**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-Q**





(Mark
      One)





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




For
      the
      quarterly period ended May 31, 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 Plaza Pearl 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 15,039,870
      (as of 07/13/07).








**TRAFFIX,
      INC.**


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


**FILED
      WITH THE SECURITIES AND EXCHANGE COMMISSION**


**QUARTER
      ENDED MAY 31, 2007**





**ITEMS
      IN FORM 10-Q**


**Page****Part
                  I**
              
              **Financial
                  Information**Item
                  1.
              
              Financial
                  StatementsConsolidated
                  Balance Sheets at May 31, 2007 (Unaudited) and November 30, 2006
                  (Audited)
              
              4Consolidated
                  Statements of Income for the three and six months ended May 31,
                  2007 and
                  May 31, 2006 (Unaudited)
              
              5Consolidated
                  Statements of Cash Flows for the six months ended May 31, 2007
                  and May 31,
                  2006 (Unaudited)
              
              6Consolidated
                  Statement of Shareholders’ Equity for the six months ended May 31, 2007
                  (Unaudited)
              
              7Notes
                  to Consolidated Financial Statements (Unaudited)
              
              8Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              23Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              NoneItem
                  4.
              
              Controls
                  and Procedures
              
              70**Part
                  II**
              
              **Other
                  Information**Item
                  1.
              
              Legal
                  Proceedings
              
              71Item
                  1A.
              
              Risk
                  Factors
              
              72Item
                  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
              
              80Item
                  6.
              
              Exhibits
              
              80**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 as of 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**
  **May
                    31, 2007**
                
                **November
                    30, 2006****(Unaudited)****Assets**Current
                    assets:Cash
                    and cash equivalents
                
                $
                8,382,762
                
                $
                8,972,197Marketable
                    securities
                
                
                20,484,815
                
                
                21,433,775Accounts
                    receivable, trade, net of allowance for doubtful accounts of
                    $1,039,463 at
                    May 31, 2007 and $1,079,661 at November 30, 2006
                
                
                8,680,336
                
                
                8,975,402Deferred
                    income taxes
                
                
                395,229
                
                
                451,909Prepaid
                    expenses and other current assets
                
                
                664,371
                
                
                957,674**Total
                    current assets**
                
                
                38,607,513
                
                
                40,790,957Property
                    and equipment, net
                
                
                1,884,620
                
                
                1,965,183Goodwill
                
                
                9,929,946
                
                
                7,913,007Other
                    intangibles, net
                
                
                2,830,405
                
                
                1,210,257Deferred
                    income taxes
                
                
                982,749
                
                
                846,223**Total
                    assets**
                
                $
                54,235,233
                
                $
                52,725,627**Liabilities
                    and shareholders' equity**Current
                    liabilities:Accounts
                    payable
                
                $
                4,709,058
                
                $
                4,692,374Accrued
                    expenses
                
                
                3,051,136
                
                
                3,831,223Due
                    to related parties
                
                
                -
                
                
                90,000Income
                    taxes payable
                
                
                327,432
                
                
                470,000**Total
                    liabilities**
                
                
                8,087,626
                
                
                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; issued
                    and
                    outstanding 14,968,624 shares and 14,365,671 shares,
                    respectively
                
                
                14,968
                
                
                14,365Additional
                    paid-in capital
                
                
                44,760,678
                
                
                42,286,760Retained
                    earnings
                
                
                -
                
                
                -Accumulated
                    other comprehensive income
                
                
                1,371,961
                
                
                1,027,268**Total
                    shareholders' equity**
                
                
                46,147,607
                
                
                43,328,393**Total
                    liabilities and shareholders' equity**
                
                $
                54,235,233
                
                $
                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**
                  
                  **Six
                      Months Ended****May
                      31, 2007**
                  
                  **May
                      31, 2006**
                  
                  **May
                      31, 2007**
                  
                  **May
                      31, 2006**Net
                      revenue
                  
                  $
                  19,800,440
                  
                  $
                  18,964,132
                  
                  $
                  37,834,671
                  
                  $
                  35,986,944Cost
                      of revenue
                  
                  
                  13,564,135
                  
                  
                  11,876,559
                  
                  
                  25,459,624
                  
                  
                  22,830,169**GROSS
                      PROFIT**
                  
                  
                  6,236,305
                  
                  
                  7,087,573
                  
                  
                  12,375,047
                  
                  
                  13,156,775Selling
                      expenses
                  
                  
                  1,179,438
                  
                  
                  1,826,296
                  
                  
                  2,261,407
                  
                  
                  3,210,166General
                      and administrative expenses
                  
                  
                  4,045,161
                  
                  
                  4,172,235
                  
                  
                  8,034,773
                  
                  
                  8,082,156Bad
                      debt (recapture) expense
                  
                  
                  (91,272
                  )
                  
