**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 THESECURITIES
                EXCHANGE ACT OF 1934




For
      the
      quarterly period ended February 28, 2007




or




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





For
      the
      transition period from _________ to_________





Commission
      file number 0-27046




**TRAFFIX,
      INC.**


(Exact
      name of registrant as specified in its charter)




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





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


(845)
      620-1212


Registrant's
      telephone number, including area code:





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




Yes x No
o




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





Large
      accelerated 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 14,938,337
      (as
      of 04/11/07).





**TRAFFIX,
      INC.**


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


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**QUARTER
      ENDED FEBRUARY 28, 2007**





**ITEMS
      IN FORM 10-Q**


**Page****Part
                  I**
              
              **Financial
                  Information**Item
                  1.
              
              Financial
                  StatementsConsolidated
                  Balance Sheets at February 28, 2007 (Unaudited) and November 30,
                  2006
                  (Audited)
              
              2Consolidated
                  Statements of Income for the three months ended February 28, 2007
                  and
                  February 28, 2006 (Unaudited)
              
              3Consolidated
                  Statements of Cash Flows for the three months ended February 28,
                  2007 and
                  February 28, 2006 (Unaudited)
              
              4Consolidated
                  Statement of Shareholders’ Equity for the three months ended February 28,
                  2007 (Unaudited)
              
              5Notes
                  to Consolidated Financial Statements (Unaudited)
              
              6Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of Operations
              
              25Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              NoneItem
                  4.
              
              Controls
                  and Procedures
              
              62**Part
                  II**
              
              **Other
                  Information**Item
                  1.
              
              Legal
                  Proceedings
              
              63Item
                  1A.
              
              Risk
                  Factors
              
              65Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              NoneItem
                  3.
              
              Defaults
                  Upon Senior Securities
              
              NoneItem
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              NoneItem
                  5.
              
              Other
                  Information
              
              72Item
                  6.
              
              Exhibits
              
              73**Signatures**


2





FORWARD
      LOOKING INFORMATION





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




3


**TRAFFIX,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**


**February
                  28,**
              
              **November
                  30,****2007**
              
              **2006****(Unaudited)****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              9,456,221
              
              $
              8,972,197Marketable
                  securities
              
              
              21,502,693
              
              
              21,433,775Accounts
                  receivable, trade, net of allowance for doubtful accountsof
                  $1,182,043 at February 28, 2007 and $1,079,661 at November 30,
                  2006
              
              
              8,844,857
              
              
              8,975,402Deferred
                  income taxes
              
              
              532,881
              
              
              451,909Prepaid
                  expenses and other current assets
              
              
              1,154,320
              
              
              957,674**Total
                  current assets**
              
              
              41,490,972
              
              
              40,790,957Property
                  and equipment, net
              
              
              1,782,308
              
              
              1,965,183Goodwill
              
              
              9,849,020
              
              
              7,913,007Other
                  intangibles, net
              
              
              3,155,939
              
              
              1,210,257Deferred
                  income taxes
              
              
              805,227
              
              
              846,223**Total
                  assets**
              
              $
              57,083,466
              
              $
              52,725,627**Liabilities
                  and shareholders' equity**Current
                  liabilities:Accounts
                  payable
              
              $
              4,937,111
              
              $
              4,692,374Accrued
                  expenses
              
              
              8,580,823
              
              
              3,831,223Due
                  to related parties
              
              
              -
              
              
              90,000Income
                  taxes payable
              
              
              415,850
              
              
              470,000**Total
                  liabilities**
              
              
              13,933,784
              
              
              9,083,597Minority
                  interest
              
              
              -
              
              
              313,637Commitments
                  and contingencies**Shareholders'
                  equity**Preferred
                  stock - $.001 par value; 1,000,000 shares authorized;none
                  issued and outstanding
              
              
              -
              
              
              -Common
                  stock - $.001 par value; authorized 50,000,000 shares;
                  issuedand
                  outstanding 14,415,837 shares and 14,365,671 shares,
                  respectively
              
              
              14,415
              
              
              14,365Additional
                  paid-in capital
              
              
              42,162,072
              
              
              42,286,760Retained
                  earnings
              
              
              -
              
              
              -Accumulated
                  other comprehensive income
              
              
              973,195
              
              
              1,027,268**Total
                  shareholders' equity**
              
              
              43,149,682
              
              
              43,328,393**Total
                  liabilities and shareholders' equity**
              
              $
              57,083,466
              
              $
              52,725,627


The
        accompanying notes are an integral part of these financial
        statements


4




**TRAFFIX,
        INC. AND SUBSIDIARIES** **CONSOLIDATED
          STATEMENTS OF INCOME** **(UNAUDITED)**
  **Three
                  Months Ended****February
                  28,**
              
              **February
                  28,****2007**
              
              **2006**Net
                  revenue
              
              $
              18,034,231
              
              $
              17,022,812Cost
                  of revenue
              
              
              11,895,489
              
              
              10,953,610**Gross
                  profit**
              
              
              6,138,742
              
              
              6,069,202Selling
                  expenses
              
              
              1,081,969
              
              
              1,383,870General
                  and administrative expenses
              
              
              3,989,612
              
              
              3,909,921Bad
                  debt expense
              
              
              63,421
              
              
              84,286**Income
                  from operations**
              
              
              1,003,740
              
              
              691,125Other
                  income (expense):Interest
                  income and dividends
              
              
              280,226
              
              
              241,992Realized
                  gains (losses) on marketable securities
              
              
              19,106
              
              
              (18,352
              )Other
                  non-operating income
              
              
              8,147
              
              
              4,117Minority
                  interest in income ofconsolidated
                  subsidiary
              
              
              (48,000
              )
              
              (200,095
              )**Income
                  before provision for****income
                  taxes**
              
              
              1,263,219
              
              
              718,787Provision
                  for income taxes
              
              
              584,996
              
              
              296,069**Net
                  income**
              
              $
              678,223
              
              $
              422,718Basic
                  earnings per share:Net
                  income
              
              $
              0.05
              
              $
              0.03Weighted
                  average shares outstanding
              
              
              14,398,363
              
              
              14,259,543Diluted
                  earnings per share:Net
                  income
              
              $
              0.05
              
              $
              0.03Weighted
                  average shares outstanding
              
              
              14,895,858
              
              
              14,460,056Cash
                  dividend declared per common share
              
              $
              0.08
              
              $
              0.08


The
        accompanying notes are an integral part of these financial
        statements


5


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


**Three
                  Months Ended****February
                  28,**
              
              **February
                  28,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  income
              
              $
              678,223
              
              $
              422,718Adjustments
                  to reconcile net income to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization
              
              
              513,077
              
              
              576,556Stock-based
                  compensation
              
              
              94,031
              
              
              172,240Provision
                  for uncollectible accounts
              
              
              63,421
              
              
              84,286Deferred
                  income taxes
              
              
              (42,722
              )
              
              (58,040
              )Net
                  (gains) losses on sale of marketable securities
              
              
              (19,106
              )
              
              18,352Minority
                  interest
              
              
              48,000
              
              
              200,095Changes
                  in assets and liabilities of business, net of
                  acquisitions:Accounts
                  receivable
              
              
              67,124
              
              
              463,262Prepaid
                  expenses and other current assets
              
              
              (196,646
              )
              
              358,807Accounts
                  payable
              
              
              244,737
              
              
              (2,609,553
              )Income
                  taxes payable
              
              
              (54,150
              )
              
              508,380Due
                  to related parties
              
              
              (90,000
              )
              
              24,105Other,
                  principally accrued expenses
              
              
              (829,302
              )
              
              (489,441
              )**Net
                  cash provided by (used in) operating activities**
              
              
              476,687
              
              
              (328,233
              )Cash
                  flows from investing activities:Purchases
                  of securities
              
              
              (29,715,959
              )
              
              (51,757,965
              )Proceeds
                  from sales of securities
              
              
              29,674,226
              
              
              53,716,008Capital
                  expenditures
              
              
              (59,042
              )
              
              (91,293
              )**Net
                  cash (used in) provided by investing activities**
              
              
              (100,775
              )
              
              1,866,750Cash
                  flows from financing activities:Distribution
                  to minority interest holder
              
              
              (144,000
              )
              
              (196,000
              )Repayment
                  of capital lease obligation
              
              
              (5,833
              )
              
              (77,000
              )Proceeds
                  from stock options exercised
              
              
              242,215
              
              
              158,401Excess
                  tax benefits from stock-based compensation
              
              
              15,960
              
              
              14,311**Net
                  cash provided by (used in) financing activities**
              
              
              108,342
              
              
              (100,288
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (230
              )
              
              12,831Net
                  increase in cash and cash equivalents
              
              
              484,024
              
              
              1,451,060Cash
                  and cash equivalents, beginning of period
              
              
              8,972,197
              
              
              9,335,723**Cash
                  and cash equivalents, end of period**
              
              $
              9,456,221
              
              $
              10,786,783
  See
        Notes
        (1), (2), (4), (6) and (11) for a summary of noncash investing and financing
        activities.
  The
          accompanying notes are an integral part of these financial
          statements


6




**TRAFFIX,
        INC. AND SUBSIDIARIES**
 ****CONSOLIDATED
        STATEMENT OF SHAREHOLDERS' EQUITY**** **FOR
          THE THREE MONTHS ENDED FEBRUARY 28, 2007** **(UNAUDITED)**
   **Accumulated****Additional**
                
                
                
