
                    expenses and other current assets
                
                
                654,743
                
                
                233,816Accounts
                    payable
                
                
                (2,703,914
                )
                
                100,691Income
                    taxes payable
                
                
                241,122
                
                
                443,193Due
                    to related parties
                
                
                121,441
                
                
                (30,635
                )Other,
                    principally accrued expenses
                
                
                648,265
                
                
                257,386**Net
                    cash provided by (used in) operating activities**
                
                
                3,920,617
                
                
                (1,451,470
                )Cash
                    flows from investing activities:Purchases
                    of securities
                
                
                (93,541,141
                )
                
                (116,093,328
                )Proceeds
                    from sales of securities
                
                
                97,416,008
                
                
                120,919,416Proceeds
                    from the sale of a subsidiary
                
                
                -
                
                
                195,000Payment
                    for asset acquisition, net of cash received
                
                
                (886,503
                )
                
                (2,931,424
                )Capital
                    expenditures
                
                
                (257,749
                )
                
                (69,582
                )**Net
                    cash provided by investing activities**
                
                
                2,730,615
                
                
                2,020,082Cash
                    flows from financing activities:Dividends
                    paid
                
                
                (2,279,468
                )
                
                (2,204,028
                )Distribution
                    to minority interest holder
                
                
                (436,000
                )
                
                (78,896
                )Repayment
                    of capital lease obligation
                
                
                (162,750
                )
                
                -Proceeds
                    from stock options exercised
                
                
                219,215
                
                
                1,521,117Excess
                    tax benefits from stock-based compensation
                
                
                21,346
                
                
                -**Net
                    cash used in financing activities**
                
                
                (2,637,657
                )
                
                (761,807
                )Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                5,214
                
                
                (76,399
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                4,018,789
                
                
                (269,594
                )Cash
                    and cash equivalents, beginning of period
                
                
                9,335,723
                
                
                7,553,285**Cash
                    and cash equivalents, end of period**
                
                $
                13,354,512
                
                $
                7,283,691See
                    Notes (1), (2) and (11) for a summary of noncash investing and
                    financing
                    activities.
  The
                    accompanying notes are an integral part of these financial
                    statements
 5


**TRAFFIX,
            INC. AND SUBSIDIARIES**
 **CONSOLIDATED
              STATEMENT OF SHAREHOLDERS' EQUITY**
 **FOR
                THE SIX MONTHS ENDED MAY 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 six months ended
                  May 31, 2006
                
                
                
                
                
                
                
                
                
                
                
                1,059,679
                
                
                
                
                
                1,059,679Unrealized
                    gains on available-for-sale securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                14,013
                
                
                14,013Foreign
                    Currency Translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                156,706
                
                
                156,706Stock-based
                    compensation expense
                
                
                
                
                
                
                
                
                473,335
                
                
                
                
                
                
                
                
                473,335Dividends
                    declared
                
                
                
                
                
                
                
                
                (1,219,789
                )
                
                (1,059,679
                )
                
                
                
                
                (2,279,468
                )Stock
                    option exercises
                
                
                47,331
                
                
                47
                
                
                219,168
                
                
                
                
                
                
                
                
                219,215Tax
                    benefit from exercise of stock options
                
                
                
                
                
                
                
                
                21,346
                
                
                
                
                
                
                
                
                21,346Common
                    stock issued in connection with
                    prior year acquistion
                
                
                103,354
                
                
                104
                
                
                580,492
                
                
                
                
                
                
                
                
                580,596**Balance,
                    May 31, 2006**
                
                
                14,359,171
                
                $
                14,359
                
                $
                43,658,781
                
                $
                -
                
                $
                1,048,021
                
                $
                44,721,161




6





**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 results of operations
      for the three and six-month periods ended May 31, 2006 are not necessarily
      indicative of the results to be expected for the subsequent quarters or the
      full
      fiscal year ending November 30, 2006.





7


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 (“CODM” - a committee consisting of Company executive employees and
      certain Audit Committee members), modified the way it assesses the operations
      and performance of the Company’s single operating segment, and the resulting
      allocation of resources, resulting from such assessment, in seeking the optimal
      potential return on those resources. As a result of this modification certain
      elements of the May 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. The income
      before provision for income taxes, provision for income taxes and net income
      for
      the three and six-month periods ended May 31, 2005 were not affected by the
      reclassification resulting from the CODM’s re-assessment of analyzing
      operations.





The
      Company had previously reported to the CODM a portion of the operating expenses
      of our Canadian subsidiary to be an item of cost of sales (the primary portion
      of the reclassified accounts were included under the heading “Email marketing
      and related delivery costs” in the May 31, 2005 Form 10-Q’s Managements’
Discussion and Analysis of Financial Condition and Results of Operations
      (“MD&A”), representing the non-third party email marketing and promotion
      costs which totaled $1,812,539 for the six months ended May 31, 2005). The
      remaining portion of the Company’s Canadian subsidiary’s operating expenses was
      considered as a single item of the Company’s general and administrative expenses
      (included under the heading “Site development, maintenance and modifications” in
      the May 31, 2005 Form 10-Q MD&A, which totaled $683,574 for the six months
      ended May 31, 2005, and represent an additional component of the accounts
      reclassified). The prior year’s subsidiary overhead allocation was
      percentage-based and did not meet the detailed granular operating measurement
      requirements of the CODM. As a result of this analysis, the component items
      of
      the Canadian subsidiary’s operating expenses were re-assessed, and determined
      that they were all fixed or variable overhead accounts, and would provide more
      clarity in assessing operations when reported to the CODM as such. Therefore,
      the prior period statement of income was reclassified to conform to the current
      period presentation, and reflects all of the Canadian subsidiary’s operating
      expenses (with the exception of Internet Game Development salaries) grouped
      with
      the Company’s general and administrative overhead/expense account grouping as
      detailed in the MD&A. Additionally, a portion of depreciation and
      amortization expense had previously been grouped with cost of goods sold
      (primarily a portion of the Canadian subsidiary’s depreciation and amortization)
      with the balance being grouped with general and administrative expenses. The
      CODM now receives income statements with depreciation and amortization expense
      as separate line items on its face, and accordingly the financial statement
      presentation was modified to agree to the CODM presentation. All periods were
      reclassified for the items described above. The following table sets forth
      the
      income statement line item components affected by the
      reclassifications:





8




**Three
                  months****ended
                  May 31,****2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              16,610,569
              
              $
              (353,457
              )
              $
              16,257,112Cost
                  of sales
              
              
              10,526,749
              
              
              (1,166,744
              )
              
              9,360,005Gross
                  profit
              
              
              6,083,820
              
              
              813,287
              
              
              6,897,107Selling
                  expenses
              
              
              974,120
              
              
              307,225
              
              
              1,281,345General
                  and Administrative expenses
              
              
              3,914,134
              
              
              47,550
              
              
              3,961,684Other
                  operating (income) expense
              
              
              -
              
              
              (189,550
              )
              
              (189,550
              )Amortization
                  of intangibles
              
              
              -
              
              
              476,762
              
              
              476,762Depreciation
                  expense
              
              
              -
              
              
              171,300
              
              
              171,300Bad
                  debt expense
              
              
              80,382
              
              
              -
              
              
              80,382Income
                  from operations
              
              $
              1,115,184
              
              $
              -
              
              $
              1,115,184




**Six
                  months****ended
                  May 31,****2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              29,886,385
              
              $
              (704,342
              )
              $
              29,182,043Cost
                  of sales
              
              
              18,941,119
              
              
              (2,294,638
              )
              
              16,646,481Gross
                  profit
              
              
              10,945,266
              
              
              1,590,296
              
              
              12,535,562Selling
                  expenses
              
              
              1,791,295
              
              
              549,899
              
              
              2,341,194General
                  and Administrative expenses
              
              
              7,675,379
              
              
              307,582
              
              
              7,982,961Other
                  operating (income) expense
              
              
              -
              
              
              (365,355
              )
              
              (365,355
              )Amortization
                  of intangibles
              
              
              -
              
              
              751,924
              
              
              751,924Depreciation
                  expense
              
              
              -
              
              
              346,246
              
              
              346,246Bad
                  debt expense
              
              
              165,607
              
              
              -
              
              
              165,607Income
                  from operations
              
              $
              1,312,985
              
              $
              -
              
              $
              1,312,985






9


The
      income statement reclassifications principally reflect the separate
      presentation, or reallocation of account groupings, of amounts previously
      included in cost of sales, selling expenses and general and administrative
      expenses. Selling salaries were reclassified from general and administrative
      expenses based on a current and retroactive study of the respective employee
      services performed in all periods presented. Amortization and depreciation
      expense had previously been partially classified with cost of sales and general
      and administrative expenses and are now classified as single line items below
      cost of sales.





Certain
      reclassifications were made to the income statement presentation previously
      included in the Company’s Form 10-Q for February 28, 2006 and 2005. Such
      reclassification was related to the reclassification of selling salaries from
      general and administrative expenses based on a current and retroactive study
      of
      the respective employee services performed in all periods
      presented.