                  10,026
                  
                  
                  (27,851
                  )
                  
                  94,312**INCOME
                      FROM OPERATIONS**
                  
                  
                  1,102,978
                  
                  
                  1,079,016
                  
                  
                  2,106,718
                  
                  
                  1,770,141Other
                      income (expense):Interest
                      income and dividends
                  
                  
                  294,601
                  
                  
                  254,380
                  
                  
                  574,827
                  
                  
                  496,372Realized
                      gains (losses) on marketable securities
                  
                  
                  17,548
                  
                  
                  -
                  
                  
                  36,654
                  
                  
                  (18,352
                  )Other
                      non-operating income (expense)
                  
                  
                  (7,470
                  )
                  
                  (26,468
                  )
                  
                  677
                  
                  
                  (22,351
                  )Minority
                      interest in income of consolidated subsidiary
                  
                  
                  -
                  
                  
                  (87,905
                  )
                  
                  (48,000
                  )
                  
                  (288,000
                  )**INCOME
                        BEFORE PROVISIONFOR
                        INCOME TAXES**
                  
                  
                  1,407,657
                  
                  
                  1,219,023
                  
                  
                  2,670,876
                  
                  
                  1,937,810Provision
                      for income taxes
                  
                  
                  642,778
                  
                  
                  582,062
                  
                  
                  1,227,774
                  
                  
                  878,131**NET
                      INCOME**
                  
                  $
                  764,879
                  
                  $
                  636,961
                  
                  $
                  1,443,102
                  
                  $
                  1,059,679Basic
                      earnings per share (Note 3):Net
                      income
                  
                  $
                  0.05
                  
                  $
                  0.04
                  
                  $
                  0.10
                  
                  $
                  0.07Weighted
                      average shares outstanding
                  
                  
                  14,899,552
                  
                  
                  14,271,369
                  
                  
                  14,661,972
                  
                  
                  14,249,337Diluted
                      earnings per share (Note 3):Net
                      income
                  
                  $
                  0.05
                  
                  $
                  0.04
                  
                  $
                  0.10
                  
                  $
                  0.07Weighted
                      average shares outstanding
                  
                  
                  15,070,141
                  
                  
                  14,487,693
                  
                  
                  14,996,014
                  
                  
                  14,451,079Cash
                      dividends declared per common share
                  
                  $
                  0.08
                  
                  $
                  0.08
                  
                  $
                  0.16
                  
                  $
                  0.16
 
 The
                    accompanying notes are an integral part of these financial
                    statements
 
 5
 **TRAFFIX,
              INC. AND SUBSIDIARIES**
 **CONSOLIDATED
              STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Six
                        Months Ended****May
                        31, 2007**
                    
                    **May
                        31, 2006**Cash
                        flows from operating activities:Net
                        income
                    
                    $
                    1,443,102
                    
                    $
                    1,059,679Adjustments
                        to reconcile net income to net cash provided by operating
                        activities:Depreciation
                        and amortization
                    
                    
                    1,037,555
                    
                    
                    1,153,573Stock-based
                        compensation
                    
                    
                    158,961
                    
                    
                    473,335Provision
                        for uncollectible accounts
                    
                    
                    (27,851
                    )
                    
                    94,312Deferred
                        income taxes
                    
                    
                    (133,594
                    )
                    
                    149,322Net
                        (gains) losses on sale of marketable securities
                    
                    
                    (36,654
                    )
                    
                    18,352Minority
                        interest
                    
                    
                    48,000
                    
                    
                    288,000Changes
                        in assets and liabilities of business, net of
                        acquisitions:Accounts
                        receivable
                    
                    
                    322,917
                    
                    
                    1,722,387Prepaid
                        expenses and other current assets
                    
                    
                    293,303
                    
                    
                    654,743Accounts
                        payable
                    
                    
                    16,684
                    
                    
                    (2,703,914
                    )Income
                        taxes payable
                    
                    
                    (142,568
                    )
                    
                    241,122Due
                        to related parties
                    
                    
                    (90,000
                    )
                    
                    121,441Other,
                        principally accrued expenses
                    
                    
                    (822,254
                    )
                    
                    648,265**Net
                        cash provided by operating activities**
                    
                    
                    2,067,601
                    
                    
                    3,920,617Cash
                        flows from investing activities:Purchases
                        of securities
                    
                    
                    (62,703,258
                    )
                    
                    (93,541,141
                    )Proceeds
                        from sales of securities
                    
                    
                    63,846,957
                    
                    
                    97,416,008Payment
                        for asset acquisition, net of cash received
                    