                **Other**
                
                **Total****Common
                    Stock**
                
                **Paid-in**
                
                **Retained**
                
                **Comprehensive**
                
                **Shareholders'****Shares**
                
                **Amounts**
                
                **Capital**
                
                **Earnings**
                
                **Income(Loss)**
                
                **Equity****Balance,
                    November 30, 2006**
                
                
                14,365,671
                
                $
                14,365
                
                $
                42,286,760
                
                $
                -
                
                $
                1,027,268
                
                $
                43,328,393Net
                    income for the three monthsended
                    February 28, 2007
                
                
                
                
                
                
                
                
                
                
                
                678,223
                
                
                
                
                
                678,223Unrealized
                    gains on available-for-sale securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,333
                
                
                5,333Foreign
                    Currency Translation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (59,406
                )
                
                (59,406
                )Comprehensive
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                624,150Stock-based
                    compensation expense
                
                
                
                
                
                
                
                
                94,031
                
                
                
                
                
                
                
                
                94,031Dividends
                    declared
                
                
                
                
                
                
                
                
                (476,844
                )
                
                (678,223
                )
                
                
                
                
                (1,155,067
                )Stock
                    option exercises
                
                
                50,166
                
                
                50
                
                
                242,165
                
                
                
                
                
                
                
                
                242,215Tax
                    benefit from exercise ofstock
                    options
                
                
                
                
                
                
                
                
                15,960
                
                
                
                
                
                
                
                
                15,960-**Balance,
                    February 28, 2007**
                
                
                14,415,837
                
                $
                14,415
                
                $
                42,162,072
                
                $
                -
                
                $
                973,195
                
                $
                43,149,682


The
        accompanying notes are an integral part of these financial
        statements


7




**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.





8


Principally,
      estimates are used in reserves for uncollectible receivables, recoverability
      of
      long-lived assets, and the realizability of deferred tax assets. Additionally,
      at times, the Company may have the potential for exposure resulting from pending
      and/or threatened litigation, or litigation not yet known, identified, or
      commenced. Management has not identified any known, pending, or potential
      actions that, in its opinion, would be of a material magnitude, and as such,
      no
      provision for loss has been recorded therefore.




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, 2006. The consolidated balance
      sheet at November 30, 2006 was derived from the audited financial statements,
      but does not include all disclosures required by generally accepted accounting
      principles accepted in the United States of America. The results of operations
      for the three-month period ended February 28, 2007 are not necessarily
      indicative of the results to be expected for the subsequent three quarters
      or
      the full fiscal year ending November 30, 2007.


Certain
        prior year amounts in the unaudited consolidated financial statements have
        been
        reclassified to conform to the current and prior year’s
        presentation.
  Certain
        reclassifications were made to the income statement presentation previously
        included in the Company’s Form 10-Q for February 28, 2006. Such reclassification
        was related to the reclassifications of cost of revenue items, selling salaries
        and general and administrative salaries and expenses based on a current and
        retroactive study of the respective services performed for the February 28,
        2006
        period, to conform the presentation of such period to that of the full fiscal
        November 30, 2006 presentation.
 
 **Three****months
                  ended****February****28,
                  2006**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              17,022,812
              
              $
              -
              
              $
              17,022,812Cost
                  of revenue
              
              
              9,568,640
              
              
              1,384,970
              
              
              10,953,610Gross
                  Proft
              
              
              7,454,172
              
              
              (1,384,970
              )
              
              6,069,202Selling
                  expenses
              
              
              1,004,009
              
              
              379,861
              
              
              1,383,870General
                  and Administrative expenses
              
              
              5,074,083
              
              
              (1,164,162
              )
              
              3,909,921Other
                  operating (income) expense
              
              
              24,113
              
              
              (24,113
              )
              
              -Amortization
                  of intangibles
              
              
              361,975
              
              
              (361,975
              )
              
              -Depreciation
                  expense
              
              
              214,581
              
              
              (214,581
              )
              
              -Bad
                  debt expense
              
              
              84,286
              
              
              -
              
              
              84,286Income
                  fromoperations
              
              $
              691,125
              
              $
              -
              
              $
              691,125-


9




During
      the three months ended February 28, 2007 and February 28 2006, options
      for 50,166 shares and 34,165 shares of the Company’s common stock, respectively,
      were exercised by its employees and directors. Tax benefits of $15,960
      and $14,311 in the three months ended February 28, 2007 and February 28,
      2006,
      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 recent pronouncements as previously
      reported in the Company’s Annual Report on Form 10-K for the fiscal year ended
      November 30, 2006.





**2.
      SIGNIFICANT ACCOUNTING POLICIES**





The
      Company’s significant accounting policies are included in its Form 10-K for the
      year ended November 30, 2006. During the three months ended February 28, 2007,
      there were no significant changes in the Company’s accounting policies.




10




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





In
      prior
      fiscal periods a significant portion of the Company’s revenue was dependent on a
      limited number of major customers. The Company continues to modify its business
      methods and practices, including diversification of its revenue drivers, in
      an
      effort to diversify its customer base. There can be no assurance that the
      Company will be successful in such efforts. As a result of the Company’s
      business planning and diversification, the three-month periods ended February
      28, 2007 and February 28, 2006 did not include any single customer which equaled
      or exceeded 10% of the Company’s consolidated net revenue. The Company’s five
      largest customers during the three months ended February 28, 2007 accounted
      for
      9.3%, 9.2%, 7.4%, 6.7% and 3.8% of consolidated net revenues during such
      period.





During
      the three months ended February 28, 2007, 5.2% of the Company’s revenue was
      derived from its proprietary Personals service, iMatchUp.com., as compared
      to
      10.8% of revenue during the comparable prior year’s period.





**Stock-based
      Compensation**





As
      a
      result of the adoption of the
      provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
      (revised 2004), "Share-Based Payment" ("SFAS 123R"), effective December 1,
      2005, the Company’s net income for the three months ended February 28, 2007 and
      February 28, 2006 includes $94,000 and $172,000, respectively, of compensation
      expense and $32,000 and $59,000, respectively, of income tax benefits related
      to
      the Company’s stock options and restricted stock grants. The compensation
      expense related to all of the Company’s stock-based compensation arrangements is
      recorded as a component of general and administrative expenses.




11




**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, and Financial Interpretation Number 18. 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.


**February
                  28,**
              
              **February
                  28,********2007**
              
              ******2006****Supplemental
                  Cash Flow Disclosures**Cash
                  paid during the three months ended for:Income
                  taxes paid (refunds received), net
              
              $
              670,611
              
              
              ($154,112




**Non-cash
      Investing and Financing Activities**





Non-cash
      investing and financing activities are excluded from the consolidated statement
      of cash flows. For the three months ended February 28, 2007 and February 28,
      2006, non-cash activities included the following items:




**Investing
      Activities:**




**February
                28,**
            
            **February
                28,****Stock
                Issued in connection with Acquisition (Also see notes 6, 7 and
                8)**
            
            **2007**
            
            **2006**Hot
                Rocket Marketing, Inc.
            
            $
            -see
                  (1) below
            
            
            -see
                (2) belowEZTracks,
                L.P.
            
            
            -see
                (1) below
            
            $
            -0-




12




(1)
      The
      Company issued 500,000 shares of its common stock on March 8, 2007, having
      a fair market value of $2,716,667, with such amount included in accrued
      expenses at February 28, 2007. The issuance of such shares related to the
      Company’s minority interest acquisition in EZTracks, L.P. Approximately 14,200
      shares of Traffix, Inc. stock, valued at $75,000, will be issued in late April
      2007, as those shares relate to a contingent earn-out attained by the Company’s
      Hot Rocket Marketing, Inc. subsidiary, effective January 31, 2007.




(2)
      The
      Company was liable to issue $580,690 in fair market value of Traffix, Inc.
      common stock with such amount included in accrued expenses at February 28,
      2006.
      The shares were issued on May 10, 2006.





Non-cash
      investing activities for marketable securities relating to unrealized gains
      and
      losses were $8,081 and $107,480, for the three months ended February 28, 2007
      and 2006, respectively.





**3.
      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****February
                  28,**
              
              **February
                  28,****2007**
              
              **2006**Denominator:Denominator
                  for basic earnings per share-weighted
                  average shares
              
              
              14,398,363
              
              
              14,259,543Effect
                  of dilutive securities:Stock
                  options
              
              
              154,523
              
              
              200,513Contingently
                  issuable shares
              
              
              342,972
              
              
              -Denominator
                  for diluted earnings per share-adjusted
                  weighted average shares
              
              
              14,895,858
              
              
              14,460,056




Options
      to purchase 2,085,350 and 2,097,401 shares of common stock for the three months
      ended February 28, 2007 and February 28, 2006, respectively, were outstanding
      but were not included in the computation of diluted earnings per share because
      their effect would be anti-dilutive.




13




**4.
      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****February
                  28,**
              
              **February
                  28,****2007**
              
              **2006**Net
                  income
              
              $
              678,223
              
              $
              422,718Other
                  comprehensive income (loss) , net of tax:Foreign
                  currency translation adjustment
              
              
              (59,406
              )
              
              81,768Unrealized
                  gains from available-for-salesecurities,
                  arising during the period, net ofincome
                  taxes of $2,748 for February 28, 2007 and$34,934
                  for February 28, 2006
              
              
              5,333
              
              
              72,546Comprehensive
                  income
              
              $
              624,150
              
              $
              577,032





**5.
      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 (1) costs associated with the
      transmission of email marketing messages, both from internal sources and
      external third party vendors, (2) costs associated with the purchase of online
      consumer data (including registered users to the Company’s websites), (3) costs
      associated with our search engine marketing and optimization activities, (4)
      costs associated with the direct purchases of online advertising space, which
      is
      resold on a performance return basis, and (5) email and website program
      promotional and creative development costs. 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 liability is incurred, (4) at the time the online advertising space
      is
      purchased, and/or (5) at the time we take receipt of the promotional and
      creative services, respectively, and all are included as components of the
      Company’s cost of sale accounts.