**Three
                  months****ended
                  February 28,****2006**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              17,022,812
              
              $
              -
              
              $
              17,022,812Cost
                  of sales
              
              
              9,568,640
              
              
              -
              
              
              9,568,640Gross
                  profit
              
              
              7,454,172
              
              
              -
              
              
              7,454,172Selling
                  expenses
              
              
              1,004,009
              
              
              379,861
              
              
              1,383,870General
                  and Administrative expenses
              
              
              5,074,083
              
              
              (379,861
              )
              
              4,694,222Other
                  operating (income) expense
              
              
              24,113
              
              
              -
              
              
              24,113Amortization
                  of intangibles
              
              
              361,975
              
              
              -
              
              
              361,975Depreciation
                  expense
              
              
              214,581
              
              
              -
              
              
              214,581Bad
                  debt expense
              
              
              84,286
              
              
              -
              
              
              84,286Income
                  from operations
              
              $
              691,125
              
              $
              -
              
              $
              691,125








10





**Three
                  months****ended
                  February 28,****2005**
              
              **Reclassifications**
              
              **As
                  revised**Income
                StatementNet
                  revenue
              
              $
              12,924,931
              
              $
              -
              
              $
              12,924,931Cost
                  of sales
              
              
              7,286,476
              
              
              -
              
              
              7,286,476Gross
                  profit
              
              
              5,638,455
              
              
              -
              
              
              5,638,455Selling
                  expenses
              
              
              817,175
              
              
              242,674
              
              
              1,059,849General
                  and Administrative expenses
              
              
              4,263,951
              
              
              (242,674
              )
              
              4,021,277Other
                  operating (income) expense
              
              
              (175,805
              )
              
              -
              
              
              (175,805
              )Amortization
                  of intangibles
              
              
              275,162
              
              
              -
              
              
              275,162Depreciation
                  expense
              
              
              174,946
              
              
              -
              
              
              174,946Bad
                  debt expense
              
              
              85,225
              
              
              -
              
              
              85,225Income
                  from operations
              
              $
              197,801
              
              $
              -
              
              $
              197,801






During
      the six months ended May 31, 2006 and 2005, options
      for 47,331 shares and 436,748 shares of the Company’s common
      stock, respectively, were exercised by its employees and directors. Tax benefits
      of $21,346 and $340,881 in the six months ended May 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.




11


During
      the six months ended May 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 six months ended May 31, 2006,
      there were no other significant changes in the Company’s accounting policies.





**Transactions
      with Major Customers and Other Revenue Concentrations**





In
      prior
      fiscal periods the significant portion of the Company’s revenue was dependent on
      a limited number of major customers. The Company has been modifying the
      structure and form of its business methods and practices, and through
      diversification of its revenue drivers, the Company continues to move away
      from
      the significant customer(s) reliance business model. As a result of the
      Company’s business planning and diversification, the three and six-month periods
      ended May 31, 2006 did not include any single customer which equaled or exceeded
      10% of the Company’s consolidated net revenue. The Company’s six largest
      customers during the six months ended May 31, 2006 accounted for 8.1%, 6.8%,
      5.9%, 4.4%, 3.5.% and 2.4% of consolidated net revenues during such period.
      During the three and six months ended May 31, 2005, one customer accounted
      for
      approximately $2.2 and $3.2 million, or 13.2% and 10.8% of consolidated net
      revenues, respectively.





12


During
      the three and six months ended May 31, 2006, 9.8% and 10.3% of the Company’s
      revenue was derived from its proprietary Personals service, iMatchUp.com.,
      as
      compared to 14.1% and 14.5% 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
      six-month periods ended May 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.







13


**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.




**Six
                  Months Ended****May
                  31,**
              
              **May
                  31,****2006**
              
              ******2005****Supplemental
                  Cash Flow Disclosures**Cash
                  paid during the six months ended for:Income
                  taxes paid, net of refunds
              
              $
              466,251
              
              $
              17,293







**N** **on-cash
      Investing and Financing Activities**





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




**Investing
      Activities:**




**May
                31,**
            
            **May
                31,****Stock
                Issued in connection with Acquisition (Also see notes 7 and
                8)**
            
            **2006**
            
            **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 $51,442 and $645,290, for the six months ended May 31, 2006 and
      2005, respectively.








**3.
      Stock-Based Compensation**




The
      Company’s shareholder-approved Sixth Amended and Restated 1996 Employee
      Incentive Plan (the “Plan”) provides for the granting of incentive stock
      options, non-qualified stock options and/or the issuance of restricted stock
      for
      up to 6,768,430 shares of our common stock. As of May 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 six months
      ended May 31, 2006. Options have five to ten year contractual terms and
      generally vest based on 0 to 3 years of continuous service.




On
      September 21, 2004, the shareholders’ ratified and approved the Company’s Fifth
      Amended and Restated 1996 Stock Option Plan. Such Fifth Amendment canceled
      518,430 options that remained available for grant under the Company’s 1995 Stock
      Option, and increased the number of shares available under the 1996 Plan by
      a
      corresponding 518,430 option shares, and increased the 1996 Plan by an
      additional 900,000 shares. The change was made pursuant to the more advantageous
      provisions included in the Plan with respect to option holders, and the
      treatment alternatives available in the case of changes in capitalization.




14


The
      total
      expense related to this Plan was $301,095 and $473,335 for the three and
      six-month periods ended May 31, 2006, respectively. The total related
      income tax benefit recognized on the income statement was $103,215 and $162,623,
      for the three and six-month periods ended May 31, 2006, 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 six-month periods
      ended May 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.




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
      six-month period ended May 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 our December 1, 2005 adoption of SFAS 123R, the impact to the
      Company’s Consolidated Financial Statements for the three and six-month periods
      ended May 31, 2006 on income before income taxes and on net income for the
      three
      and six-month periods ended May 31, 2006 were reductions of $301,095 and
      $473,335 and $197,880 and $310,712, respectively, when comparing what results
      would have been if it had continued to account for stock-based compensation
      under APB 25. The impact on both basic and diluted earnings per share for
      the three and six-month periods ended May 31, 2006 was $0.01 and $0.02 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.






15







*Pro
      Forma Information under SFAS No, 123*




Pro
      forma
      information regarding the effect on the net income and basic and diluted
      earnings per share for the three and six-month periods ended May 31, 2005,
      had
      the Company applied the fair value recognition provisions of SFAS No. 123,
      are
      as follows:


**Three
                  months ended**
              
              **Six
                  months ended****May
                  31,**
              
              **May
                  31,****2005**
              
              **2005**Net
                  income
              
              $
              707,684
              
              $
              1,330,965Less:
                    Total stock-based compensation expense determined under fair
                    value based
                    method, net of related tax effects
              
              
              (148,244
              )
              
              (266,534
              )Pro
                  forma Net income, as adjusted
              
              $
              559,440
              
              $
              1,064,431Basic
                  earnings per share:As
                  reported
              
              $
              0.05
              
              $
              0.10Pro
                  forma
              
              $
              0.04
              
              $
              0.08Diluted
                  earnings per share:As
                  reported
              
              $
              0.05
              
              $
              0.09Pro
                  forma
              
              $
              0.04
              
              $
              0.07







*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:




16


**Six
                    Months Ended****May
                    31,**
                
                **May
                    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.




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 May 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 six-month periods ended May 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.




During
      the three and six-month periods ended May 31, 2006, stock-based compensation
      expense, net, related to the Plan was allocated as follows:




17
 
 **Three
                      Months**
                  
                  **Six
                      Months****Ended**
                  
                  **Ended****May
                      31,**
                  
                  **May
                      31,****2006**
                  
                  **2006**General
                      and administrative expenses
                  
                  $
                  301,095
                  
                  $
                  473,335Stock-based
                      compensation expense before income taxes
                  
                  
                  301,095
                  
                  
                  473,335Income
                      tax benefit
                  
                  
                  (103,215
                  )
                  
                  (162,623
                  )Total
                      stock-based compensation expense after income taxes
                  
                  $
                  197,880
                  
                  $
                  310,712
  *Stock
            Options*
  The
            status of the Plan during the six months ended May 31, 2006 was as
            follows:
  **May
                      31, 2006****Average****Weighted**
                  
                  **Remaining****Average**
                  
                  **Contractual**
                  
                  **Average****Number
                      of**
                  
                  **Exercise**
                  
                  **Term**
                  
                  **Intrinsic****Options**
                  
                  **Price**
                  
                  **(in
                      years)**
                  
                  **Value**Options
                      outstanding,  beginning
                      of period
                  
                  
                  3,140,359
                  
                  $
                  5.65Granted
                  
                  
                  142,500
                  
                  
                  5.41Exercised
                  
                  
                  (47,331
                  )
                  
                  4.63Forfeited
                  
                  
                  (51,167
                  )
                  
                  5.86Options
                      outstanding, end
                      of period
                  
                  
                  3,184,361
                  
                  $
                  5.65
                  
                  
                  5.7
                  
                  $
                  1,885,598Vested
                      and expected to vest
                      at May 31, 2006
                  
                  
                  3,174,536
                  
                  $
                  5.65
                  
                  
                  5.7
                  
                  $
                  1,879,780Exercisable
                      at May 31, 2006
                  
                  
                  2,721,012
                  
                  $
                  5.49
                  
                  
                  5.7
                  
                  $
                  1,839,437





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between the Company’s closing stock price on May
      31, 2006, the last trading day of the second 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 May 31, 2006. This amount changes based on the fair market value
      of
      the Company’s stock. Total intrinsic value of options exercised for the six
      months ended May 31, 2006 was $62,782. Total fair value of options vested and
      expensed was $310,712, net of tax, for the six months ended May 31, 2006. The
      weighted-average grant-date fair value of options granted during the six months
      ended May 31, 2006 was $3.14.