                    
                    (1,590,000
                    )
                    
                    (886,503
                    )Capital
                        expenditures
                    
                    
                    (239,988
                    )
                    
                    (257,749
                    )**Net
                        cash (used in) provided by investing activities**
                    
                    
                    (686,289
                    )
                    
                    2,730,615Cash
                        flows from financing activities:Dividends
                        paid
                    
                    
                    (2,350,134
                    )
                    
                    (2,279,468
                    )Distribution
                        to minority interest holder
                    
                    
                    (144,000
                    )
                    
                    (436,000
                    )Repayment
                        of capital lease obligation
                    
                    
                    (5,833
                    )
                    
                    (162,750
                    )Proceeds
                        from stock options exercised
                    
                    
                    388,407
                    
                    
                    219,215Excess
                        tax benefits from stock-based compensation
                    
                    
                    42,519
                    
                    
                    21,346**Net
                        cash used in financing activities**
                    
                    
                    (2,069,041
                    )
                    
                    (2,637,657
                    )Effect
                        of exchange rate changes on cash and cash equivalents
                    
                    
                    98,294
                    
                    
                    5,214Net
                        (decrease) increase in cash and cash equivalents
                    
                    
                    (589,435
                    )
                    
                    4,018,789Cash
                        and cash equivalents, beginning of period
                    
                    
                    8,972,197
                    
                    
                    9,335,723**Cash
                        and cash equivalents, end of period**
                    
                    $
                    8,382,762
                    
                    $
                    13,354,512
 
 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 SIX MONTHS ENDED MAY 31, 2007** **(UNAUDITED)**
 **Common
                            Stock**
                        
                        **Additional**
                          **Paid-in**
                        
                        **Retained**
                        
                        **Accumulated**
                          **Other**
                          **Comprehensive**
                        
                        **Total**
                          **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 six monthsended
                            May 31, 2007
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,443,102
                        
                        
                        
                        
                        
                        1,443,102Unrealized
                            gains on available-for-sale securities
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        104,337
                        
                        
                        104,337Foreign
                            Currency Translationadjustment
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        240,356
                        
                        
                        240,356Comprehensive
                            Income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,787,795Stock-based
                            compensation expense
                        
                        
                        
                        
                        
                        
                        
                        
                        158,961
                        
                        
                        
                        
                        
                        
                        
                        
                        158,961Dividends
                            declared
                        
                        
                        
                        
                        
                        
                        
                        
                        (907,032
                        )
                        
                        (1,443,102
                        )
                        
                        
                        
                        
                        (2,350,134
                        )Stock
                            option exercises
                        
                        
                        88,333
                        
                        
                        88
                        
                        
                        388,318
                        
                        
                        
                        
                        
                        
                        
                        
                        388,406Tax
                            benefit from exercise ofstock
                            options
                        
                        
                        
                        
                        
                        
                        
                        
                        42,519
                        
                        
                        
                        
                        
                        
                        
                        
                        42,519Common
                            stock issued in connectionwith
                            terms of prior year acquisition
                        
                        
                        14,620
                        
                        
                        15
                        
                        
                        74,985
                        
                        
                        
                        
                        
                        
                        
                        
                        75,000Common
                            stock issued in connectionwith
                            terms of current acquisition ofminority
                            interest
                        
                        
                        500,000
                        
                        
                        500
                        
                        
                        2,716,167
                        
                        
                        
                        
                        
                        
                        
                        
                        2,716,667**Balance,
                            May 31, 2007**
                        
                        
                        14,968,624
                        
                        $
                        14,968
                        
                        $
                        44,760,678
                        
                        $
                        -
                        
                        $
                        1,371,961
                        
                        $
                        46,147,607
 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.
 
 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. 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 therefor.
 
 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 and six-month periods ended May 31, 2007 are not necessarily
        indicative of the results to be expected for the subsequent two quarters
        or the
        full fiscal year ending November 30, 2007.
  8
 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 the quarter ended May 31, 2006. Such
        reclassifications were related to the reclassification of cost of revenue
        items
        and general and administrative salaries and expenses based on a current and
        retroactive study of the respective services performed for the May 31, 2006
        periods, to conform the presentation of such periods to that of the full
        fiscal
        year ended November 30, 2006 presentation, as follows:
 **Three
                    months ended May 31,****2006**
                
                **Reclassifications**
                
                **As
                    revised**Income
                    StatementNet
                    revenue
                
                $
                18,964,132
                
                $
                -
                
                $
                18,964,132Cost
                    of revenue
                
                
                10,421,632
                
                
                1,454,927
                
                
                11,876,559Gross
                    Profit
                
                
                8,542,500
                
                
                (1,454,927
                )
                