14





Total
      advertising and marketing costs included in cost of sales for the three months
      ended February 28, 2007 and February 28, 2006 were approximately $11.9 million
      and $11.0 million, respectively.




**6.
      Recent Asset Acquisitions**




**Fiscal
      2007 Acquisition**




On
      March
      13, 2007, the Company entered into a Memorandum of Agreement (the “Madacy/EZ
      Agreement”) with Madacy Entertainment LP (“Madacy”) and EZ-Tracks, LP (“EZ LP”),
      to amend the terms of a Marketing and Services Agreement dated January 22,
      2005,
      as amended (the “M&S Agreement”), by and among Madacy, EZ LP and the
      Company.





The
      M&S Agreement had provided, among other things, that EZ LP would market and
      promote EZTracks.com, the Company’s web destination consisting of downloadable
      songs licensed from Madacy (the “License”). A subsidiary of the Company, which
      owned 50.7% of EZ LP, was responsible for managing the operations of the
      business, including generating traffic to the website, as well as selling
      advertising on the site. CIK Holdings Inc. (“CIK”), an entity associated with
      Madacy, owned 49.3% of EZ LP and licensed to EZ LP its inventory of downloadable
      music, including downloadable music licensed from other parties.




15




Pursuant
      to the terms of the Madacy/EZ Agreement, the M&S Agreement was amended to,
      among other things, (i) provide for a single fixed 10-year term commencing
      on
      January 1, 2007 and terminating on December 31, 2016; (ii) give the Company
      the
      option to extend such term for up to five (5) additional one-year terms; (iii)
      continue the sublicense from Madacy of the San Juan Songs (as defined in the
      M&S Agreement); and (iv) continue and establish a term to the License for
      ringtones, ringbacks and other telephone uses.





Concurrent
      with the execution of the Madacy/EZ Agreement, the Company entered into a
      Memorandum of Agreement dated March 13, 2007 with CIK, pursuant to which the
      Company acquired CIK’s 49.3% ownership of EZ LP (the “CIK Agreement”) (so that
      the Company now owns all of the limited partnership interests of EZ LP).





The
      purchase price consisted of 500,000 shares of the Company’s common stock (valued
      at approximately $2,717,000, using an average share price of $5.43 in accordance
      with the valuation standards set forth under Statement of Financial Accounting
      Standards 141 (Business Combinations), Paragraph 22) and $1,290,000 in cash,
      reduced by approximately $170,000 of a prior minority interest balance. In
      addition, the Company agreed to pay CIK additional consideration of between
      $1.25 million and $2.75 million in the event of a Traffix Sales Event or an
      EZ-Tracks Sale, each as defined in the CIK Agreement. The purchase price has
      been tentatively allocated as follows (subject to a purchase price allocation
      currently being prepared by an independent third party): $2,254,000 to
      amortizable intangibles, with a weighted-average-useful life of 7.5 years and
      the balance of approximately $1,583,000 allocated to unamortizable
      goodwill.





The
      CIK
      Agreement further provided for CIK’s warranty and guaranty that there would be
      no termination of the License and M&S Agreement prior to July 1, 2012, and,
      if, for any reason (other than the Company’s default), there is such a
      termination, then CIK would pay the Company a sum certain, which amount would
      equal $2.6 million should the termination occur in 2007 and which amount would
      decrease during each subsequent six month period. Should the termination occur
      during the final period (i.e. the six months ending June 30, 2012), the amount
      payable by CIK would have been reduced to $0.3 million.





16




**Fiscal
        2005 Acquisition with current quarter earn-out achieved**


In
      January of Fiscal 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 our consolidated entity.




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




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




17




Additionally,
      in accordance with the terms of the acquisition agreement, for the period August
      1, 2006 to January 31, 2007, the Company was liable for a combined additional
      purchase price payment of $375,000, which has been accrued at February 28,
      2007
      and will be settled by a cash payment of $300,000 and the issuance of
      approximately 14,200 shares, having an approximate fair market value of
      $75,000, to be made on or about April 25, 2007.




The
      terms
      of the acquisition agreement also provided for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      February 1, 2006 to January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the agreement. Hot Rocket did not reach either of
      the
      EBITDA thresholds for those periods.




Future
      contingent payments made, if any, will be treated
      as additional purchase price and included as an addition to
      goodwill.




**7.
      Accrued Expenses**




Accrued
      expenses are comprised of the following at:


**February
                  28,**
              
              **November
                  30,****2007**
              
              **2006****(Unaudited)**Accrued
                  payroll and bonuses
              
              $
              1,299,203
              
              $
              1,553,107Advances
                  from customers
              
              
              536,419
              
              
              634,353Accrued
                  fee share liabilities
              
              
              181,337
              
              
              309,494Capital
                  lease obligations
              
              
              -
              
              
              6,844Accrued
                  marketing media costs
              
              
              320,071
              
              
              690,729Accrued
                  search engine marketing costs
              
              
              109,657
              
              
              119,153Accrued
                  professional fees
              
              
              307,151
              
              
              289,244Dividends
                  payable
              
              
              1,155,067
              
              
              -Accrued
                  earnouts - Hot Rocket Marketing
              
              
              375,000
              
              
              -Accrued
                  acquistion purchase price - Minority Interest
              
              
              4,006,667
              
              
              -Minority
                  interest income payable - December 2006
              
              
              48,000
              
              
              -Accrued
                  property taxes
              
              
              39,989
              
              
              30,380Accrued
                  straight-line rent concession
              
              
              80,369
              
              
              82,705Other
                  accrued liabilities
              
              
              121,893
              
              
              115,214Total
                  accrued liabilities
              
              $
              8,580,823
              
              $
              3,831,223





18




**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 February 28, 2007
              
              As
                  of November 30, 2006Gross
              
              
              
              GrossCarrying
              
              Accumulated
              
              Carrying
              
              AccumulatedAmount
              
              Amortization
              
              Amount
              
              AmortizationUnamortized
                  intangible assets:Goodwill
              
              $
              9,849,020
              
              
              
              
              $
              7,913,007Amortizable
                  Intangible Assets:*GroupLotto
                  identifiable intangibles:*GroupLotto
                  Site Brand Recognition
              
              $
              722,922
              
              $
              722,922
              
              $
              722,922
              
              $
              722,922GroupLotto
                  Database
              
              
              433,754
              
              
              433,754
              
              
              433,754
              
              
              433,754Intellectual
                  Property Assets
              
              
              289,169
              
              
              289,169
              
              
              289,169
              
              
              289,169Marketing
                  Right License Fee
              
              
              246,915
              
              
              147,152
              
              
              246,915
              
              
              131,756*Infiknowledge
                  identifiable intangibles:*Internet
                  Game Suite
              
              
              262,568
              
              
              261,304
              
              
              269,169
              
              
              266,523Intellectual
                  Property Assets
              
              
              196,924
              
              
              195,976
              
              
              201,876
              
              
              199,891Market
                  Position Acquired
              
              
              218,805
              
              
              217,752
              
              
              224,307
              
              
              222,102*Thanksmuch
                  identifiable intangibles:*Profiled
                  customer data
              
              
              50,000
              
              
              50,000
              
              
              50,000
              
              
              50,000Restrictive
                  Covenants
              
              
              10,000
              
              
              10,000
              
              
              10,000
              
              
              10,000*SendTraffic
                  identifiable intangibles:*Restrictive
                  Covenants
              
              
              523,109
              
              
              472,859
              
              
              523,109
              
              
              422,609Software
              
              
              963,951
              
              
              790,811
              
              
              963,951
              
              
              716,672*Hot
                  Rocket identifiable intangibles*Restrictive
                  Covenants
              
              
              569,394
              
              
              240,727
              
              
              569,394
              
              
              212,257Software
              
              
              1,012,257
              
              
              713,266
              
              
              1,012,257
              
              
              628,911*EZ
                  Tracks identifiable intangibles*Music
                  Licensing and trade name
              
              
              2,254,219
              
              
              52,356
              
              
              -
              
              
              -Total
                  amortizable intangible assets
              
              $
              7,753,987
              
              $
              4,598,048
              
              $
              5,516,823
              
              $
              4,306,566


19





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 finite lives ranging
      between five and eight years and are generally amortized on a straight-line
      basis, with the weighted average life being 5.1 years.





The
      acquisition identifiable intangibles related amortization expense has been
      recorded from the dates of the respective acquisitions.