18


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





**May
                    31, 2006****Number
                      of****Options**
                
                **Weighted**
                    **Average****Grant-date**
                  **Fair
                    Value****Nonvested****Options**Nonvested
                    Options outstanding, beginning
                    of period
                
                
                568,852
                
                $
                1.39Granted
                
                
                142,500
                
                
                3.14Vested
                
                
                (240,000
                )
                
                2.07Forfeited
                
                
                (8,003
                )
                
                1.39Nonvested
                  Options outstanding, end of period
                
                
                463,349
                
                $
                1.58




As
      of May
      31, 2006, there was $416,864 of total unrecognized compensation cost related
      to
      nonvested share-based compensation arrangements granted under the Plan. That
      cost is expected to be recognized over a weighted-average period of 8.2 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 May 31, 2006:




******Range************of******
                  **Exercise**
                  **P****rices**
                
                
                **Number**
                    **of
                      options**
                  **Outstanding**
                
                
                **Weighted**
                        **Average**
                      **Remaining**
                    **Contractual**
                  **Life**
                
                
                **Weighted**
                      **Average**
                    **Exercise**
                  **Price**
                
                
                **Number**
                    **of
                      options**
                  **Exercisable**
                
                
                **Weighted**
                      **Average**
                    **Exercise**
                  **Price**$
                1.72-$2.50
                
                
                219,797
                
                
                4.7
                
                $
                2.34
                
                
                219,797
                
                $
                2.34$
                2.63-$3.85
                
                
                288,083
                
                
                5.6
                
                
                3.15
                
                
                288,083
                
                
                3.15$
                4.22-$6.22
                
                
                1,792,481
                
                
                5.6
                
                
                5.62
                
                
                1,579,636
                
                
                5.60$
                6.35-$9.38
                
                
                846,500
                
                
                6.1
                
                
                7.12
                
                
                595,996
                
                
                7.07$
                11.31-15.57
                
                
                37,500
                
                
                1.0
                
                
                12.67
                
                
                37,500
                
                
                12.67$
                1.72-$15.57
                
                
                3,184,361
                
                
                5.7
                
                $
                5.65
                
                
                2,721,012
                
                $
                5.50




19


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**
                  
                  **Six
                      Months Ended****May
                      31,**
                  
                  **May
                      31,**
                  
                  **May
                      31,**
                  
                  **May
                      31,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Denominator:Denominator
                      for basic earnings per share-weighted average
                      shares
                  
                  
                  14,271,369
                  
                  
                  13,986,127
                  
                  
                  14,249,337
                  
                  
                  13,794,009Effect
                      of dilutive securities:Stock
                      options
                  
                  
                  216,324
                  
                  
                  247,584
                  
                  
                  201,742
                  
                  
                  451,018Denominator
                      for diluted earnings per share-adjusted
                      weighted average shares
                  
                  
                  14,487,693
                  
                  
                  14,233,711
                  
                  
                  14,451,079
                  
                  
                  14,245,027






Options
      to purchase 1,862,150 and 2,135,401 shares of common stock for the three months
      ended May 31, 2006 and 2005, respectively, and 2,115,150 and 2,082,401 for
      the
      six months ended May 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.




**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**
              
              **Six
                  Months Ended****May
                  31,**
                **2006**
              
              **May
                  31,**
                **2006**
              
              **May
                  31,**
                **2006**
              
              **May
                  31,**
                **2006**Net
                Income
              
              $
              636,961
              
              $
              707,684
              
              $
              1,059,679
              
              $
              1,330,965Other
                comprehensive
                income (loss), net of tax:Foreign
                  currency translation adjustment
              
              
              74,938
              
              
              (51,152
              )
              
              156,706
              
              
              (147,091
              )Unrealized
                  gain (loss) from available-for-sale securities, arising
                duringthe
                  period, net of income taxes of $25,005 and ($9,929)
                forMay
                  31, 2005and
                  $-0- for May 31, 2005
              
              
              (58,533
              )
              
              (18,410
              )
              
              14,013
              
              
              (60,024
              )Add:
                  reclassification adjustment for gains realized in net
                income,net
                  of tax effect of $224,684
              
              
              -
              
              
              -
              
              
              -
              
              
              (360,584
              )Comprehensive
                income
              
              $
              653,366
              
              $
              638,122
              
              $
              1,230,398
              
              $
              73,266






20


**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) and the costs associated with the transmission of email marketing
      messages by external third-party vendors. During the period July 1, 2004 to
      May
      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 May 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 May 31, 2006 and 2005 were approximately $10.4 million and $9.4 million,
      respectively, and for the six months ended May 31, 2006 and 2005 were
      approximately $20.0 million and $16.6 million, respectively.




**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.




21


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. The Company determined, in
      accordance with the terms of the acquisition agreement, that 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.




At
      May
      31, 2006, the Company 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 first measurement period, which ends
      February 28, 2007. As of May 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.




22


**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 May 31, 2006
              
              As
                  of November 30, 2005GrossCarryingAmount
              
              Accumulated
                  Amortization
              
              GrossCarryingAmount
              
              Accumulated
                AmortizationUnamortized
                  intangible assets:Goodwill
              
              $
              7,944,114
              
              
              
              
              $
              6,426,336Amortizable
                  Intangible Assets:*GroupLotto
                  identifiable intangibles:*GroupLotto
                  Site Brand Recognition
              
              $
              722,922
              
              $
              703,100
              
              $
              722,922
              
              $
              630,808GroupLotto
                  Database
              
              
              433,754
              
              
              421,861
              
              
              433,754
              
              
              378,486Intellectual
                  Property Assets
              
              
              289,169
              
              
              281,240
              
              
              289,169
              
              
              252,323Marketing
                  Right License Fee
              
              
              252,915
              
              
              114,381
              
              
              252,915
              
              
              80,590*Infiknowledge
                  identifiable intangibles:*Internet
                  Game Suite
              
              
              278,591
              
              
              247,993
              
              
              263,241
              
              
              207,717Intellectual
                  Property Assets
              
              
              208,944
              
              
              185,995
              
              
              197,430
              
              
              155,788Market
                  Position Acquired
              
              
              232,159
              
              
              206,660
              
              
              219,367
              
              
              173,098*Thanksmuch
                  identifiable intangibles:*Profiled
                  customer data
              
              
              50,000
              
              
              50,000
              
              
              50,000
              
              
              50,000Restrictive
                  Covenants
              
              
              10,000
              
              
              9,878
              
              
              10,000
              
              
              8,878*SendTraffic
                  identifiable intangibles:*Restrictive
                  Covenants
              
              
              523,109
              
              
              322,109
              
              
              523,109
              
              
              221,609Software
              
              
              963,951
              
              
              568,395
              
              
              963,951
              
              
              420,118*Hot
                  Rocket identifiable intangibles*Restrictive
                  Covenants
              
              
              569,394
              
              
              155,318
              
              
              569,394
              
              
              98,379Software
              
              
              1,012,257
              
              
              460,202
              
              
              1,012,257
              
              
              291,492Total
                  amortizable intangible assets
              
              $
              5,547,165
              
              $
              3,727,132
              
              $
              5,507,509
              
              $
              2,969,286


23





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.




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





24




**2006**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **2010***GroupLotto
                  Identifiable**Intangible
                  amortization:*Site
                  Brand Recognition
              
              $
              19,822
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Database
              
              
              11,893
              
              
              —
              
              
              —
              
              
              —
              
              
              —Intellectual
                  Property Assets
              
              
              7,929
              
              
              —
              
              
              —
              
              
              —
              
              
              —Licenses
              
              
              30,062
              
              
              52,667
              
              
              45,805
              
              
              10,000
              
              
              —$
              69,706
              
              $
              52,667
              
              $
              45,805
              
              $
              10,000
              
              $
              —*Infiknowledge
                  Identifiable**Intangible
                  amortization:*Internet
                  Game Suite
              
              $
              28,076
              
              $
              1,577
              
              $
              527
              
              $
              418
              
              $
              —Intellectual
                  Property Assets
              
              
              21,057
              
              
              1,183
              
              
              395
              
              
              315
              
              
              —Market
                  Position Acquired
              
              
              23,397
              
              
              1,314
              
              
              439
              
              
              348
              
              
              —$
              72,530
              
              $
              4,074
              
              $
              1,361
              
              $
              1,081
              
              $
              —*ThanksMuch
                  Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              $
              122
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —$
              122
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —*SendTraffic
                  Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              $
              100,500
              
              $
              100,500
              
              $
              —
              
              $
              —
              
              $
              —Software
              
              
              148,277
              
              
              234,898
              
              
              12,381
              
              
              —
              
              
              —$
              248,777
              
              $
              335,398
              
              $
              12,381
              
              $
              —
              
              $
              —*Hot
                  Rocket Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              $
              56,939
              
              $
              113,879
              
              $
              113,879
              
              $
              113,879
              
              $
              15,500Software
              
              
              168,710
              
              
              337,418
              
              
              45,927
              
              
              —
              
              
              —$
              225,649
              
              $
              451,297
              
              $
              159,806
              
              $
              113,879
              
              $
              15,500**Summary
                  of Identifiable****Intangibles:***GroupLotto:*
              
              $
              69,706
              
              $
              52,667
              
              $
              45,805
              
              $
              10,000
              
              $
              —*Infiknowledge:*
              
              
              72,530
              
              
              4,074
              
              
              1,361
              
              
              1,081
              
              
              —*ThanksMuch:*
              
              
              122
              
              
              —
              
              
              —
              
              
              —
              
              
              —*Hot
                  Rocket:*
              
              
              225,649
              
              
              451,297
              
              
              159,806
              
              
              113,879
              
              
              15,500*SendTraffic:*
              
              
              248,777
              
              
              335,398
              
              
              12,381
              
              
              —
              
              
              —*Totals*
              
              $
              616,784
              
              $
              843,436
              
              $
              219,353
              
              $
              124,960
              
              $
              15,500




25


**9.
      Income Taxes**




The
      Company’s income tax provision for the three and six months ended May 31, 2006
      was approximately $582,000 and $878,000, respectively, and includes $553,000
      and
      $809,000 of expense related to the current year’s three and six month operations
      and approximately $29,000 and $69,000 of period expense related to an increase
      in the Company’s estimates related to tax audits.




The
      Company’s income tax provision for the three and six months ended May 31, 2005
      was approximately $486,000 and $922,000, respectively, and includes $439,000
      and
      $829,000 of expense related to the current year’s three and six month operations
      and approximately $47,000 and $93,000 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 six months ended May 31, 2006 was
      47.7% and 45.3%. 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 from permanent differences between book and taxable income
      and additions to our tax audit reserves during the three and six months ended
      May 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**
                
                
                **Fiscal Year****2006 (1)**
                
                
                **2005 (2)**Income
                    tax expense at U.S. federal statutory rate
                
                
                34.0
                %
                
                34.0
                %State
                    income taxes, net of U.S. federal impact
                
                
                5.3
                %
                
                0.6
                %Impact
                    of foreign operations
                
                
                1.5
                %
                
                0.3
                %Increase
                    (decrease) in tax contingencies
                
                
                2.8
                %
                
                -7.7
                %Other,
                    including non-deductible expenses
                
                
                1.7
                %
                
                2.8
                %45.3
                %
                
                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.








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




26




*Nasco
        Corporate Finance Consultants, LLC, Todd Cook et al* ***.***
 
 In
        December 2004, the Company 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, the Company seeks 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 the Company for customer leads which the Company
        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 the Company 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 the Company are being dismissed with prejudice, with the Company
        making
        no payments and the Company’s claims being dismissed with prejudice after
        completion of agreed-upon payments by the defendants of a portion of the
        Company’s claim.