                7,087,573Selling
                    expenses
                
                
                1,826,296
                
                
                -
                
                
                1,826,296General
                    and Administrative expenses
                
                
                5,031,628
                
                
                (859,393
                )
                
                4,172,235Other
                    operating (income) expense
                
                
                18,517
                
                
                (18,517
                )
                
                -Amortization
                    of intangibles
                
                
                361,817
                
                
                (361,817
                )
                
                -Depreciation
                    expense
                
                
                215,200
                
                
                (215,200
                )
                
                -Bad
                    debt expense
                
                
                10,026
                
                
                
                
                
                10,026Income
                    from operations
                
                $
                1,079,016
                
                $
                -
                
                $
                1,079,016


9
  **Six
                  months ended May 31, 2006**
              
              **Reclassifications**
              
              **As
                  revised**Income
                  StatementNet
                  revenue
              
              $
              35,986,944
              
              $
              -
              
              $
              35,986,944Cost
                  of revenue
              
              
              19,990,272
              
              
              2,839,897
              
              
              22,830,169Gross
                  Profit
              
              
              15,996,672
              
              
              (2,839,897
              )
              
              13,156,775Selling
                  expenses
              
              
              3,210,166
              
              
              -
              
              
              3,210,166General
                  and Administrative expenses
              
              
              9,725,850
              
              
              (1,643,694
              )
              
              8,082,156Other
                  operating (income) expense
              
              
              42,630
              
              
              (42,630
              )
              
              -Amortization
                  of intangibles
              
              
              723,792
              
              
              (723,792
              )
              
              -Depreciation
                  expense
              
              
              429,781
              
              
              (429,781
              )
              
              -Bad
                  debt expense
              
              
              94,312
              
              
              
              
              
              94,312Income
                  from operations
              
              $
              1,770,141
              
              $
              -
              
              $
              1,770,141
 
 During
        the six months ended May 31, 2007 and May 31, 2006, options for 88,333 shares
        and 47,331 shares of the Company’s common stock, respectively, were exercised by
        its employees and directors. Tax benefits of $42,519 and $21,346 in the six
        months ended May 31, 2007 and May 31, 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.
 10
 **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 six months ended May 31, 2007, there
        were no significant changes in the Company’s accounting policies.
 
 **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 and six-month periods ended
        May
        31, 2007 and May 31, 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 six months ended May 31, 2007 accounted for
        8.3%,
        8.1%, 8.1%, 6.1% and 4.3% of consolidated net revenues during such
        period.
 
 During
        the six months ended May 31, 2007, 4.1% of the Company’s revenue was derived
        from its proprietary Personals service, iMatchUp.com., as compared to 10.3%
        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 and six-month periods ended May 31,
        2007 and May 31, 2006 includes $65,000 and $301,100, and $159,000 and $473,300,
        respectively, of compensation expense and $22,100 and $102,400, and $54,000
        and
        $160,800, 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.
 **Six
                    Months Ended****May
                    31, 2007**
                
                **May
                    31, 2006****Supplemental
                    Cash Flow Disclosure**Cash
                    paid during the six months ended for:Income
                    taxes paid (refunds received), net
                
                $
                1,572,981
                
                $
                466,251
  12
  **Non-cash
        Investing and Financing Activities**
 
 Non-cash
        investing and financing activities are excluded from the consolidated statement
        of cash flows. For the six months ended May 31, 2007 and May 31, 2006, non-cash
        activities included the following items:
  **Investing
          Activities:**
  **Six
                    Months Ended****May
                    31,**
                
                **May
                    31,****Stock
                    Issued in connection with Acquisitions (Also see notes 6 and
                    8)**
                
                **2007**
                
                **2006**Hot
                    Rocket Marketing, Inc.
                
                
                -see
                    (1) below
                
                
                -see
                    (2) belowEZTracks,
                    L.P.
                
                
                -see
                    (1) below
                
                $
                -
  (1)
        The
        Company issued 500,000 shares of its common stock on March 8, 2007, having
        a
        fair market value of $2,716,667. The issuance of such shares related to the
        Company’s minority interest acquisition in EZTracks, L.P. Approximately 14,600
        shares of the Company’s
        common stock, valued at $75,000, were issued on April 25, 2007, as those
        shares related to a contingent earn-out attained by the Company’s Hot Rocket
        Marketing, Inc. subsidiary, effective January 31, 2007 (see “Note 6”).
  (2)
        On
        May 10, 2006, as partial payment of contingent purchase price (see Note 6),
        the
        Company issued 103,354 shares of common stock having a fair market value
        of
        $580,596.
 