20


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


**2007**
                
                **2008**
                
                **2009**
                
                **2010**
                
                **2011***GroupLotto
                    Identifiable**Intangible
                    amortization:*Licenses
                
                $
                43,958
                
                $
                45,805
                
                $
                10,000
                
                $
                -
                
                $
                -*Total
                    Group's amortization*
                
                
                43,958
                
                
                45,805
                
                
                10,000
                
                
                -
                
                
                -*Infiknowledge
                    Identifiable**Intangible
                    amortization:*Internet
                    Game Suite
                
                
                368
                
                
                496
                
                
                400
                
                
                -
                
                
                -Intellectual
                    Property Assets
                
                
                276
                
                
                372
                
                
                300
                
                
                -
                
                
                -Market
                    Position Acquired
                
                
                307
                
                
                414
                
                
                332
                
                
                -
                
                
                -*Total
                    Group's amortization*
                
                
                951
                
                
                1,282
                
                
                1,032
                
                
                -
                
                
                -*SendTraffic
                    Identifiable**Intangible
                    amortization:*Restrictive
                    Covenants
                
                
                50,250
                
                
                -
                
                
                -
                
                
                -
                
                
                -Software
                
                
                160,759
                
                
                12,381
                
                
                -
                
                
                -
                
                
                -*Total
                    Group's amortization*
                
                
                211,009
                
                
                12,381
                
                
                -
                
                
                -
                
                
                -*Hot
                    Rocket Identifiable**Intangible
                    amortization:*Restrictive
                    Covenants
                
                
                85,409
                
                
                113,879
                
                
                113,879
                
                
                15,500
                
                
                -Software
                
                
                253,064
                
                
                45,927
                
                
                -
                
                
                -
                
                
                -*Total
                    Group's amortization*
                
                
                338,473
                
                
                159,806
                
                
                113,879
                
                
                15,500
                
                
                -*EZ
                    Tracks Identifiable**Intangible
                    amortization:*Music
                    Lic.and trade name
                
                
                223,160
                
                
                300,562
                
                
                300,562
                
                
                300,562
                
                
                300,562*Total
                    Group's amortization*
                
                
                223,160
                
                
                300,562
                
                
                300,562
                
                
                300,562
                
                
                300,562**Summary
                    of Identifiable****Intangibles:***GroupLotto:*
                
                
                43,958
                
                
                45,805
                
                
                10,000
                
                
                -
                
                
                -*Infiknowledge:*
                
                
                951
                
                
                1,282
                
                
                1,032
                
                
                -
                
                
                -*SendTraffic:*
                
                
                211,009
                
                
                12,381
                
                
                -
                
                
                -
                
                
                -*Hot
                    Rocket:*
                
                
                338,473
                
                
                159,806
                
                
                113,879
                
                
                15,500
                
                
                -*EZ
                    Tracks:*
                
                
                223,160
                
                
                300,562
                
                
                300,562
                
                
                300,562
                
                
                300,562*Totals*
                
                $
                817,551
                
                $
                519,836
                
                $
                425,473
                
                $
                316,062
                
                $
                300,562





21




**9.
      Income Taxes**




The
      Company’s income tax provision for the three months ended February 28, 2007 was
      approximately $585,000, which represents expense related to current year
      operations.





The
      effective annualized income tax rate for the three months ended February 28,
      2007 was 46.3%.  This Fiscal 2007 estimated effective rate correlates with
      the Company’s annual effective income tax rate of 46.2% as recognized in the
      fiscal year ended November 30, 2006.





**10.
      Litigation**





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





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




In
      September 2006, DADA USA Inc. (“Dada”) filed this action in Supreme Court of the
      State of New York, New York County (Index No. 603365/06).




The
      action relates to a marketing agreement between Dada and Q121 Inc., the
      Company’s subsidiary. Dada alleges, *inter alia,* that
      Q121 Inc. breached the agreement by using unapproved advertisements or failing
      to prevent sub-publishers from using approved ads in an unapproved manner or
      misappropriating confidential information or diverting customers; and that
      it
      engaged in unfair competition. The complaint seeks damages in an amount which
      the plaintiff alleges it believes to be in excess of ten million
      dollars.




22




Dada
      sought to enjoin Q121 Inc. from drawing down on a letter of credit which had
      secured Dada's performance under the agreement. The court denied Dada's
      application for a temporary restraining order, the issuing bank paid the full
      amount of the letter of credit, and Dada withdrew the request for a preliminary
      injunction. Limited discovery had taken place and the matter was referred to
      mediation. A mediation session occurred in March 2007, as a result of which
      a
      tentative settlement agreement was reached, the terms of which do not
      involve any payment by the Company.  The remaining details are currently
      being negotiated by the parties. In the interim, all proceedings have been
      stayed.




The
      Company believes that there is no merit to Dada's claims and, if the tentative
      settlement agreement is unable to be finalized, intends vigorously to defend
      the
      action.




*Hatton
      v. Prize America/Prize Distributors*




In
      or
      about October 2005 Brandon Hatton filed a *pro
      se* action
      in the U.S. District Court, Middle District of Tennessee (No. 05 CV 00073)
      and
      was also granted permission to proceed *in
      forma pauperis.* The
      complaint, as amended, alleges that some time between June 2002 and July 2004
      the plaintiff won a prize, that defendant failed to pay/deliver, and claims
      damages of $391 million.




In
      December, 2006 the Company learned that plaintiff had attempted to serve
      process; Company counsel has made a special appearance and has moved to dismiss
      the action on jurisdictional grounds. That application is pending.




23




The
      Company believes that there is no merit to this claim and, in the event its
      application is denied, intends vigorously to defend the action.




*Nicherie
      v. Pellicano et al, CV 06-6434 United States District Court; Central District
      of
      California*





The
      Company was served with a Second Amended Complaint in this action, which alleges
      twenty causes of action variously directed against forty-seven individuals
      and
      entities as well as against Does 1 - 200. The plaintiff alleged that he is
      an
      inmate at the Metropolitan Detention Center in Los Angeles, that he was
      President and CEO of Federal Transtel, Inc. and that through a trust he owned
      or
      controlled an interest in that company. The third cause of action was directed
      at a number of defendants, including the Company, and purported to state a
      RICO
      claim; plaintiff also purported to bring the twentieth cause of action on behalf
      of the United States of America against a number of individuals and entities
      including the Company pursuant to the False Claim Act, 31 USC 3730(b), alleging,
      among other things, what he described as “’small increment billing’ frauds ...
which targeted the United States government and its employees who had authority
      to use government credit cards . . ..” and sought unspecified damages and
      attorneys fees. In some of the other causes of action, the plaintiff purported
      to bring the claim against “all defendants” but failed to allege any act by the
      Company.





By
      order
      of the court dated March 27, 2007 the claims against the Company were dismissed
      in this matter. The Company has not received any notice that the plaintiff
      has
      appealed that order.




24




**11.
      Subsequent Events**




On
      April
      13, 2007, 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 February 28, 2007. Such dividend is payable on or about May 10, 2007
      to
      holders of record of such shares at the close of business on May 1, 2007. 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.




See
      Note
      6, above, for the discussion of the EZTracks LP transaction, which closed on
      March 13, 2007, with an effective date of January 1, 2007.





**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 may contain forward-looking
      statements and information relating to the Company that are based on the current
      beliefs and expectations of Management, as well as assumptions made by and
      information currently available to us. When used in this Management's Discussion
      and Analysis, and elsewhere in this Form 10-Q, the words “anticipate",
“believe", “estimate", and “expect" similar expressions, as they relate to our
      Company are intended to identify forward-looking statements. Such statements
      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.





25




**Overview**





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




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




On
      March
      13, 2007, we entered into a Memorandum of Agreement (the “Madacy/EZ Agreement”)
      with Madacy Entertainment LP (“Madacy”) and EZ-Tracks, LP (“EZ LP”), to amend
      the terms of a Marketing and Services Agreement dated January 22, 2005, as
      amended (the “M&S Agreement”), by and among Madacy, EZ LP and us.





The
      M&S Agreement had provided, among other things, that EZ LP would market and
      promote EZTracks.com, our web destination consisting of downloadable songs
      licensed from Madacy (the “License”). A subsidiary of our Company, which
      owned 50.7% of EZ LP, was responsible for managing the operations of the
      business, including generating traffic to the website, as well as selling
      advertising on the site. CIK Holdings Inc. (“CIK”), an entity associated with
      Madacy, owned 49.3% of EZ LP and licensed to EZ LP its inventory of downloadable
      music, including downloadable music licensed from other parties.




26




Pursuant
      to the terms of the Madacy/EZ Agreement, the M&S Agreement was amended to,
      among other things, (i) provide for a single fixed 10-year term commencing
      on
      January 1, 2007 and terminating on December 31, 2016; (ii) give us the option
      to
      extend such term for up to five (5) additional one-year terms; (iii) continue
      the sublicense from Madacy of the San Juan Songs (as defined in the M&S
      Agreement); and (iv) continue and establish a term to the License for ringtones,
      ringbacks and other telephone uses.





Concurrent
      with the execution of the Madacy/EZ Agreement, we entered into a Memorandum
      of
      Agreement dated March 13, 2007 with CIK, pursuant to which we acquired CIK’s
      49.3% ownership of EZ LP (the “CIK Agreement”) (so that we now own all of the
      limited partnership interests of EZ LP).





The
      purchase price consisted of 500,000 shares of our common stock (valued at
      approximately $2,717,000, using an average share price of $5.43 in accordance
      with the valuation standards set forth under Statement of Financial Accounting
      Standards 141 (Business Combinations), Paragraph 22) and $1,290,000 in cash,
      reduced by approximately $170,000 of a prior minority interest balance. In
      addition, we agreed to pay CIK additional consideration of between $1.25 million
      and $2.75 million in the event of a Traffix Sales Event or an EZ-Tracks Sale,
      each as defined in the CIK Agreement. The purchase price has been tentatively
      allocated as follows (subject to a purchase price allocation currently being
      prepared by an independent third party): $2,254,000 to amortizable intangibles,
      with a weighted-average-useful life of 7.5 years and the balance of
      approximately $1,583,000 allocated to unamortizable goodwill.




27




The
      CIK
      Agreement further provided for CIK’s warranty and guaranty that there would be
      no termination of the License and M&S Agreement prior to July 1, 2012, and,
      if, for any reason (other than our default), there is such a termination, then
      CIK would pay us a sum certain, which amount would equal $2.6 million should
      the
      termination occur in 2007 and which amount would decrease during each subsequent
      six month period. Should the termination occur during the final period (i.e.
      the
      six months ending June 30, 2012), the amount payable by CIK would have been
      reduced to $0.3 million.