**11.
      Subsequent Events**




On
      July
      11, 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 May 31, 2006. Such dividend is payable on or about August 10, 2006 to
      holders of record of such shares at the close of business on August 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.








**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.





27


**Overview**





We
      are a
      leading Internet 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 marketing channels. The services we offer include the development of
      a
      complete creative promotion used to market our client's product and/or service
      to consumers online, including the use of Search Engine Marketing Optimization.
      In the provision of our client services, we use all major online marketing
      channels, including email promotions to generate new customers for our clients;
      we deliver data files indicating the results of the email promotions; we create
      and host customized websites and/or web pages to facilitate consumer
      transactions for our clients; we generate comprehensive reporting of the website
      activity allowing our clients to analyze the effectiveness of the promotion;
      and
      we provide revenue generating potential for our clients through affiliate
      marketing opportunities. We use this media platform to generate customers,
      sales
      and leads for our own service offers, in addition to 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.




We
      also
      generate revenue directly from consumers through our “direct-to-consumer”
business, which includes our online personals service known as iMatchUp.com.




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




The
      initial purchase price 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. We 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 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.




28


At
      May
      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 February
      28,
      2007. As of May 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.




The
      personals component of our “direct-to-consumer” services generated approximately
      $1.9 million and $3.7 million, or 10% and 10% of our revenue, during the three
      and six months ended May 31, 2006, as compared to approximately $2.3 million
      and
      $4.2 million, or 14% and 14% of our revenue, during the prior year’s comparable
      fiscal periods.




We
      made
      one asset acquisition in each of Fiscal 2004 and 2005. The productive assets
      acquired through these asset acquisitions accounted for approximately $7.0
      million and $14.4 million of our consolidated
      revenue s,
      and
      approximated 37% and 40% of consolidated revenues during the three and six
      months ended May 31, 2006 when compared to $4.2 million and $6.5 million during
      the prior year’s comparable periods, which approximated 26% and 22% of
      consolidated revenues. Such asset acquisitions are described in more detail
      below, and further described in the preceding notes to the May 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 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 (i.e., search
      engines, email, banner advertisements) and through cross-marketing within our
      own online media. Our Web properties and our marketing activities are designed
      to generate real-time response-based marketing results for our corporate
      clients. When visiting our online properties, consumers are given the
      opportunity to purchase, sign-up for, ask to be contacted regarding, or simply
      indicate an interest in, hundreds of offers for various products and services.
      Specifically, through these interactive Web properties we generate a variety
      of
      transactional results ranging from (a) Web traffic, (b) inbound telemarketing
      calls, (c) outbound telemarketing leads, (d) demographically/psychographically
      profiled lists of consumers, (e) highly-targeted customized response-based
      leads, (f) completed applications for products, and (g) sales of our clients’
products and services.





*Online
      Advertising - Website Advertising*




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





29


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.





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 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 to appeal to 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 online marketing
      industry.




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




*Syndication.* After we
      develop a campaign that works efficiently on our own media, we sometimes
      "syndicate" the program to third-party media. Typically, we have expended time,
      media and other costs in developing certain campaigns. In exchange for this
      invested effort, we obtain the right to market those campaigns to other online
      media companies. We believe that with syndicated offers we can leverage
      campaigns we have developed so that in future fiscal periods we can generate
      additional revenue with reduced costs and risks associated with such business
      extension.





*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.




30


*Online
        Advertising - Data Sales, rentals and list management*


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




*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 businesses 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.




**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. Also
      see Note 1 to the Consolidated Financial Statements.





**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, has been removed as a separate segment from its CODM reporting
      and therefore our financial disclosure. For the May 31, 2006 and 2005 three
      and
      six-month periods, the terminated LEC segment’s immaterial-operating-activity is
      included on our other operating (income) expense line item on the unaudited
      consolidated statements of income for all periods presented.




31


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




We
      had
      revenue from our Canadian-based subsidiary of approximately $414,000 and
      $225,000 during the six months ended May 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 of an overhead
      nature; we classify them within the same categories as our domestic operations
      disclose general and administrative expenses.








**RESULTS
      OF OPERATIONS**





The
      following is a discussion of our results of operations for the three and
      six-month periods ended May 31, 2006 and May 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 MAY 31, 2006 AND 2005




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




32


***Net
                    Revenue Components******Online
                    Advertising and Media Service Activities***
  **Three
                    Months Ended**
                
                **Change**
                
                **Change****May
                    31,**
                
                **May
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                12,680,966
                
                $
                11,629,850
                
                $
                1,051,116
                
                
                9
                %Search
                    Engine Marketing
                
                
                4,221,023
                
                
                2,188,640
                
                
                2,032,383
                
                
                93
                %Personals
                
                
                1,860,152
                
                
                2,285,301
                
                
                (425,149
                )
                
                -19
                %Internet
                    game development
                
                
                201,991
                
                
                153,321
                
                
                48,670
                
                
                32
                %**Consolidated
                    totals**
                
                $
                18,964,132
                
                $
                16,257,112
                
                $
                2,707,020
                
                
                17
                %





Net
      Revenue increased approximately $2.7 million, or 17%, to $19.0 million for
      the
      three months ended May 31, 2006, from $16.3 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 Optimization services ($2.0 million increase, or 93%) and
      increased revenues from Online Advertising ($1 million increase, or 9%), which
      includes an increase in our resale on a performance basis of Internet Media
      Advertising ($0.7 million, or 39%), and a combined increase in our Web
      Advertising, Email Marketing Programs and Data sales and rentals of
      approximately $0.3 million, or 2.8%. Internet Game Development revenues
      approximated $0.2 million, for an approximate $0.05 million increase, or 32%.
      Search Engine Marketing Optimization 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. 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 $0.2 million, or 6%, resulting from declines in the delivery
      rates
      of our email marketing offers; and (b) Data sale and rental revenue declines
      of
      $0.2 million, or 27%, which resulted from the shift in our business, where
      our
      increased reliance on Search Engine Marketing and Internet Advertising Revenue,
      which generates a smaller amount of data that would otherwise become available
      for sale and rental purposes.




33


Our
      Personals business, the iMatchUp.com dating sites, recognized a revenue decline
      of approximately $0.4 million, or 19%, 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 three months ended May 31, 2006 and May 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, website
      registrations costs, the cost of customer profiles, other customer acquisition
      costs, search engine marketing optimization 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 May 31, 2006 and May 31, 2005, are set forth
      below:


***Cost
          of Sale Components***
 ***Online
              Advertising and Media Service Activities***
 **Three
                    Months Ended**
                
                **Change**
                
                **Change****May
                    31,**
                
                **May
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                6,018,377
                
                $
                5,907,709
                
                $
                110,668
                
                
                2
                %Search
                    Engine Marketing
                
                
                3,227,792
                
                
                1,663,082
                
                
                1,564,710
                
                
                94
                %Personals
                
                
                1,114,135
                
                
                1,742,663
                
                
                (628,528
                )
                
                -36
                %Internet
                    game development
                
                
                61,328
                
                
                46,551
                
                
                14,777
                
                
                32
                %**Consolidated
                    totals**
                
                $
                10,421,632
                
                $
                9,360,005
                
                $
                1,061,627
                
                
                11
                %




34


Cost
        of
        sales on a consolidated basis increased $1.1 million, or 11%, to $10.4 million
        for the three months ended May 31, 2006, from $9.4 million in the comparable
        prior year period.




The
      significant factor contributing to the increase in consolidated costs of sales
      was related to a net increase of approximately $1.6 million in costs incurred
      in
      the generation of increased Search Engine Marketing Optimization revenues.
      The
      Online Advertising component recognized a net increase of approximately $0.1
      million, or 2%, and was comprised of: increases in purchases of online
      advertising space of $0.2 million, or 12%, 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), offset by (a) a
      decline in website advertising registrations (decrease of $0.4 million or,
      22%,
      and (b) a decline in third party email vendor costs of approximately $0.1
      million, or 21%. In our Personals business, costs incurred in the acquisition
      of
      new customer profiles decreased $0.6 million, or 36%. The decrease in customer
      profile cost correlates to our decreased emphasis on new Personals customer
      enrollment during the three months ended May 31, 2006. Instead, we focused
      on
      maintaining our current customer base for a longer lifetime. The increase in
      Search Engine Marketing Optimization 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 Personals business,
      and our other Online Advertising and Media Service activities revenue
      components.





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


***Gross
        Profit Components***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              6,662,589
              
              $
              5,722,141
              
              $
              940,448
              
              
              16
              %Search
                  Engine Marketing
              
              
              993,231
              
              
              525,558
              
              
              467,673
              
              
              89
              %Personals
              
              
              746,017
              
              
              542,638
              
              
              203,379
              
              
              37
              %Internet
                  game development
              
              
              140,663
              
              
              106,770
              
              
              33,893
              
              
              32
              %**Consolidated
                  totals**
              
              $
              8,542,500
              
              $
              6,897,107
              
              $
              1,645,393
              
              
              24
              %







35


***Gross
        Profit Margin Components***
 ***Online
        Advertising and Media Service Activities***
  **Absolute**
              
              **Relative****Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              
              52.5
              %
              
              49.2
              %
              
              3.3
              %
              
              6.8
              %Search
                  Engine Marketing
              
              
              23.5
              %
              
              24.0
              %
              
              -0.5
              %
              
              -2.0
              %Personals
              
              
              40.1
              %
              
              23.7
              %
              
              16.4
              %
              
              68.9
              %Internet
                  game development
              
              
              69.6
              %
              
              69.6
              %
              
              0.0
              %
              
              0.0
              %**Consolidated
                  totals**
              
              
              45.0
              %
              
              42.4
              %
              
              2.6
              %
              
              6.2
              %





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 45.0% during
      the three months ended May 31, 2006, compared to 42.4% in the prior year’s
      comparable period, representing 2.6% absolute improvement and a relative
      improvement of 6.2% 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, iMatchUp.com
      dating sites, and is based on the reduction of costs related to new Personals
      member acquisitions and our focus on extending the billable life time of our
      current membership base, as well as the offsetting factors relating to
      increasing our efforts in the expansion of our search engine marketing
      optimization and online advertising space sales, with slight increases
      recognized in Online Advertising, and declines recognized in the building of
      our
      search engine marketing optimization activities.