 Non-cash
        investing activities for marketable securities relating to unrealized gains
        and
        losses were $158,085 and $51,442, for the six months ended May 31, 2007 and
        2006, respectively.
  13
 **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**
                
                **Six
                    Months Ended****May
                    31, 2007**
                
                **May
                    31, 2006**
                
                **May
                    31, 2007**
                
                **May
                    31,****2006**Denominator:Denominator
                    for basic earnings per share- weighted average shares
                
                
                14,899,552
                
                
                14,271,369
                
                
                14,661,972
                
                
                14,249,337Effect
                    of dilutive securities:Stock
                    options
                
                
                170,589
                
                
                216,324
                
                
                334,042
                
                
                201,742Denominator
                    for diluted earnings per share- adjusted weighted average
                    shares
                
                
                15,070,141
                
                
                14,487,693
                
                
                14,996,014
                
                
                14,451,079
  Options
        to purchase 1,785,850 and 1,862,150 shares of common stock for the three
        months
        ended May 31, 2007 and 2006 were outstanding but were not included in the
        computation of diluted earnings per share because their effect would be
        anti-dilutive.
  **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:
  **ThreeMonths
                    Ended**
                
                **Six
                    Months
                    Ended****May
                    31,
                    2007**
                
                **May
                    31,
                    2006**
                
                **May
                    31, 2007**
                
                **May
                    31, 2006**Net
                    income
                
                $
                764,879
                
                $
                636,961
                
                $
                1,443,102
                
                $
                1,059,679Other
                    comprehensive income (loss) , net of tax:Foreign
                    currency translation adjustment
                
                
                299,762
                
                
                74,938
                
                
                240,356
                
                
                156,706Unrealized
                    gains from available-for-sale securities, arising during the
                    six-month
                    period, net of income taxes of $158,085 and $53,750 for May 31,
                    2007 and
                    $51,442 and $9,929 for May 31, 2006
                
                
                99,004
                
                
                (58,533
                )
                
                104,337
                
                
                14,013Comprehensive
                    income
                
                $
                1,163,645
                
                $
                653,366
                
                $
                1,787,795
                
                $
                1,230,398
  14
  **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 marketing 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 revenue accounts.
  Total
        advertising and marketing costs included in cost of revenue for the three
        months
        ended May 31, 2007 and 2006 were approximately $13.6 million and $11.9 million,
        respectively, and for the six months ended May 31, 2007 and 2006 were
        approximately $25.5 million and $22.8 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.
 
 15
 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.
 
 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 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 and
        expected to be completed by August 31, 2007): $2,254,000 was tentatively
        allocated to the amortizable license-intangible and trade name (see Note
        8),
        with an assigned useful life of 7.5 years (the entire initial license
        term being 10 years) and the balance of the purchase price, or
        approximately $1,583,000, was allocated to unamortizable goodwill.
 
 16
 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.
 
 **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.
  17
 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
        acquisition 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).
  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 was settled by a cash payment of
        $300,000 and the issuance on May 4, 2007, of 14,620 shares, then having an
        approximate fair-market value of $75,000.
  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 acquisition agreement. Hot Rocket did not
        reach
        either of the EBITDA thresholds for those periods.
 
 **7.
        Accrued Expenses**
  Accrued
        expenses are comprised of the following at:
 **May
                    31, 2007**
                
                **November
                    30, 2006****(Unaudited)**Accrued
                    payroll and bonuses
                
                $
                1,117,015
                
                $
                1,553,107Advances
                    from customers
                
                
                473,847
                
                
                634,353Accrued
                    fee share liabilities
                
                
                144,929
                
                
                309,494Capital
                    lease obligations
                
                
                -
                
                
                6,844Accrued
                    marketing media costs
                
                
                320,233
                
                
                690,729Accrued
                    search engine marketing costs
                
                
                219,594
                
                
                119,153Accrued
                    professional fees
                
                
                394,918
                
                
                289,244Minority
                    interest income payable - December 2006
                
                
                48,000
                
                
                -Accrued
                    email costs
                
                
                120,077Accrued
                    property taxes
                
                
                11,477
                
                
                30,380Accrued
                    straight-line rent concession
                
                
                78,996
                
                
                82,705Other
                    accrued liabilities
                
                
                122,050
                
                
                115,214Total
                    accrued liabilities
                
                $
                3,051,136
                
                $
                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 May 31, 2007
                
                As
                    of November 30, 2006Gross
                  Carrying
                  Amount
                
                Accumulated
                  Amortization
                
                Gross
                  Carrying
                  Amount
                
                Accumulated
                  AmortizationUnamortized
                    intangible assets:Goodwill
                
                $
                9,929,946
                
                
                
                
                $
                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
                
                
                162,547
                
                
                246,915
                
                
                131,756*Infiknowledge
                    identifiable intangibles:*Internet
                    Game Suite
                