In
      January of Fiscal 2005, we, through our wholly owned subsidiary, Hot Rocket
      Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
      Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
      the business of buying and selling performance based online advertising space
      for third parties, as well as providing such services to the sales activities
      of
      our consolidated entity.




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




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




28




Additionally,
      in accordance with the terms of the acquisition agreement, for the period August
      1, 2006 to January 31, 2007, we were liable for a combined additional
      purchase price payment of $375,000, which has been accrued at February 28,
      2007
      and will be settled by a cash payment of $300,000 and the issuance of
      approximately 14,200 shares, having an approximate fair market value of $75,000,
      to be made on or about April 25, 2007.




The
      terms
      of the acquisition agreement also provided for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      February 1, 2006 to January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the agreement. Hot Rocket did not reach either of
      the
      EBITDA thresholds for those periods.




Future
      contingent payments made, if any, will be treated as additional purchase price
      and included as an addition to goodwill.





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




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




29




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




**Online
      Advertising and Media Services**





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




*Online
      Advertising - Website Advertising*




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





30


The
      websites feature content ranging from music for downloads to sweepstakes. In
      Fiscal 2004, we launched EZ-Tracks.com (a Canadian domiciled majority owned
      subsidiary), our music destination site that features over 30,000 songs
      available for free and legal downloading, as well as other content such as
      musical greeting cards and a downloadable version of the Bible in audio format.
      During the quarter ended February 28, 2007, we acquired the 49.3% minority
      interest in EZ-Tracks.com (see “- Overview”). We have a games website that
      offers a variety of free parlor-style games, such as backgammon and checkers.
      In
      Fiscal 2004, we also launched reciperewards.com, a website that features
      thousands of cooking recipes.





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




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




*Online
      Advertising - Email Marketing Programs*




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





31


*Results
      Analysis*




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




*Affiliate
      Marketing*




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




*Syndication*




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




32




*Online
      Advertising - Internet Media Performance Based Sales*




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




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




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




*Search
      Engine Marketing*




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




*Personals*




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




33




*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 period’s results, as well as prior periods’ 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.




**Segment
      Information**





We
      operate in one segment, Online Advertising and Media Services. In classifying
      the financial information for our operating activities, we rely primarily upon
      the evaluations of the chief operating decision maker (CODM - as managed by
      committee) and executive management in deciding how to allocate our resources
      and assess our performance. Disclosure is also required about products and
      services, geographic areas and major customers.


34


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




We
      had
      Internet Game Development revenue from our Canadian-based subsidiary of
      approximately $287,000 and $212,000 during the three-month periods ended
      February 28, 2007 and 2006, respectively. The primary role of the Canadian
      subsidiary is to support back office data operations and does not directly
      contribute significant amounts to consolidated net income. The majority of
      the
      Canadian subsidiary’s outlays are related to the generation of our revenues.
      Correspondingly, we classify them within the categories of cost of sales and
      selling, general and administrative expenses, where appropriate.





Segment
      information is set forth in Note 1 to the Consolidated Financial Statements
      referred to in the Financial Statements and Supplementary Data section hereof.





**RESULTS
      OF OPERATIONS**





The
      following is a discussion of our results of operations for the three months
      ended February 28, 2007 and February 28, 2006. It should be read in conjunction
      with our Annual Report on Form 10-K as filed for the year ended November 30,
      2006, the notes thereto and other financial information included elsewhere
      in
      this report.




35




THREE
      MONTHS ENDED FEBRUARY 28, 2007 AND FEBRUARY 28, 2006




Our
      net
      revenues, and the disclosure of our revenue components, for each of the three
      months ended February 28, 2007 and February 28, 2006, are set forth
      below:




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





**Three
                Months Ended**
            
            **Change**
            
            **Change****February
                28,**
            
            **February
                28,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Online
                Advertising
            
            $
            10,755,586
            
            $
            10,978,856
            
            $
            (223,270
            )
            
            -2
            %Search
                Engine Marketing
            
            
            6,051,449
            
            
            3,995,353
            
            
            2,056,096
            
            
            51
            %Personals
            
            
            939,911
            
            
            1,836,714
            
            
            (896,803
            )
            
            -49
            %Internet
                game development
            
            
            287,285
            
            
            211,889
            
            
            75,396
            
            
            36
            %**Consolidated
                totals**
            
            $
            18,034,231
            
            $
            17,022,812
            
            $
            1,011,419
            
            
            6
            %




Net
      Revenue increased approximately $1.0 million, or 6%, to $18.0 million for the
      three months ended February 28, 2007, from $17 million in the prior year’s
      comparable period. The Online Advertising and Media Service's core business
      grew
      organically, primarily driven by increased revenues from Search Engine Marketing
      Optimization services ($2.1 million, or 51%), offset by a combined decline
      in
      our Online Advertising and our Personals business of approximately $0.2 million,
      or 2.0%, and $0.9 million, or 49%, respectively. Internet Game Development
      revenues approximated $0.3 million, for an approximate $0.1 million increase,
      or
      36%. Search Engine Marketing services revenue increased as a result of our
      increased focus on the identification of new third party clients and our
      enhancement of existing Search client relationships. Our Online Advertising
      revenue principally consists of three revenue sub-sets: (a) our Website
      advertising sub-set revenue increased to $6.6 million from $5.0 million, for
      an
      increase of approximately $1.6 million, or 31%, and is primarily the result
      of
      our increased emphasis on generating revenue via our Websites for our wireless
      related clients; (b) our Email Marketing sub-set revenue declined to $1.1
      million from $1.9 million, for a decrease of approximately $0.8 million, or
      43%,
      and resulted from internet service providers’ consumer contact restrictions
      negatively impacting our ability to deliver email and reach our permission
      based
      consumers; (c) a decrease in revenues generated from our resale, on a variable
      performance basis, of Internet Media Advertising space acquired on a fixed
      cost
      basis by our Hot Rocket Marketing subsidiary, with a decline to $2.4 million
      in
      revenue, from $3.4 million, representing an approximate $1 million decrease,
      or
      29%.




36




Our
      Personals business revenue declined as a result of decreased consumer
      enrollments based on the unprofitable values currently being paid for such
      new
      personals enrollees.




Our
      cost
      of sales during the three months ended February 28, 2007 and February 28, 2006
      were comprised of direct and indirect marketing costs associated with the
      acquisition  and
      retention of consumers for our Online Advertising and Media Service activities’
marketing programs, and includes direct response email marketing costs
      (including related salaries, depreciation and amortization costs), website
      registrations costs, the cost of customer profiles, other customer acquisition
      costs, search engine marketing costs, and the related contingent-based
      sweepstakes indemnification expense.





The
      cost
      of revenues, and the disclosure of the components, for each of the three-month
      periods ended February 28, 2007 and February 28, 2006, are set forth
      below:




***Cost
        of Revenue Components***
  ***Online
          Advertising and Media Service Activities***


**Three
                  Months Ended**
              
              **Change**
              
              **Change****February
                  28,**
              
              **February
                  28,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              7,020,513
              
              $
              6,231,863
              
              $
              788,650
              
              
              13
              %Search
                  Engine Marketing
              
              
              4,717,852
              
              
              3,440,691
              
              
              1,277,161
              
              
              37
              %Personals
              
              
              67,585
              
              
              1,214,406
              
              
              (1,146,821
              )
              
              -94
              %Internet
                  game development
              
              
              89,539
              
              
              66,650
              
              
              22,889
              
              
              34
              %**Consolidated
                  totals**$
              11,895,489
              
              $
              10,953,610
              
              $
              941,879
              
              
              9
              %




37




Cost
      of
      revenues on a consolidated basis increased $0.9 million, or 9%, to $11.9 million
      for the three months ended February 28, 2007, from $11 million in the comparable
      prior year period.




The
      significant factors contributing to the increase in consolidated costs of sales
      were related to an increase of $1.3 million, or 37%, in the costs incurred
      in
      conducting our increased volume of Search Engine Marketing activities and an
      increased relative cost of procuring marketing media in the conduct of our
      Online Advertising activities. The increases in cost of revenue referenced
      above
      were offset by a decline in the cost of revenues attributable to our Personals
      business, as that decrease of $1.1 million, or 94%, relates to the suspension
      in
      outlays for new Personals enrollees based on the prohibitive market established
      cost of such enrollees.




Our
      gross
      profit in terms of dollars, on a component basis, and our gross profit
      percentage, on a component basis, for each of the three-month periods ended
      February 28, 2007 and February 28, 2006, are set forth below:




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


**Three
                  Months Ended**
              
              **Change**
              
              **Change****February
                  28,**
              
              **February
                  28,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              3,735,073
              
              $
              4,746,993
              
              $
              (1,011,920
              )
              
              -21
              %Search
                  Engine Marketing
              
              
              1,333,597
              
              
              554,662
              
              
              778,935
              
              
              140
              %Personals
              
              
              872,326
              
              
              622,308
              
              
              250,018
              
              
              40
              %Internet
                  game development
              
              
              197,746
              
              
              145,239
              
              
              52,507
              
              
              36
              %**Consolidated
                  totals**$
              6,138,742
              
              $
              6,069,202
              
              $
              69,540
              
              
              1
              %





38





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


**Absolute**
              
              **Relative****Three
                  Months Ended**
              
              **Change**
              
              **Change****February
                  28,**
              
              **February
                  28,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              %%%
              
              %%%Online
                  Advertising
              
              
              34.7
              %
              
              43.2
              %
              
              -8.5
              %
              
              -19.7
              %Search
                  Engine Marketing
              
              
              22.0
              %
              
              13.9
              %
              
              8.2
              %
              
              58.7
              %Personals
              
              
              92.8
              %
              
              33.9
              %
              
              58.9
              %
              
              173.9
              %Internet
                  game development
              
              
              68.8
              %
              
              68.5
              %
              
              0.3
              %
              
              0.4
              %**Consolidated
                  totals**34.0
              %
              
              35.7
              %
              
              -1.6
              %
              
              -4.5
              %





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 34.0% during
      the three months ended February 28, 2007, compared to 35.7% in the prior year’s
      comparable period, representing an absolute percentage point decrease of 1.6%,
      or a 4.5% decline on a relative basis when compared to the prior year’s
      comparable period.