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





36


***Selling
        Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              1,003,515
              
              $
              568,283
              
              $
              435,232
              
              
              77
              %Selling
                  salaries and related costs
              
              
              761,688
              
              
              641,879
              
              
              119,809
              
              
              19
              %Travel,
                  entertainment, shows, other
              
              
              61,093
              
              
              71,183
              
              
              (10,090
              )
              
              -14
              %**Consolidated
                  totals**
              
              $
              1,826,296
              
              $
              1,281,345
              
              $
              544,951
              
              
              43
              %





Selling
      expenses, on a consolidated basis, increased approximately $0.5 million, or
      43%,
      to $1.8 million during the three months ended May 31, 2006 from $1.3 million
      during the three months ended May 31, 2005. The increase resulted from an
      approximate $0.4 million increase in fee share commissions correlating to our
      increased use of third-party databases in our acquisition of proprietary
      customers for our online dating sites coupled with an 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.
      We
      also experienced increases in selling salaries and related costs of $0.1 million
      as a result of increased sales commissions earned during the three months ended
      May 31, 2006 (total revenues of $19.0 million) when compared to the three months
      ended May 31, 2005 (total revenues of $16.2 million).




Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      technology and operation systems, and general administration personnel, (ii)
      professional fees (which include legal; audit, accounting and tax; public
      relations; database management and consulting; and public company related
      printing and filing costs), (iii) insurance costs, (iv) occupancy and other
      equipment rental costs, (v) 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.




37


Our
      General and Administrative Expenses for the three months ended May 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****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              3,461,131
              
              $
              2,541,192
              
              $
              919,939
              
              
              36
              %Professional
                  fees
              
              
              435,185
              
              
              385,168
              
              
              50,017
              
              
              13
              %Insurance
                  costs
              
              
              237,201
              
              
              231,873
              
              
              5,328
              
              
              2
              %Website
                  and email hosting
              
              
              132,457
              
              
              205,169
              
              
              (72,712
              )
              
              -35
              %Occupancy
                  and equipment costs
              
              
              156,519
              
              
              126,503
              
              
              30,016
              
              
              24
              %Personals
                  credit card and processing fees
              
              
              97,866
              
              
              112,761
              
              
              (14,895
              )
              
              -13
              %All
                  other miscellanous G&A expenses
              
              
              511,269
              
              
              359,018
              
              
              152,251
              
              
              42
              %**Consolidated
                  totals**
              
              $
              5,031,628
              
              $
              3,961,684
              
              $
              1,069,944
              
              
              27
              %


38


General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $1.1 million, or 27%, when comparing G&A of $5.0 million for
      the three months ended May 31, 2006 to G&A of $3.9 million incurred during
      the three months ended May 31, 2005. The net increase was attributable to
      combined increases in compensation costs and miscellaneous G&A of
      approximately $1.1 million or 37%, offset by declines in Website and email
      hosting ($0.1 million), and immaterial declines in Personals related credit
      card
      processing fees. The significant increase in compensation costs were
      attributable to: (a) stock-based compensation costs of approximately $0.3
      million resulting from our December 1, 2005 adoption of SFAS 123R; (b) increases
      in compensation costs and related expenses of approximately $0.4 million
      resulting from increases in the number of our domestic employees to service
      the
      growth of our search engine marketing optimization activities and Internet
      Media
      Performance Based sale activities, both coupled with modest pay increases for
      a
      portion of our domestic workforce; and (c) increases in our Infiknowledge
      subsidiary payroll expense ($0.2 million) resulting from the staff increases
      necessary to service our increased levels of business activity.




Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $91,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the three months ended May 31, 2006, of
      which
      $30,000 was recovered in settlement awards and $61,000 was expensed in our
      G&A accounts. We incurred approximately $146,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the three months ended May 31, 2005, of
      which
      $80,000 was capitalized in the Hot Rocket acquisition and $66,000 was expensed
      in our G&A accounts.




39


***Other
        Operating (Income) Expense***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Other
                operating(income)
                  expense
              
              $
              18,517
              
              $
              (189,550
              )
              $
              208,067
              
              
              -110
              %**Consolidated
                  totals**
              
              $
              18,517
              
              $
              (189,550
              )
              $
              208,067
              
              
              -110
              %






For
      the
      three months ended May 31, 2006 and 2005, we reassessed the way the operations
      of the Company are analyzed for purposes of the allocation of resources. In
      this
      reassessment process, we terminated the separate disclosure of our LEC Billed
      Service segment based on its dormant position over the last 24 months. The
      terminated LEC segment’s immaterial-operating-activity is now included on our
      other operating (income) expense line item on our unaudited consolidated
      statements of income for both periods presented.




LEC
      segment’s revenues were $-0- and $353,457 in the three months ended May 31, 2006
      and 2005, respectively. The LEC segment’s cost of sales were $18,517 and
      $163,907 in the three months ended May 31, 2006 and 2005, respectively. The
      combination of these two items for Fiscal 2006 and 2005 amounted to $18,517
      and
      $(189,550), and are included in the table above. It is anticipated that future
      fiscal periods will have declining amounts of other operating (income) expense,
      as the remaining LEC accounts continue their current rate of
      attrition.





40


***Amortization
        of Intangibles***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                Advertising and Media Services
              
              $
              361,817
              
              $
              476,762
              
              $
              (114,945
              )
              
              -24
              %**Consolidated
                  totals**
              
              $
              361,817
              
              $
              476,762
              
              $
              (114,945
              )
              
              -24
              %




Amortization
      expense of intangible assets acquired in acquisitions decreased $0.115 million,
      or 24%, when comparing an expense of $0.362 million for the three months ended
      May 31, 2006 with $0.477 million for the three months ended May 31, 2005. The
      principal factor contributing to the current quarter’s decrease in amortization
      expense relates to the $137,483 charge incurred in the period ending May 31,
      2005 upon the reduction of the life of the restrictive covenants with the
      principals of Send Traffic.





41


***Depreciation
        Expense***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising and
                  Media Services
              
              $
              215,200
              
              $
              171,300
              
              $
              43,900
              
              
              26
              %**Consolidated
                  totals**
              
              $
              215,200
              
              $
              171,300
              
              $
              43,900
              
              
              26
              %





Depreciation
      expense increased $0.044 million, or 26%, when comparing an expense of $0.215
      million for the three months ended May 31, 2006 with $0.171 million for the
      three months ended May 31, 2005. The principal factor contributing to the
      current quarter’s increase in depreciation expense relates to our acquisition of
      server equipment in the third and fourth quarters of Fiscal 2005, which is
      generating depreciation expense that did not have a comparable offsetting charge
      in the three months ended May 31, 2005.








42


***Bad
        Debt Expense Components***
 ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              (11,243
              )
              $
              60,757
              
              $
              (72,000
              )
              
              -119
              %Search
                  Engine Marketing
              
              
              17,663
              
              
              19,625
              
              
              (1,962
              )
              
              100
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              3,606
              
              
              -
              
              
              3,606
              
              
              100
              %**Consolidated
                  totals**
              
              $
              10,026
              
              $
              80,382
              
              $
              (70,356
              )
              
              -88
              %


Bad
      Debt
      expense declined by approximately $70,000 when comparing the three months ended
      May 31, 2006 with the three months ended May 31, 2005. The current quarter’s bad
      debt expense includes a $50,000 reduction in bad debt attributable to a
      favorable litigation settlement resulting in a recoup of previously written
      off
      receivables. 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 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) 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) could be further increased or decreased in future fiscal
      periods.




43


**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**
              
              **May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****income
                  (expense):**
              
              **2006**
              
              **2005**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              254,380
              
              $
              237,514
              
              $
              16,866
              
              
              7
              %Realized
                  (losses) gains on sale of marketable securities
              
              
              -
              
              
              (11,218
              )
              
              11,218
              
              
              -100
              %Other
                  non-operating income:
                Other
                  miscellaneous income (expense)
              
              
              (1,710
              )
              
              6,957
              
              
              (8,667
              )
              
              -125
              %Foreign
                  Currency Exchange Rate
                Fees
                  and interest expense
              
              
              (24,758
              )
              
              (4,631
              )
              
              (20,127
              )
              
              435
              %Minority
                  interest (income)
              
              
              (87,905
              )
              
              (150,529
              )
              
              62,624
              
              
              -42
              %**Total
                  other non-operating**
                **income:**
              
              $
              140,007
              
              $
              78,093
              
              $
              61,914
              
              
              79
              %





Consolidated
      Other Non-operating Income (Expense) increased approximately $62,000, from
      approximately $78,000 for the three months ended May 31, 2005, to approximately
      $140,000 for the three months ended May 31, 2006.




44


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




(a)
            Interest
                income increased approximately $17,000, or 7%, as the result of mare
                favorable rates available during Fiscal 2006 as compared to Fiscal
                2005.





(b)
            Minority
                Interest resulting from our EZTracks partnership with Madacy Entertainment
                decreased from approximately $150,000 in the second quarter of Fiscal
                2005
                to approximately $88,000 in the second quarter of Fiscal
                2006.





**MINORITY
      INTEREST**




During
      January 2005, we entered into an agreement with Madacy Entertainment, through
      a
      newly created partnership, EZTracks LP, to market and promote EZTracks.com,
      our
      new web destination consisting of approximately 30,000 downloadable songs
      covering a wide array of musical genres. We, through a wholly-owned subsidiary,
      own 50.7% of the partnership and will be responsible for managing the operations
      of the business, including generating traffic to the website, as well as selling
      advertising on the site. Madacy Entertainment, through its wholly-owned
      subsidiary, owns 49.3% of the partnership and will provide its inventory of
      music and an extensive library of music licensed from other parties. Madacy
      will
      have limited involvement with certain aspects of operations. The results of
      operations for the three months ended May 31, 2006 and May 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.