                
                287,079
                
                
                285,833
                
                
                269,169
                
                
                266,523Intellectual
                    Property Assets
                
                
                215,308
                
                
                214,374
                
                
                201,876
                
                
                199,891Market
                    Position Acquired
                
                
                239,231
                
                
                238,193
                
                
                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
                
                
                523,109
                
                
                523,109
                
                
                422,609Software
                
                
                963,951
                
                
                864,949
                
                
                963,951
                
                
                716,672*Hot
                    Rocket identifiable intangibles*Restrictive
                    Covenants
                
                
                569,394
                
                
                269,197
                
                
                569,394
                
                
                212,257Software
                
                
                1,012,257
                
                
                797,621
                
                
                1,012,257
                
                
                628,911*EZ
                    Tracks identifiable intangibles*Music
                    Licensing and trade name
                
                
                2,254,218
                
                
                125,234
                
                
                -
                
                
                -Total
                    amortizable intangible assets
                
                $
                7,817,307
                
                $
                4,986,902
                
                $
                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.




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
              
              $
              28,563
              
              $
              45,805
              
              $
              10,000
              
              $
              -
              
              $
              -*Total
                  Group's amortization*
              
              
              28,563
              
              
              45,805
              
              
              10,000
              
              
              -
              
              
              -*Infiknowledge
                  Identifiable**Intangible
                  amortization:*Internet
                  Game Suite
              
              
              266
              
              
              543
              
              
              437
              
              
              -
              
              
              -Intellectual
                  Property Assets
              
              
              200
              
              
              407
              
              
              327
              
              
              -
              
              
              -Market
                  Position Acquired
              
              
              224
              
              
              452
              
              
              362
              
              
              -
              
              
              -*Total
                  Group's amortization*
              
              
              690
              
              
              1,402
              
              
              1,126
              
              
              -
              
              
              -*SendTraffic
                  Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Software
              
              
              86,621
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -*Total
                  Group's amortization*
              
              
              86,621
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -*Hot
                  Rocket Identifiable**Intangible
                  amortization:*Restrictive
                  Covenants
              
              
              56,939
              
              
              113,879
              
              
              113,879
              
              
              15,500
              
              
              -Software
              
              
              168,709
              
              
              45,927
              
              
              -
              
              
              -
              
              
              -*Total
                  Group's amortization*
              
              
              225,648
              
              
              159,806
              
              
              113,879
              
              
              15,500
              
              
              -*EZ
                  Tracks Identifiable**Intangible
                  amortization:*Music
                  Lic.and trade name
              
              
              150,281
              
              
              300,562
              
              
              300,562
              
              
              300,562
              
              
              300,562*Total
                  Group's amortization*
              
              
              150,281
              
              
              300,562
              
              
              300,562
              
              
              300,562
              
              
              300,562**Summary
                  of Identifiable****Intangibles:***GroupLotto:*
              
              
              28,563
              
              
              45,805
              
              
              10,000
              
              
              -
              
              
              -*Infiknowledge:*
              
              
              690
              
              
              1,402
              
              
              1,126
              
              
              -
              
              
              -*SendTraffic:*
              
              
              86,621
              
              
              12,381
              
              
              -
              
              
              -
              
              
              -*Hot
                  Rocket:*
              
              
              225,648
              
              
              159,806
              
              
              113,879
              
              
              15,500
              
              
              -*EZ
                  Tracks:*
              
              
              150,281
              
              
              300,562
              
              
              300,562
              
              
              300,562
              
              
              300,562*Totals*
              
              $
              491,803
              
              
              519,956
              
              
              425,567
              
              
              316,062
              
              
              300,562


20




**9.
      Income Taxes**




The
      Company’s income tax provision for the three and six months ended May 31, 2007
      was approximately $643,000 and $1,228,000, respectively, which represents
      expense related to current year operations.




The
      Company’s income tax provision for the three and six months ended May 31, 2006
      was approximately $582,000 and $878,000, respectively, which represents expense
      related to current year operations.




The
      effective annualized income tax rate for the three and six months ended May
      31,
      2007 was 45.7% and 46.0%, respectively. 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 the Company’s consolidated financial position, results of
      operations or cash flows.





*DADA
      USA INC. f/k/a DADAMobile Inc. v. Q121 Inc. d/b/a MXFOCUS 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).




21




The
      action related to a marketing agreement between Dada and Q121 Inc., the
      Company’s subsidiary. Dada alleged, *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 sought damages in an amount which
      the plaintiff alleged it believed to be in excess of ten million
      dollars.




This
      matter has been settled and the Company has received a release from Dada; the
      Company made no payment to Dada as part of the settlement.