39




The
      4.5%
      relative decline in the gross profit percentage is primarily attributable to
      a
      decrease in the gross profit margin of the Online Advertising component, which
      due to its higher relative revenue contribution yields a higher proportionate
      impact on the total relative decline, offset by increases in the gross profit
      margins of our Personals business and our Search Engine Marketing business.




Our
      Selling Expenses for each of the three-month periods ended February 28, 2007
      and
      February 28, 2006 are set forth below:


***Selling
        Expense Components***
  ***Online
          Advertising and Media Service Activities***


**Three
                  Months Ended**
              
              **Change**
              
              **Change****February
                  28,**
              
              **February
                  28,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              271,382
              
              $
              698,827
              
              $
              (427,445
              )
              
              -61
              %Selling
                  salaries and related costs
              
              
              747,769
              
              
              630,249
              
              
              117,520
              
              
              19
              %Travel,
                  entertainment, shows, other
              
              
              62,818
              
              
              54,794
              
              
              8,024
              
              
              15
              %**Consolidated
                  totals**$
              1,081,969
              
              $
              1,383,870
              
              $
              (301,901
              )
              
              -22
              %




Selling
      expenses, on a consolidated basis, decreased approximately $0.3 million, or
      22%,
      to $1.1 million during the three months ended February 28, 2007 from $1.4
      million during the three months ended February 28, 2006. The decrease resulted
      from an approximate $0.4 million decrease in fee share commissions correlating
      to our decreased email marketing revenue (as referenced above in the MD&A
      revenue discussion) and the correlative decrease in payments to third-party
      database owners in the generation of such decreased revenues. We are the primary
      obligor to the third party list owner and bear the responsibility of payment
      to
      the list owner regardless of whether or not our client pays. This decrease
      was
      offset by an increase of approximately $0.1 million, or 19%, in selling salaries
      and related costs attributable to increases in our sales force and increased
      selling commissions attributable to our increased comparable period revenues.




40




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




Our
      General and Administrative Expenses for the three months ended February 28,
      2007
      and February 28, 2006 are set forth below:


***General
        and Administrative Expense Components***
  ***Online
          Advertising and Media Service Activities***





**Three
                Months Ended**
            
            **Change**
            
            **Change****February
                28,**
            
            **February
                28,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Compensation
                and related costs
            
            $
            2,396,756
            
            $
            2,458,503
            
            $
            (61,747
            )
            
            -3
            %Professional
                fees
            
            
            457,234
            
            
            325,400
            
            
            131,834
            
            
            41
            %Insurance
                costs
            
            
            227,415
            
            
            241,905
            
            
            (14,490
            )
            
            -6
            %Occupancy
                and equipment costs
            
            
            130,841
            
            
            98,560
            
            
            32,281
            
            
            33
            %Depreciation
                and amortization
            
            
            367,773
            
            
            390,526
            
            
            (22,753
            )
            
            -6
            %All
                other miscellanous G&A expenses
            
            
            409,593
            
            
            395,027
            
            
            14,566
            
            
            4
            %**Consolidated
                totals**
            
            $
            3,989,612
            
            $
            3,909,921
            
            $
            79,691
            
            
            2
            %




41




General
      and Administrative expenses ("G&A") on a consolidated basis increased
      approximately $0.1 million, or 2%, when comparing G&A of $4.0 million for
      the three months ended February 28, 2007 to G&A of $3.9 million incurred
      during the three months ended February 28, 2006. The net increase was
      attributable to combined increases in professional fees, occupancy costs and
      miscellaneous G&A of approximately $0.2 million or 22%, offset by combined
      declines in compensation and related costs, insurance costs, and depreciation
      and amortization of approximately $0.1 million, or 3%. The decline in
      compensation costs were attributable to a decrease in stock-based compensation
      costs of approximately $0.1 million resulting from a decline in option grants
      in
      the three months ended February 28, 2007 when compared to the three months
      ended
      February 28, 2006; insurance costs declined as a result of favorable terms
      procured on our directors and officers renewal; and depreciation and
      amortization costs had a net decline based on certain assets reaching their
      useful life, offset by additional amortization and depreciation on current
      period acquisitions.




42




Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, was a member of our Board of Directors from
      inception to August 25, 2006, at which time he chose not to stand for
      re-election. FKIWSBR fees are billed on an arms length transaction basis. We
      incurred approximately $135,000 in legal fees (exclusive of disbursements)
      from
      FKIWSBR during the three months ended February 28, 2006.




***Bad
        Debt Expense and (Recapture) Components***
  ***Online
          Advertising and Media Service Activities***





**Three
                Months Ended**
            
            **Change**
            
            **Change****February
                28,**
            
            **February
                28,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Online
                Advertising
            
            $
            (57,139
            )
            $
            47,818
            
            $
            (104,957
            )
            
            -219
            %Search
                Engine Marketing
            
            
            120,560
            
            
            36,468
            
            
            84,092
            
            
            100
            %Personals
            
            
            -
            
            
            -
            
            
            -
            
            
            0
            %Internet
                game development
            
            
            -
            
            
            -
            
            
            -
            
            
            0
            %**Consolidated
                totals**
            
            $
            63,421
            
            $
            84,286
            
            $
            (20,865
            )
            
            -25
            %




43




Bad
      Debt
      expense decreased on a net basis by approximately $21,000, or 25%, when
      comparing the three months ended February 28, 2007 with the three months ended
      February 28, 2006. The decrease is attributable to certain customer bad debt
      recaptures and adjustments to other smaller accounts in our Online Advertising
      activities, resulting in a net-recapture of approximately $57,000, offset by
      increases in our reserves for clients in our Search Engine Marketing activities
      as a result of specific clients and in general based on our increased revenues
      earned in such activity. Our allowance for bad debt results from our assessment
      of the risk of collection embedded in our customer base as described below.




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




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





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




***OTHER
        NON-OPERATING INCOME (EXPENSE)***
  **Three
                    Months Ended**
                
                **Change**
                
                **Change****Other
                    non-operating**
                
                **February
                    28,**
                
                **February
                    28,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****income
                    (expense):**
                
                **2007**
                
                **2006**
                
                $$$
                
                %%%Interest
                    income and dividends
                
                $
                280,226
                
                $
                241,992
                
                $
                38,234
                
                
                16
                %Realized
                    gains (losses) on sale ofmarketable
                    securities
                
                
                19,106
                
                
                (18,352
                )
                
                37,458
                
                
                -204
                %Other
                    non-operating income:Other
                    miscellaneousincome
                
                
                27,776
                
                
                8,943
                
                
                18,833
                
                
                100
                %Foreign
                    Currency Exchange RateFees
                    and interest expense
                
                
                (19,629
                )
                
                (4,826
                )
                
                (14,803
                )
                
                307
                %Minority
                    interest (income)
                
                
                (48,000
                )
                
                (200,095
                )
                
                152,095
                
                
                -76
                %**Total
                    other non-operating****income:**
                
                $
                259,479
                
                $
                27,662
                
                $
                231,817
                
                
                838
                %




44





Consolidated
      Other Non-operating Income (Expense) increased approximately $0.2 million,
      from
      approximately $28,000 for the three months ended February 28, 2006, to
      approximately $259,000 for the three months ended February 28, 2007.




The
      factors contributing to the increase are set forth in the order as shown in
      the
      above table:




(a)
            Interest
                income increased approximately $38,000, or 16%, as the result of
                more
                favorable rates available during Fiscal 2007 as compared to Fiscal
                2006 on
                principally the same cash and marketable security
                balances.


(b)
            Realized
                gains on the sale of marketable securities increased by $37,000 when
                comparing the current fiscal period gains of $19,000, with the prior
                period’s comparable losses of $18,000.


(c)
            Other
                miscellaneous income increased approximately $18,800 and primarily
                was the
                result of collections from various test marketing projects performed
                for
                the Company’s clients.




45




(d)
            Minority
                Interest resulting from our EZ-Tracks partnership with Madacy
                Entertainment decreased from approximately $200,000 in the first
                quarter
                of Fiscal 2006 to $48,000 in the first quarter of Fiscal 2007 as
                a result
                of the acquisition of the related minority interest by us during
                the first
                quarter of Fiscal 2007 (see “-
                Overview”).





**MINORITY
      INTEREST**




During
      Fiscal 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,
      owned 50.7% of the partnership and were 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, owned 49.3% until January 1, 2007, at which time we acquired the
      49.3% interest in the partnership. Prior to the acquisition of the interest,
      Madacy provided its inventory of music and an extensive library of music
      licensed from other parties. Madacy had limited involvement with certain aspects
      of operations. The results of operations for the three months ended February
      28,
      2007, and for the three months ended February 28, 2006, include the fully
      consolidated results of EZTracks LP with minority interest established to
      reflect Madacy’s ownership share of the partnership’s operating results, as
      applicable, for such periods.