45


***The
        following table summarizes the results of EZTracks for the periods indicated
        below:***
  **Three
                  Months**
              
              **Three
                  Months****Ended**
              
              **Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Net
                  Revenues
              
              $
              2,544,612
              
              $
              1,659,708
              
              $
              884,904
              
              
              53
              %Cost
                  of Sales
              
              
              2,288,894
              
              
              1,329,708
              
              
              959,186
              
              
              72
              %Gross
                  Profit
              
              
              255,718
              
              
              330,000
              
              
              (74,282
              )
              
              -23
              %General
                  andAdministrative
                  Expenses
              
              
              77,414
              
              
              24,667
              
              
              52,747
              
              
              214
              %Net
                  Income
              
              $
              178,304
              (1)
              $
              305,333
              (1)
              $
              (127,029
              )
              
              -42
              %Minority
                  interest
              
              $
              87,905
              (2)
              $
              150,529
              (2)
              $
              (62,624
              )
              
              -42
              %
  (1)
              All items included in the Company's Online
                  Advertising
                  and Media Services activities (2)
              Represents
                Madacy Entertainment's 49.3% minority
                interest


**PROVISION
      FOR INCOME TAXES**





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
      resolution of any open audits would have a material adverse effect upon our
      consolidated financial statements.




Our
      income tax provision for the three months ended May 31, 2006 was approximately
      $582,000, which includes $553,000 of tax expense related to current year
      operations and approximately $29,000 of period expense related to an increase
      in
      our estimates related to potential for tax audits.




The
      effective rate relationship of 47.7% differs from our annual effective rate
      of
      30.0% recognized during the year ended November 30, 2005. A portion of the
      effective tax rate variance is attributable to tax benefits recognized during
      Fiscal 2005, from the use of approximately $0.2 million in previously devalued
      capital loss carryover deferred tax assets. Such devalued capital loss deferred
      tax assets were fully utilized in Fiscal 2005, and offset tax expense on Fiscal
      2005’s realized capital gain income. Additionally, in Fiscal 2005 certain state
      tax audits were settled in amounts that were less than the amounts recorded
      to
      cover the initial expected audit outcome. The balance of the rate reconciliation
      is attributable to a permanent difference arising out of the difference between
      the book and tax basis of certain acquired amortizable intangible assets. This
      permanent difference expires during the three months ended August 31, 2006,
      as a
      result of the complete amortization of the related intangible.




SIX
      MONTH ENDED MAY 31, 2006 AND 2005




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


46


***Net
      Revenue Components***


***Online
          Advertising and Media Service Activities***
 **Six
                    Months Ended**
                
                **Change**
                
                **Change****May
                    31,**
                
                **May
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2006**
                
                **2005**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                23,659,822
                
                $
                21,094,548
                
                $
                2,565,274
                
                
                12
                %Search
                    Engine Marketing
                
                
                8,216,376
                
                
                3,643,289
                
                
                4,573,087
                
                
                126
                %Personals
                
                
                3,696,866
                
                
                4,218,815
                
                
                (521,949
                )
                
                -12
                %Internet
                    game development
                
                
                413,880
                
                
                225,391
                
                
                188,489
                
                
                84
                %**Consolidated
                    totals**
                
                $
                35,986,944
                
                $
                29,182,043
                
                $
                6,804,901
                
                
                23
                %


Net
      Revenue increased approximately $6.8 million, or 23%, to $36.0 million for
      the
      six months ended May 31, 2006, from $29.2 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
      Optimization services ($4.6 million, or 126%) and increased revenues from Online
      Advertising ($2.6 million, or 12%), which includes an increase in our resale
      on
      a performance basis of Internet Media Advertising ($3.3 million, or 115%),
      offset by a combined decline in our Web Advertising, Email Marketing Programs
      and Data sales and rentals of approximately $0.7 million, or 4.0%. Internet
      Game
      Development revenues approximated $0.4 million, for an approximate $0.2 million
      increase, or 84%. Search Engine Marketing Optimization 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. 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 $0.4 million, or 8%, resulting
      from declines in the delivery rates of our email marketing offers; and (c)
      Data
      sale and rental revenue declines of $0.4 million, or 22%, which resulted from
      the shift in our business, where our increased reliance on Search Engine
      Marketing and Internet Advertising Revenue, which generates a smaller amount
      of
      data that would otherwise become available for sale and rental
      purposes.




47




Our
      Personals business, the iMatchUp.com dating sites, recognized a revenue decline
      of approximately $0.5 million, or 12%, 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 three months ended May 31, 2006 and May 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, website
      registrations costs, the cost of customer profiles, other customer acquisition
      costs, search engine marketing optimization costs, and the related
      contingent-based sweepstakes indemnification expense.





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




***Cost
                  of Sale Components******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              11,338,892
              
              $
              10,826,304
              
              $
              512,588
              
              
              5
              %Search
                  Engine Marketing
              
              
              6,345,607
              
              
              2,656,054
              
              
              3,689,553
              
              
              139
              %Personals
              
              
              2,180,111
              
              
              3,095,690
              
              
              (915,579
              )
              
              -30
              %Internet
                  game development
              
              
              125,662
              
              
              68,433
              
              
              57,229
              
              
              84
              %**Consolidated
                  totals**
              
              $
              19,990,272
              
              $
              16,646,481
              
              $
              3,343,791
              
              
              20
              %





48


Cost
      of
      sales on a consolidated basis increased $3.3 million, or 20%, to $20.0 million
      for the six months ended May 31, 2006, from $16.6 million in the comparable
      prior year period.




The
      significant factor contributing to the increase in consolidated costs of sales
      was related to a net increase of approximately $3.7 million in costs incurred
      in
      the generation of increased Search Engine Marketing Optimization revenues.
      The
      Online Advertising component recognized a net increase of approximately $0.5
      million, or 5%, and was comprised of: increases in purchases of online
      advertising space of $0.7 million, or 35%, 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), offset by (a) a
      decline in website advertising registrations (decrease of $1.8 million or,
      39%,
      and (b) a decline in third party email vendor costs of approximately $0.2
      million, or 23%. In our Personals business, costs incurred in the acquisition
      of
      new customer profiles decreased $0.9 million, or 30%. The decrease in customer
      profile cost correlates to our decreased emphasis on new Personals customer
      enrollment during the six months ended May 31, 2006. Instead, we focused on
      maintaining our current customer base for a longer lifetime. The increase in
      Search Engine Marketing Optimization 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 Personals business
      and
      our other Online Advertising and Media Service activities revenue components.





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


***Gross
                  Profit Components******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              12,320,930
              
              $
              10,268,244
              
              $
              2,052,686
              
              
              20
              %Search
                  Engine Marketing
              
              
              1,870,769
              
              
              987,235
              
              
              883,534
              
              
              89
              %Personals
              
              
              1,516,755
              
              
              1,123,125
              
              
              393,630
              
              
              35
              %Internet
                  game development
              
              
              288,218
              
              
              156,958
              
              
              131,260
              
              
              84
              %**Consolidated
                  totals**
              
              $
              15,996,672
              
              $
              12,535,562
              
              $
              3,461,110
              
              
              28
              %




49


***Gross
                  Profit Margin Components******Online
                  Advertising and Media Service Activities***
  **Absolute**
              
              **Relative****Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              
              52.1
              %
              
              48.7
              %
              
              3.4
              %
              
              7.0
              %Search
                  Engine Marketing
              
              
              22.8
              %
              
              27.1
              %
              
              -4.3
              %
              
              -16.0
              %Personals
              
              
              41.0
              %
              
              26.6
              %
              
              14.4
              %
              
              54.1
              %Internet
                  game development
              
              
              69.6
              %
              
              69.6
              %
              
              0.0
              %
              
              0.0
              %**Consolidated
                  totals**
              
              
              44.5
              %
              
              43.0
              %
              
              1.5
              %
              
              3.5
              %


Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 44.5% during
      the six months ended May 31, 2006, compared to 43.0% in the prior year’s
      comparable period, representing 1.5% absolute improvement and a relative
      improvement of 3.5% 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, iMatchUp.com
      dating sites, and is based on the reduction of costs related to new Personals
      member acquisitions and our focus on extending the billable life time of our
      current membership base, as well as the offsetting factors relating to
      increasing our efforts in the expansion of our search engine marketing
      optimization and on-line advertising space sales, with slight declines
      recognized in Online Advertising, and larger declines recognized in the building
      of our Search Engine Marketing Optimization activities.




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




50


***Selling
                  Expense Components******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              1,702,342
              
              $
              1,036,204
              
              $
              666,138
              
              
              64
              %Selling
                  salaries and related costs
              
              
              1,391,937
              
              
              1,184,120
              
              
              207,817
              
              
              18
              %Travel,
                  entertainment, shows, other
              
              
              115,887
              
              
              120,870
              
              
              (4,983
              )
              
              -4
              %**Consolidated
                  totals**
              
              $
              3,210,166
              
              $
              2,341,194
              
              $
              868,972
              
              
              37
              %




Selling
      expenses, on a consolidated basis, increased approximately $0.9 million, or
      37%,
      to $3.2 million during the six months ended May 31, 2006 from $2.3 million
      during the six months ended May 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 in our acquisition of proprietary
      customers for our online dating sites coupled with an 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 shares arrangements
      and
      increased sales commissions of $0.2 million earned during the six months ended
      May 31, 2006 (total revenues of $36.0 million) when compared to the six months
      ended May 31, 2005 (total revenues of $ 29.0 million).