Simultaneously
      with this settlement, the Company also settled a claim it had asserted against
      the parent of Dada USA with respect to a separate marketing agreement (Q121,
      Inc. v. Dada Mobile S.p.A., U.S. District Court, Southern District of New York,
      No. 06 CV. 11342). Pursuant to that settlement, the Company received a payment
      of $350,000 and exchanged releases.




*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.




22





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.


*Curtis
        J. Jackson/Shoot the Rapper Ads*
 
 In
        May
        2007, representatives of the rapper Curtis J. Jackson (p/k/a 50 Cent) contacted
        the Company with respect to certain ads which they claimed used Mr. Jackson’s
        image without authority. The Company thereafter ceased using that copy and
        replaced it with a new one.  Mr. Jackson's representatives have, however,
        again contacted the Company and claimed that the ads continue to run; they
        have
        advised that their client is willing to settle the matter for a payment of
        $500,000; and they have threatened to file a complaint in Supreme Court,
        New
        York County.  The Company believes that there is no merit to the claim and,
        in the event it is not resolved amicably, intends vigorously to defend against
        any complaint that may be filed.




Tactara
      LLC


In
        June
        2007, Tactara LLC (“Tactara”) filed a complaint in the Superior Court of
        California, Los Angeles, alleging that the Company breached a service order
        agreement and seeking damages of $189,000 plus interest. The Company's contract
        with Tactara provides for arbitration; the Company has requested that the
        action
        be withdrawn; and counsel are currently working on a stipulation to stay
        the
        action. The Company believes that there is no merit to the claim and in the
        event Tactara commences arbitration, the Company intends vigorously to defend
        against it.




**11.
      Subsequent Events**




On July
      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 May 31,
      2007. Such dividend is payable on or about August 10, 2007 to holders of record
      of such shares at the close of business on August 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.





**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 our Company's management, with respect to future
      events and are subject to certain risks, uncertainties and assumptions, which
      could cause the actual results to differ materially from those reflected in
      the
      forward-looking statements.




23


**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”). Our subsidiary, 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.




24





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 the we 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 and expected to be completed by August
      31, 2007): $2,254,000 was tentatively allocated to amortizable
      license-intangible and trade name with an assigned useful life of 7.5 years
      (the
      entire license term being 10 years) and the balance of the purchase price,
      or
      approximately $1,583,000, was allocated to unamortizable
      goodwill.




25





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
      acquisition 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).




26




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 was settled by a cash payment of $300,000
      and
      the issuance on May 4, 2007, of 14,620 shares, then having an approximate
      fair-market value of $75,000.




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”.




27




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.




28




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 six months ended May 31, 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.




29




*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.




30




*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.




31





*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 period’s 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.




32




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 $513,000 and $414,000 during the six-month periods ended May
      31,
      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 and
      six-month periods ended May 31, 2007 and May 31, 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.




33




THREE
      MONTHS ENDED MAY 31, 2007 AND 2006




Our
      net
      revenues, and the disclosure of our revenue components, for each of the three
      months ended May 31, 2007 and May 31, 2006, are set forth below:


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




**Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              12,170,500
              
              $
              12,680,966
              
              $
              (510,466
              )
              
              -4
              %Search
                  Engine Marketing
              
              
              6,796,984
              
              
              4,221,023
              
              
              2,575,961
              
              
              61
              %Personals
              
              
              607,030
              
              
              1,860,152
              
              
              (1,253,122
              )
              
              -67
              %Internet
                  game development
              
              
              225,926
              
              
              201,991
              
              
              23,935
              
              
              12
              %**Consolidated
                  totals**
              
              $
              19,800,440
              
              $
              18,964,132
              
              $
              836,308
              
              
              4
              %


Net
      Revenue increased approximately $0.8 million, or 4%, to $19.8 million for the
      three months ended May 31, 2007, from $19.0 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
      services ($2.6 million, or 61%), offset by a combined decline in our Online
      Advertising and our Personals business of approximately $0.5 million, or 4.0%,
      and $1.3 million, or 67%, respectively. Internet Game Development revenues
      remained flat at approximately $0.2 million, during both three-month periods.
      Search Engine Marketing service 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 $8.3 million from $7.6 million, for an increase of approximately
      $0.7 million, or 9%, and is primarily the result of our continued emphasis
      on
      generating revenue via our Websites for our recently developed wireless client
      relationships, offset by declines in other historically traditional clientele;
      (b) our Email Marketing sub-set revenue declined to $0.8 million from $2.3
      million, for a decrease of approximately $1.5 million, or 64%, and resulted
      from
      internet service providers’ consumer contact restrictions negatively impacting
      our ability to deliver email and reach our permission based consumers; (c)
      revenues generated from our Hot Rocket Marketing subsidiary increased to $3
      million from $2.8 million, for an increase of approximately $0.2 million, or
      9%,
      and resulted from expansion in their client base, and improved volume with
      existing clients.