46




***The
        following table summarizes the results of EZTracks for the periods indicated
        below:***







**Three
                Months Ended**
            
            **Change**
            
            **Change****February
                28,**
            
            **February
                28,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Net
                Revenues
            
            $
            2,143,882
            
            $
            3,443,584
            
            $
            (1,299,702
            )
            
            -38%Cost
                of Sales
            
            
            1,313,008
            
            
            2,984,965
            
            
            (1,671,957
            )
            
            -56%Gross
                Profit
            
            
            830,874
            
            
            458,619
            
            
            372,255
            
            
            81%General
                andAdministrative
                Expenses
            
            
            75,529
            
            
            52,745
            
            
            22,784
            
            
            43%Net
                Income
            
            $
            755,345(1
            )
            $
            405,874(1
            )
            $
            349,471
            
            
            86%Minority
                interest
            
            $
            48,000(3
            )
            $
            200,096(2
            )
            $
            (152,096
            )
            
            -76%




(1)
              All
                  items included in the Company's Online Advertising and Media Services
                  sole
                  segment.
  (2)
                Represents
                    Madacy Entertainment's 49.3% minority
                    interest.
  (3)
                  Represents
                      Madacy Entertainment's 49.3% minority interest for the period
                      December 1,
                      2006 to December
                      31, 2006 (as effective January 1, 2007 the Company acquired
                      Madacy
                      Entertainment's 49.3%
                      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, and Financial Interpretation Number 18. The pronouncements
      consider interim quarterly periods as an integral part of the annual period,
      with interim quarterly tax periods reflecting the estimated annual effective
      tax
      rate. We believe that we have adequately provided for tax-related matters.
      We
      are subject to examination by taxing authorities in various jurisdictions.
      Matters raised upon audit may involve substantial amounts of tax. Management
      considers it unlikely that future audits of any open audit year (if at all)
      would have a material adverse effect upon our consolidated financial statements.




47




Our
      income tax provision for the three months ended February 28, 2007 was
      approximately $585,000, which is tax expense related to current period
      operations.




The
      current year’s estimated effective rate relationship of 46.3% differs
      immaterially from our annual effective rate of 46.2% recognized during the
      year
      ended November 30, 2006. The slight increase in the effective tax rate is
      primarily attributable to state income taxes.





**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of
      February 28, 2007, we had aggregate working capital of $27.6 million, compared
      to aggregate working capital of $31.7 million as of November 30, 2006. We had
      available cash, cash equivalents, equities and readily available marketable
      debt
      securities of $31.0 million as of February 28, 2007, compared to available
      cash,
      cash equivalents, equities and readily available marketable debt securities
      of
      $30.4 million as of November 30, 2006. The equity component of our marketable
      securities was $1.9 million at February 28, 2007 and November 30, 2006,
      respectively.




Cash
      provided by operating activities was approximately $0.477 million for the three
      months ended February 28, 2007, compared to approximately $0.328 million used
      in
      operating activities during the three months ended February 28, 2006,
      representing a net increase in cash provided by operations of approximately
      $0.805 million. Changes in assets and liabilities of the business, net of
      acquisitions, used approximately $0.8 million less in cash when comparing the
      three months ended February 28, 2007 with the three months ended February 28,
      2006, contributing the significant portion of the net-increase to the increased
      cash provided by operations.




Cash
      used
      in investing activities was approximately $0.1 million during the three months
      ended February 28, 2007, compared to $1.9 million of cash provided by investing
      activities during the prior year’s comparable quarter. The primary use of cash
      in investing activities in the three months ended February 28, 2007 related
      to
      net proceeds used for the acquisition of marketable securities approximately
      equaling proceeds generated from the sale of marketable securities, as compared
      to net proceeds from the sale of marketable securities exceeding proceeds used
      for the acquisition of marketable securities of approximately $1.9 million
      for
      the three months ended February 28, 2006. Additionally, capital expenditures
      used $59,000 of investing cash flows during the three months ended February
      28,
      2007, compared to $91,000 of investing cash flows used for capital expenditures
      during the three months ended February 28, 2006.




48




Cash
      provided by financing activities was approximately $0.108 million for the three
      months ended February 28, 2007, compared to $0.1 million used in financing
      activities for the three months ended February 28, 2006. Fiscal 2007 financing
      cash flows were: (a) $52,000 less than the prior comparable fiscal period with
      respect to distributions to a minority interest holder (whose interest was
      acquired effective January 1, 2007); (b) $71,000 less than the prior comparable
      period with respect to payments required under capital lease obligations; with
      both (a) and (b) further supplemented by approximately $83,000 in increased
      financing cash flows provided by option exercises during the three months ended
      February 28, 2007.




Our
      days-sales-outstanding ("DSO") in accounts receivable at February 28, 2007
      was
      44 days, compared to 45 days at November 30, 2006, 56 days at August 31, 2006,
      and 46 days at May 31, 2006. The one day, or 2.2% decrease in the current
      quarter’s DSO compared to the fourth quarter of the prior fiscal year relates to
      our continued efforts in monitoring our clients and improving our rates of
      collection across all of our client relationships. Our DSO may rise above 44
      days (as recognized during the three months ended August 31, 2006) in future
      fiscal periods as a result of changes in the components of our client mix or
      other potential factors not currently identifiable.




49




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
      of a
      40-day DSO, and might exceed the 44-day DSO recognized in the three-month period
      ended February 28, 2007.




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.





Our
      future plans and business strategy may continue to call for our Internet-based
      Online Advertising and Media Service activities to be our sole operating focus
      as it was for the three months ended February 28, 2007, as well as the years
      ended November 30, 2006 and 2005. Our cash demands for capital expenditures
      and
      equipment lease obligations have declined to $64,875 during the three months
      ended February 28, 2007 compared to $168,293 during the three months ended
      February 28, 2006. Our capital expenditures and capital lease obligation
      payments during the fiscal years ended November 30, 2004 to 2006 were: $141,052,
      $519,079 and $719,741, respectively. The significant portion of such capital
      expenditure was for new email servers that substantially reduced our reliance
      on
      and related additional costs associated with third party email delivery
      suppliers. All other outlays for capital expenditures were also used to support
      other facets of our Online Advertising and Media Services business.




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


50


On
      March
      13, 2007, we entered into a Memorandum of Agreement (the “Madacy/EZ Agreement”)
      with Madacy Entertainment LP (“Madacy”) and EZ-Tracks, LP (“EZ LP”), to amend
      the terms of a Marketing and Services Agreement dated January 22, 2005, as
      amended (the “M&S Agreement”), by and among Madacy, EZ LP and us.





The
      M&S Agreement had provided, among other things, that EZ LP would market and
      promote EZTracks.com, our web destination consisting of downloadable songs
      licensed from Madacy (the “License”). A subsidiary of our Company, which owned
      50.7% of EZ LP, was responsible for managing the operations of the business,
      including generating traffic to the website, as well as selling advertising
      on
      the site. CIK Holdings Inc. (“CIK”), an entity associated with Madacy, owned
      49.3% of EZ LP and licensed to EZ LP its inventory of downloadable music,
      including downloadable music licensed from other parties.





Pursuant
      to the terms of the Madacy/EZ Agreement, the M&S Agreement was amended to,
      among other things, (i) provide for a single fixed 10-year term commencing
      on
      January 1, 2007 and terminating on December 31, 2016; (ii) give us the option
      to
      extend such term for up to five (5) additional one-year terms; (iii) continue
      the sublicense from Madacy of the San Juan Songs (as defined in the M&S
      Agreement); and (iv) continue and establish a term to the License for ringtones,
      ringbacks and other telephone uses.




51




Concurrent
      with the execution of the Madacy/EZ Agreement, we entered into a Memorandum
      of
      Agreement dated March 13, 2007 with CIK, pursuant to which we acquired CIK’s
      49.3% ownership of EZ LP (the “CIK Agreement”) (so that we now own all of the
      limited partnership interests of EZ LP).





The
      purchase price consisted of 500,000 shares of our common stock (valued at
      approximately $2,717,000, using an average share price of $5.43 in accordance
      with the valuation standards set forth under Statement of Financial Accounting
      Standards 141 (Business Combinations), Paragraph 22) and $1,290,000 in cash,
      reduced by approximately $170,000 of a prior minority interest balance. In
      addition, we agreed to pay CIK additional consideration of between $1.25 million
      and $2.75 million in the event of a Traffix Sales Event or an EZ-Tracks Sale,
      each as defined in the CIK Agreement. The purchase price has been tentatively
      allocated as follows (subject to a purchase price allocation currently being
      prepared by an independent third party): $2,254,000 to amortizable intangibles,
      with a weighted-average-useful life of 7.5 years and the balance of
      approximately $1,583,000 allocated to unamortizable goodwill.





The
      CIK
      Agreement further provided for CIK’s warranty and guaranty that there would be
      no termination of the License and M&S Agreement prior to July 1, 2012, and,
      if, for any reason (other than our default), there is such a termination, then
      CIK would pay us a sum certain, which amount would equal $2.6 million should
      the
      termination occur in 2007 and which amount would decrease during each subsequent
      six month period. Should the termination occur during the final period (i.e.
      the
      six months ending June 30, 2012), the amount payable by CIK would have been
      reduced to $0.3 million.




52




In
      January of Fiscal 2005, we, through our wholly owned subsidiary, Hot Rocket
      Acquisition Corp., acquired all of the intangible assets of Hot Rocket Marketing
      Inc. and Clockwork Advertising Inc. (collectively “Hot Rocket”), corporations in
      the business of buying and selling performance based online advertising space
      for third parties, as well as providing such services to the sales activities
      of
      our consolidated entity.