Our
      general and administrative expenses ("G&A") are principally comprised of (i)
      compensation costs and related expenses for executive, finance, information
      technology and operation systems, and general administration personnel, (ii)
      professional fees (which include legal; audit, accounting and tax; public
      relations; database management and consulting; and public company related
      printing and filing costs), (iii) insurance costs, (iv) occupancy and other
      equipment rental costs, (v) 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 six months ended May 31, 2006
        and
        May 31, 2005 are presented in the table set forth below:


***General
                  and Administrative Expense Components******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              6,777,155
              
              $
              4,976,015
              
              $
              1,801,140
              
              
              36
              %Professional
                  fees
              
              
              760,585
              
              
              850,220
              
              
              (89,635
              )
              
              -11
              %Insurance
                  costs
              
              
              479,106
              
              
              466,008
              
              
              13,098
              
              
              3
              %Website
                  and email hosting
              
              
              266,454
              
              
              482,533
              
              
              (216,079
              )
              
              -45
              %Occupancy
                  and equipment costs
              
              
              287,086
              
              
              272,898
              
              
              14,188
              
              
              5
              %Personals
                  credit card and processing fees
              
              
              183,004
              
              
              211,545
              
              
              (28,541
              )
              
              -13
              %All
                  other miscellanous G&A expenses
              
              
              972,460
              
              
              723,742
              
              
              248,718
              
              
              34
              %**Consolidated
                  totals**
              
              $
              9,725,850
              
              $
              7,982,961
              
              $
              1,742,889
              
              
              22
              %


General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $1.7 million, or 22%, when comparing G&A of $9.7 million for
      the six months ended May 31, 2006 to G&A of $8.0 million incurred during the
      six months ended May 31, 2005. The net increase was attributable to combined
      increases in Compensation costs and miscellaneous G&A of approximately $2.0
      million, or 36%, offset by declines in Professional fees ($0.1 million), Website
      and email hosting ($0.2 million), and immaterial declines in Personals related
      credit card processing fees. The significant increase in compensation costs
      were
      attributable to: (a) stock-based compensation costs of approximately $0.47
      million resulting from our December 1, 2005 adoption of SFAS 123R; (b) increases
      in compensation costs and related expenses of approximately $0.89 million
      resulting from increases in the number of our domestic employees to service
      the
      growth of our search engine marketing optimization activities and Internet
      Media
      Performance Based sale activities, both coupled with modest pay increases for
      a
      portion of our domestic workforce; and (c) increases in our Infiknowledge
      subsidiary payroll expense ($0.44 million) resulting from the staff increases
      necessary to service our increased levels of business activity.




Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. We incurred approximately $226,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the six months ended May 31, 2006, of which
      $30,000 was recovered in settlement awards and $196,000 was expensed in our
      G&A accounts. We incurred approximately $391,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the six months ended May 31, 2005, of which
      $169,000 was capitalized in the Hot Rocket acquisition and $222,000 was expensed
      in our G&A accounts.




52


***Other
                  Operating (Income) Expense***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Other
                  operating (income) expense
              
              $
              42,630
              
              $
              (365,355
              )
              $
              407,985
              
              
              -112
              %**Consolidated
                  totals**
              
              $
              42,630
              
              $
              (365,355
              )
              $
              407,985
              
              
              -112
              %




During
      the six months ended May 31, 2006 and 2005, we reassessed the way the operations
      of the Company are analyzed for purposes of the allocation of resources. In
      this
      reassessment process we terminated the separate disclosure of our LEC Billed
      Service segment based on its dormant position over the last 24 months. The
      terminated LEC segment’s immaterial-operating-activity is now included on our
      other operating (income) expense line item on our unaudited consolidated
      statements of income for both periods presented.




LEC
      segment’s revenues were $-0- and $704,342 in the six months ended May 31, 2006
      and 2005, respectively. The LEC segment’s cost of sales were $42,630 and
      $338,987 in the six months ended May 31, 2006 and 2005, respectively. The
      combination of these two items for Fiscal 2006 and 2005 amounted to $42,630
      and
      $(365,355), and are included on the table above. It is anticipated that future
      fiscal periods will have declining amounts of other operating (income) expense,
      as the remaining LEC accounts continue their current rate of
      attrition.





53


***Amortization
                  of Intangibles******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising and Media Services
              
              $
              723,792
              
              $
              751,924
              
              $
              (28,132
              )
              
              -4
              %**Consolidated
                  totals**
              
              $
              723,792
              
              $
              751,924
              
              $
              (28,132
              )
              
              -4
              %




Amortization
      expense of intangible assets acquired in acquisitions decreased $0.028 million,
      or 4% when comparing an expense of $0.724 million for the six months ended
      May
      31, 2006 with $0.751 million for the six months ended May 31, 2005. The
      principal factor contributing to this decrease in amortization expense relates
      to the $137,483 charge incurred in the period ending May 31, 2005 upon the
      reduction of the life of the restrictive covenants with the principals of Send
      Traffic, offset by the acquisition of Hot Rocket Marketing, which was purchased
      on January 21, 2005. As such, the Fiscal 2005 six month period included
      amortization expense for the period January 21, 2005 to May 31, 2005, or
      approximately 67% of the respective period, as compared to a full six month’s
      amortization expense for the period ended May 31, 2006.








54


***Depreciation
                  Expense******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising and Media Services
              
              $
              429,781
              
              $
              346,246
              
              $
              83,535
              
              
              24
              %**Consolidated
                  totals**
              
              $
              429,781
              
              $
              346,246
              
              $
              83,535
              
              
              24
              %






Depreciation
      expense increased $0.084 million, or 24%, when comparing an expense of $0.430
      million for the six months ended May 31, 2006 with $0.346 million for the six
      months ended May 31, 2005. The principal factor contributing to this increase
      in
      depreciation expense relates to our acquisition of server equipment in the
      third
      and fourth quarters of Fiscal 2005, which is generating depreciation expense
      that did not have comparable offsetting charge in the six months ended May
      31,
      2005.








55


***Bad
                  Debt Expense Components******Online
                  Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              **2005**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              36,575
              
              $
              145,982
              
              $
              (109,407
              )
              
              -75
              %Search
                  Engine Marketing
              
              
              54,131
              
              
              19,625
              
              
              34,506
              
              
              176
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              3,606
              
              
              -
              
              
              3,606
              
              
              100
              %**Consolidated
                  totals**
              
              $
              94,312
              
              $
              165,607
              
              $
              (71,295
              )
              
              -43
              %





Bad
      Debt
      expense declined approximately $72,000 when comparing the six months ended
      May
      31, 2006 with the six months ended May 31, 2005. The fiscal period’s bad debt
      expense includes a $50,000 reduction in bad debt attributable to a favorable
      litigation settlement resulting in a recoup of previously written off
      receivables. 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 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) 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) could be further increased or decreased in future fiscal
      periods.




56


**OTHER
      NON-OPERATING INCOME (EXPENSE)**





The
      components of our "Other non-operating income (expense)" are set forth
      below:


***OTHER
                  NON-OPERATING INCOME (EXPENSE)***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****Other
                non-operating**
              
              **May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****income
                  (expense):**
              
              **2006**
              
              **2005**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              496,372
              
              $
              425,337
              
              $
              71,035
              
              
              17
              %Realized
                  (losses) gains on sale of marketable
                  securities
              
              
              (18,352
              )
              
              574,050
              
              
              (592,402
              )
              
              -103
              %Realized
                  gain on sale of subsidiary
              
              
              -
              
              
              195,000
              
              
              (195,000
              )
              
              -100
              %Other
                  non-operating income:Other
                  miscellaneous income (expense)
              
              
              7,233
              
              
              6,918
              
              
              315
              
              
              5
              %Foreign
                  Currency Exchange Rate
                Fees
                  and interest expense
              
              
              (29,584
              )
              
              (13,302
              )
              
              (16,282
              )
              
              122
              %Minority
                  interest (income)
              
              
              (288,000
              )
              
              (248,174
              )
              
              (39,826
              )
              
              16
              %**Total
                  other non-operating income:**
              
              $
              167,669
              
              $
              939,829
              
              $
              (772,160
              )
              
              -82
              %





Consolidated
      Other Non-operating Income (Expense) decreased approximately $0.772 million,
      from approximately $0.940 million for the six months ended May 31, 2005, to
      approximately $0.168 million for the six months ended May 31, 2006.




57


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




(a)
            Interest
                income increased approximately $71,000, or 17%, 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 decreased by $0.6 million
                when
                aligned against the prior year’s comparable six 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 utilizing
                expiring capital loss carryforwards.





(c)
            The
                six months ended May 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 six 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 new web
      destination consisting of approximately 30,000 downloadable songs covering
      a
      wide array of musical genres. We, through a wholly-owned subsidiary, own 50.7%
      of the partnership and will be responsible for managing the operations of the
      business, including generating traffic to the website, as well as selling
      advertising on the site. Madacy Entertainment, through its wholly-owned
      subsidiary, owns 49.3% of the partnership and will provide its inventory of
      music and an extensive library of music licensed from other parties. Madacy
      will
      have limited involvement with certain aspects of operations. The results of
      operations for the six months ended May 31, 2006, and for the period January
      21,
      2005 to May 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.




58


***The
                  following table summarizes the results of EZTracks for the periods
                  indicated below:***
  **Six
                  Months**
              
              
              
              **January
                  21,****Ended**
              
              
              
              **2005
                  to**
              
              
              
              **Change**
              
              **Change****May
                  31,**
              
              
              
              **May
                  31,**
              
              
              
              **Inc(Dec)**
              
              **Inc(Dec)****2006**
              
              
              
              **2005**
              
              
              
              $$$
              
              %%%Net
                  Revenues
              
              $
              5,988,196
              
              
              
              
              $
              2,399,830
              
              
              
              
              $
              3,588,366
              
              
              150
              %Cost
                  of Sales
              
              
              5,273,859
              
              
              
              
              
              1,868,250
              
              
              
              
              
              3,405,609
              
              
              182
              %Gross
                  Profit
              
              
              714,337
              
              
              
              
              
              531,580
              
              
              
              
              
              182,757
              
              
              34
              %General and Administrative Expenses
              
              
              130,159
              
              
              
              
              
              28,184
              
              
              
              
              
              101,975
              
              
              362
              %Net
                  Income
              
              $
              584,178
              
              (1)
              
              
              $
              503,396
              
              (1)
              
              
              $
              80,782
              
              
              16
              %Minority
                  interest
              
              $
              288,000
              
              (2)
              
              
              $
              248,174
              
              (2)
              
              
              $
              39,826
              
              
              16
              %
  (1)
                  All items included in the Company's Online Advertising and Media
                  Services
                  activities(2)
                  Represents Madacy Entertainment's 49.3% minority interest


**PROVISION
      FOR INCOME TAXES**





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
      resolution of any open audits would have a material adverse effect upon our
      consolidated financial statements.




59


Our
      income tax provision for the six months ended May 31, 2006 was approximately
      $878,000, which includes $809,000 of tax expense related to current year
      operations and approximately $69,000 of period expense related to an increase
      in
      our estimates related to potential for tax audits.




The
      effective rate relationship of 45.3% differs from our annual effective rate
      of
      30.0% recognized during the year ended November 30, 2005. A portion of the
      effective tax rate variance is attributable to tax benefits recognized during
      Fiscal 2005, from the use of approximately $0.2 million in previously devalued
      capital loss carryover deferred tax assets. Such devalued capital loss deferred
      tax assets were fully utilized in Fiscal 2005, and offset tax expense on Fiscal
      2005’s realized capital gain income.




Additionally,
      in Fiscal 2005 certain state tax audits were settled in amounts that were less
      than the amounts recorded to cover the initial expected audit outcome. The
      balance of the rate reconciliation is attributable to a permanent difference
      arising out of the difference between the book and tax basis of certain acquired
      amortizable intangible assets. This permanent difference expires during the
      three months ended August 31, 2006, as a result of the complete amortization
      of
      the related intangible.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of May
      31, 2006, we had aggregate working capital of $30.1 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 $28.4 million as of May 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 $1.9 million at May 31, 2006 and November 30, 2005.




Cash
      provided by operating activities was approximately $3.9 million for the six
      months ended May 31, 2006, compared to approximately $1.5 million used in
      operating activities during the six months ended May 31, 2005, representing
      an
      increase of $5.4 million cash provided by operating activities. Changes in
      assets and liabilities of the business, net of acquisitions, provided $4.4
      million more in cash when comparing the six months ended May 31, 2006 with
      the
      six months ended May 31, 2005. Additionally, there were combined increases
      in
      amortization and depreciation of approximately $0.55 million and (as a result
      of
      our December 1, 2005 SFAS 123R adoption) stock-based compensation charge of
      $0.473 million when comparing the six months ended May 31, 2006 to the six
      months ended May 31, 2005.




Cash
      provided by investing activities was approximately $2.7 million during the
      six
      months ended May 31, 2006, compared to $2.0 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 six months ended May 31,
      2005
      related to net cash of approximately $2.9 million expended in the asset
      acquisition of Hot Rocket on January 21, 2005, more than offset by net proceeds
      from the sale of securities exceeding cash used in security purchases of
      approximately $4.8 million. During the six months ended May 31, 2006, net
      proceeds from the sale of securities exceeded cash used in security purchases
      of
      approximately $3.9 million, offset by approximately $0.886 million in additional
      purchase price paid for a prior year acquisition and $0.258 million in cash
      used
      for capital expenditures.




Cash
      used
      in financing activities was approximately $2.6 million for the six months ended
      May 31, 2006, compared to $0.8 million used in financing activities for the
      six
      months ended May 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) $0.162 million in capital lease obligation payments, both offset
      by $0.219 million in financing proceeds from stock option exercises. The first
      six months of Fiscal 2005 had a financing cash flow of $1.5 million from stock
      option exercise proceeds. Dividends of $2.3 and $2.2 million were paid for
      the
      six month periods ended May 31, 2006 and May 31, 2005, respectively.




60


Our
      days-sales-outstanding ("DSO") in accounts receivable at May 31, 2006 was 46
      days, compared to 54 days at February 28, 2006, 65 days at November 30, 2005,
      and 58 days at August 31 and May 31, 2005. The 8 day, or 15% decrease in the
      current quarter’s DSO compared to the first quarter of this fiscal year relates
      to improved rates of collection across the majority of our client relationships
      (with one pre-pay client relationship accounting for 6.7% of revenues in the
      second quarter of Fiscal 2006) partially offset by the increase of our DSO
      from
      the extended payment terms granted to a client who delivered 6.9% of our second
      quarter Fiscal 2006 revenues. Our DSO in future fiscal periods may rise above
      the 46 days recognized during the three months ended May 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 46-day DSO recognized in the three-month period ended May
      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.




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 six-month periods ended May 31, 2006 and 2005. Our cash demands for capital
      expenditures and equipment lease obligations have increased to $.42 million
      during the six months ended May 31, 2006 compared to $.07 million during the
      six
      months ended May 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 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 On-line 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.




61


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 On-Line Advertising and Media Services
      segment.




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 generates an aggregate of $27 million in EBITDA
      (as
      quantified in the Agreement) over the four year period following the closing.
      We
      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
      May
      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 first measurement period, which ends February 28,
      2007. As of May 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.




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
      May 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 On-line 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.





62


**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 May 31, 2006, are set forth below:


Total
                    ContractualOperating
                    Leases
                
                Employment
                    agreements
                
                Other
                
                ObligationsDomestic
                
                Foreign
                
                Domestic
                
                Foreign
                
                Domestic
                
                Domestic
                
                Foreign2006
                
                $
                111,359
                
                $
                -
                
                $
                955,001
                
                $
                176,839
                
                $
                -
                
                $
                1,066,360
                
                $
                176,8392007
                
                
                397,685
                
                
                -
                
                
                1,866,445
                
                
                4,472
                
                
                -
                
                
                2,264,130
                
                
                4,4722008
                
                
                400,444
                
                
                -
                
                
                364,574
                
                
                -
                
                
                
                
                
                765,018
                
                
                -2009
                
                
                368,507
                
                
                -
                
                
                212,714
                
                
                -
                
                
                
                
                
                581,221
                
                
                -2010
                
                
                353,001
                
                
                -
                
                
                31,208
                
                
                -
                
                
                -
                
                
                384,209$
                1,630,996
                
                $
                -
                
                $
                3,429,942
                
                $
                181,311
                
                $
                -
                
                $
                5,060,938
                
                $
                181,311
 63





**RELATED
      PARTIES**




Feder,
      Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, has been a member of our Board of Directors
      since
      inception. FKIWSBR legal services are billed on an arms length transaction
      basis. We incurred approximately $226,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the six months ended May 31, 2006 of which
      $30,000 was recovered in settlement awards and $196,000 was expensed in our
      G&A accounts. We incurred approximately $391,000 in legal fees (exclusive of
      disbursements) from FKIWSBR during the six months ended May 31, 2005, of
      which $169,000 was capitalized in the Hot Rocket acquisition and $222,000 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 the accruals for fulfillment redemptions,
      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.





64





**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 segments, as well as on a consolidated basis. The
      revenue allocation among our segments in future periods will most probably
      be
      different than our current revenue allocation due to several factors, including
      consumer tastes, business opportunities, regulatory issues that may exist in
      future periods, and other currently unknown factors that could impact our
      revenue generating cycle or cost structure. 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.




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





We
      currently earn the most significant portion of our revenue from the E-commerce
      segment pursuant to marketing agreements with 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.





65


Certain
      revenue related obligations are recorded at the time revenue is recognized.
      They
      include costs payable to other on-line, 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 (if applicable) and all other variable costs directly associated
      with
      completing our obligations relative to the revenue being recognized. Our actual
      premium fulfillment estimates have varied from that which were accrued at the
      time of recording the related revenue. This is deemed a change in management’s
      estimate, and we take the additional cost, or benefit, on the accrual adjustment
      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 six months ended May 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; (e) our accruals for fulfillment obligations arising out of promotions
      proving to be less than the actual redemptions processed in subsequent fiscal
      periods; or (f) 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.





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 six month period ended May 31, 2006, we had six customers in our Online
      Advertising and Media Services segment accounting for approximately $10.3
      million or 28.6% of consolidated net revenues and approximately $3.3 million,
      or
      36.6% of consolidated net accounts receivable as of May 31, 2006. The five
      customers accounted for 8.1%, 6.8%, 5.9%, 4.4%, 3.5% and 2.4% of consolidated
      net revenue during such period.




66


During
      the six month period ended May 31, 2005, we had ten customers in our Online
      Advertising and Media Services segment accounting for approximately $10.2
      million or 34.2% of consolidated net revenue and approximately $5.1 million
      or
      53.8% of consolidated net accounts receivable as of May 31, 2005. The ten
      customers accounted for 10.8%, 3.9%, 2.9%, 2.8%, 2.8%, 2.5%, 2.4%, 2.0%, 2.0%
      and 1.9% of consolidated net revenue for that three month period.





In
      the
      six months ended May 31, 2006, 10.3% of our revenue was derived from our
      proprietary on-line Personals products compared to 14.5% of our revenue for
      the
      six month period ended May 31, 2005.





**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.





**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 May 31, 2006 amounted to approximately $1.9 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
      economic downturn and difficulties that may be faced by some of the companies
      in
      which we have investments, our investment portfolio could be further 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.





(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.





67


**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.




**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.





*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 twelve
      fiscal quarters and have declared a dividend payable on or about August 10,
      2006
      to holders of record of our common stock at the close of business on August
      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.





68


*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.*





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.





69


*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.





*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.




70


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





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





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





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





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





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 2,275,615 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.




71


**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





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”).





In
      addition to the initial purchase price of approximately $3.8 million, 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
      Acquisition Agreement) over the four year period following the closing. Pursuant
      thereto, for the period February 1, 2005 to January 31, 2006, we were liable
      for
      an additional purchase price payment of $1.467 million, which was settled
      through our payment of approximately $886,000 in cash and our issuance on May
      10, 2006 of 103,354 shares of our common stock.





Such
      issuance of 103,354 shares was exempt from the registration requirements of
      the
      Securities Act of 1933, as amended, by virtue of Section 4(2) of that Act
      as being a transaction by an issuer not involving any public
      offering.





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





On
      July
      11, 2006, our Board of Directors declared a dividend of $.08 per share to
      shareholders of record as of August 1, 2006, payable on or about August 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.





72


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.Date: July
              17, 2006
            By:
            /s/ Jeffrey
              L. SchwartzJeffrey
              L. SchwartzChairman
              and CEO(Principal Executive Officer) By:
            /s/ Daniel
              HarveyDaniel
              HarveyChief
              Financial OfficerDate:
              July 17, 2006
            (Principal
                Financial Officer)





73


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.





74