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




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




Additionally,
      in accordance with the terms of the acquisition agreement, for the period August
      1, 2006 to January 31, 2007, we were liable for a combined additional purchase
      price payment of $375,000, which has been accrued at February 28, 2007 and
      will
      be settled by a cash payment of $300,000, and the issuance of approximately
      14,200 shares, having an approximate fair market value of $75,000, to be made
      on
      or about April 25, 2007.




53




The
      terms
      of the acquisition agreement also provided for additional contingent payments
      of
      purchase price for the periods February 1, 2006 through July 31, 2006, and
      February 1, 2006 to January 31, 2007, upon the attainment of certain EBITDA
      thresholds as specified in the agreement. Hot Rocket did not reach either of
      the
      EBITDA thresholds for those periods.




Future
      contingent payments made, if any, will be treated as additional purchase price
      and included as an addition to goodwill.




**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 February 28, 2007, are set forth below:


Total
                  ContractualOperating
                  Leases
              
              Employment
                  agreements
              
              Other
              
              ObligationsDomestic
              
              Foreign
              
              Domestic
              
              Foreign
              
              Domestic
              
              Domestic
              
              Foreign2007
              
              $
              421,697
              
              $
              -
              
              $
              1,475,739
              
              $
              225,000
              
              $
              -
              
              $
              1,897,436
              
              $
              225,0002008
              
              
              556,269
              
              
              -
              
              
              352,978
              
              
              325,000
              
              
              -
              
              
              909,247
              
              
              325,0002009
              
              
              566,362
              
              
              -
              
              
              155,234
              
              
              350,000
              
              
              
              
              
              721,596
              
              
              350,0002010
              
              
              574,180
              
              
              -
              
              
              22,449
              
              
              -
              
              
              
              
              
              596,629
              
              
              -2011
              
              
              500,619
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              500,619
              
              
              --$
              2,619,127
              
              $
              -
              
              $
              2,006,400
              
              $
              900,000
              
              $
              -
              
              $
              4,625,527
              
              $
              900,000




54




**RELATED
      PARTIES**




Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass and Rhine LLP (“FKIWSBR”) provides
      general legal services to us in the ordinary course of business and litigation
      services in defense of actions arising from such business activities. Murray
      L.
      Skala, a partner in such firm, was a member of our Board of Directors from
      inception to August 25, 2006, at which time he chose not to stand for
      re-election. FKIWSBR fees are billed on an arms length transaction basis. We
      incurred approximately $135,000 in legal fees (exclusive of disbursements)
      from
      FKIWSBR during the three months ended February 28, 2006.




**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.




55


**Estimates**





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





**FACTORS
      THAT COULD AFFECT FUTURE RESULTS**





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





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




56




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





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




57




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





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




58




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.




59




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





We
      carry
      goodwill and other identifiable intangibles on our balance sheet arising from
      current and prior-year acquisitions. We are required to review, at least
      annually goodwill for any asset impairment. If the review of the goodwill
      related to the subsidiaries organized to acquire such assets determines that
      such goodwill is impaired, then we will be required to recognize an impairment
      charge on such goodwill necessary to reduce the carrying value of the goodwill
      to its net realizable value. Should events occur that would give rise to such
      impairment charge, we would recognize decreased profitability to the extent
      of
      such adjustment. Cash flows would not be directly affected by the impairment
      charge, but cash flows would, most likely, be adversely affected as a result
      of
      the facts and circumstances that created the impairment charge. As of February
      28, 2007, we reviewed our annual analysis performed August 31, 2006, and
      determined there continues to be no impairment, and have not recognized any
      events through the date of this report that would negatively impact goodwill,
      or
      otherwise require an 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 February 28, 2007 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
      potential for an economic downturn and the potential of related fiscal
      difficulties that may be faced by some of the companies in which we have
      investments, our investment portfolio could become impaired by the failure
      of
      such companies to fulfill their responsibility of adhering to the repayment
      of
      principal upon maturity. Additionally, our cash flows and interest income could
      be negatively impacted by Federal Reserve Bank interest rate reductions, if
      any.




60




**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.




61




**PART
      II**





**OTHER
      INFORMATION**




**Item
      1.**  **Legal
      Proceedings**




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




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




In
      September 2006, DADA USA Inc. (“Dada”) filed this action in Supreme Court of the
      State of New York, New York County (Index No. 603365/06).




The
      action relates to a marketing agreement between Dada and Q121 Inc., our
      subsidiary. Dada alleges, *inter alia,* that
      Q121 Inc. breached the agreement by using unapproved advertisements or failing
      to prevent sub-publishers from using approved ads in an unapproved manner or
      misappropriating confidential information or diverting customers; and that
      it
      engaged in unfair competition. The complaint seeks damages in an amount which
      the plaintiff alleges it believes to be in excess of ten million
      dollars.




Dada
      sought to enjoin Q121 Inc. from drawing down on a letter of credit which had
      secured Dada's performance under the agreement. The court denied Dada's
      application for a temporary restraining order, the issuing bank paid the full
      amount of the letter of credit, and Dada withdrew the request for a preliminary
      injunction. Limited discovery had taken place and the matter was referred to
      mediation. A mediation session occurred in March 2007, as a result of which
      a
      tentative settlement agreement was reached, the terms of which do not involve
      any payment by us. The remaining details are currently being negotiated by
      the
      parties. In the interim, all proceedings have been stayed.




62




We
      believe that there is no merit to Dada's claims and, if the tentative settlement
      agreement is unable to be finalized, intend vigorously to defend the
      action.




*Hatton
      v. Prize America/Prize Distributors*




In
      or
      about October 2005 Brandon Hatton filed a *pro
      se* action
      in the U.S. District Court, Middle District of Tennessee (No. 05 CV 00073)
      and
      was also granted permission to proceed *in
      forma pauperis.* The
      complaint, as amended, alleges that some time between June 2002 and July 2004
      the plaintiff won a prize, that defendant failed to pay/deliver, and claims
      damages of $391 million.




In
      December, 2006 we learned that plaintiff had attempted to serve process; our
      counsel has made a special appearance and has moved to dismiss the action on
      jurisdictional grounds. That application is pending.





We
      believe that there is no merit to this claim and, in the event our
      application is denied, intend vigorously to defend the action.




63




*Nicherie
      v. Pellicano et al, CV 06-6434 United States District Court; Central District
      of
      California*





We
      were
      served with a Second Amended Complaint in this action, which alleges twenty
      causes of action variously directed against forty-seven individuals and entities
      as well as against Does 1 - 200. The plaintiff alleged that he is an inmate
      at
      the Metropolitan Detention Center in Los Angeles, that he was President and
      CEO
      of Federal Transtel, Inc. and that through a trust he owned or controlled an
      interest in that company. The third cause of action was directed at a number
      of
      defendants, including us, and purported to state a RICO claim; plaintiff also
      purported to bring the twentieth cause of action on behalf of the United States
      of America against a number of individuals and entities including us pursuant
      to
      the False Claim Act, 31 USC 3730(b), alleging, among other things, what he
      described as “’small increment billing’ frauds ... which targeted the United
      States government and its employees who had authority to use government credit
      cards . . ..” and sought unspecified damages and attorneys fees. In some of the
      other causes of action, the plaintiff purported to bring the claim against
“all
      defendants” but failed to allege any act by us.





By
      order
      of the court dated March 27, 2007 the claims against us were dismissed in this
      matter. We have not received any notice that the plaintiff has appealed that
      order.




**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.




64




*We
      May Not Continue To Pay Dividends On Our Equity Securities.*




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





*Advertisers
      May Be Reluctant To Devote A Portion Of Their Budgets To Internet Advertising
      And Digital Marketing Solutions.*





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.




65




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




As
      a
      direct-to-consumer marketing company we are subject to a variety of federal,
      state and local laws and regulations designed to protect consumers that govern
      certain of our marketing practices, all as more fully set forth in 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.
      During the three months ended February 28, 2007 we recognized a decline in
      our
      email marketing revenue of approximately 43% when compared to the three months
      ended February 28, 2006. We believe that such decline is the result of the
      factors mentioned above, and may continue to decline at higher rates in future
      fiscal periods.




66




*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.




67




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





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




*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.




68




*Our
      Success Depends On Our Ability To Continue Forming Relationships With Other
      Internet And Interactive Media Content, Service 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 and expand existing, profitable advertising and joint
      marketing arrangements, we may suffer substantial adverse consequences to our
      financial condition and results of operations.




69


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


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





*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.




70


*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 2,268,615 shares of our
      outstanding common stock representing approximately 15.19% 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.




Item 5.  Other
      Information




On
      April
      16, 2007, we issued a press release announcing (i) our results of operations
      for
      the quarter ended February 28, 2007; and (ii) that our Board of Directors,
      on
      April 13, 2007, had declared a dividend of $.08 per share to shareholders of
      record as of May 1, 2007, payable on or about May 10, 2007.  A copy of such
      release is filed herewith as an exhibit.




71




**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
                *




99.1
            April
                16, 2007 Press Release*





*  Filed
      herewith.





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





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





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




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.By:
            /s/
              Jeffrey L. SchwartzJeffrey
                L. SchwartzChairman
                and CEO Chairman and CEODate:April
              16, 2007
            (Principal Executive
              Officer)


By:
            /s/ Daniel
              HarveyDaniel
              HarveyChief
              Financial OfficerDate: April
              16,
              2007
            (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
                *





99.1
            April
                16, 2007 Press Release*





*  Filed
      herewith.





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





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





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




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