34




Our
      Personals business revenue declined as a result of our prior year suspension
      of
      consumer enrollments based on the unprofitable values being paid for such new
      personals enrollees. We continue to generate revenues from the declining base
      of
      customers acquired in prior years.




Our
      cost
      of revenue during the three months ended May 31, 2007 and May 31, 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 May 31, 2007 and May 31, 2006, are set forth below:


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




**Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              7,897,199
              
              $
              7,007,240
              
              $
              889,959
              
              
              13
              %Search
                  Engine Marketing
              
              
              5,561,671
              
              
              3,550,000
              
              
              2,011,671
              
              
              57
              %Personals
              
              
              35,313
              
              
              1,255,954
              
              
              (1,220,641
              )
              
              -97
              %Internet
                  game development
              
              
              69,952
              
              
              63,365
              
              
              6,587
              
              
              10
              %**Consolidated
                  totals**
              
              $
              13,564,135
              
              $
              11,876,559
              
              $
              1,687,576
              
              
              14
              %


35


Cost
      of
      revenues on a consolidated basis increased $1.7 million, or 14%, to $13.6
      million for the three months ended May 31, 2007, from $11.9 million in the
      comparable prior year period.




The
      significant factors contributing to the increase in consolidated costs of
      revenues were related to an increase of $2.0 million, or 57%, 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 of $1.2 million, or 97%, which relates to the
      suspension in outlays for new Personals enrollees based on the prohibitive
      market 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
      May
      31, 2007 and May 31, 2006, are set forth below:


***Gross
          Profit Components*** ***Online
          Advertising and Media Service Activities***
  **Three
                    Months Ended**
                
                **Change**
                
                **Change****May
                    31,**
                
                **May
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2007**
                
                **2006**
                
                $$$
                
                %%%Online
                    Advertising
                
                $
                4,273,301
                
                $
                5,673,726
                
                $
                (1,400,425
                )
                
                -25
                %Search
                    Engine Marketing
                
                
                1,235,313
                
                
                671,023
                
                
                564,290
                
                
                84
                %Personals
                
                
                571,717
                
                
                604,198
                
                
                (32,481
                )
                
                -5
                %Internet
                    game development
                
                
                155,974
                
                
                138,626
                
                
                17,348
                
                
                13
                %**Consolidated
                    totals**
                
                $
                6,236,305
                
                $
                7,087,573
                
                $
                (851,268
                )
                
                -12
                %
  ***Gross
          Profit Components***
 ***Online
          Advertising and Media Service Activities***
 
 **Absolute**
                
                **Relative****Three
                    Months Ended**
                
                **Change**
                
                **Change****May
                    31,**
                
                **May
                    31,**
                
                **Inc(Dec)**
                
                **Inc(Dec)****2007**
                
                **2006**
                
                %%%
                
                %%%Online
                    Advertising
                
                
                35.1
                %
                
                44.7
                %
                
                -9.6
                %
                
                -21.5
                %Search
                    Engine Marketing
                
                
                18.2
                %
                
                15.9
                %
                
                2.3
                %
                
                14.5
                %Personals
                
                
                94.2
                %
                
                32.5
                %
                
                61.7
                %
                
                189.8
                %Internet
                    game development
                
                
                69.0
                %
                
                68.6
                %
                
                0.4
                %
                
                0.6
                %**Consolidated
                    totals**
                
                
                31.5
                %
                
                37.4
                %
                
                -5.9
                %
                
                -15.8
                %
 
 36




Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 31.5% during
      the three months ended May 31, 2007, compared to 37.4% in the prior year’s
      comparable period, representing an absolute percentage point decrease of 5.9%,
      or a 15.8% decline on a relative basis when compared to the prior year’s
      period.




The
      15.8%
      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. Offsetting the decline are 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 May 31, 2007 and
      May
      31, 2006 are set forth below:




***Selling
        Expense Components*** ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Fee
                  share commissions
              
              $
              220,505
              
              $
              1,003,515
              
              $
              (783,010
              )
              
              -78
              %Selling
                  salaries and related costs
              
              
              886,837
              
              
              761,688
              
              
              125,149
              
              
              16
              %Travel,
                  entertainment, shows, other
              
              
              72,096
              
              
              61,093
              
              
              11,003
              
              
              18
              %**Consolidated
                  totals**
              
              $
              1,179,438
              
              $
              1,826,296
              
              $
              (646,858
              )
              
              -35
              %


Selling
      expenses, on a consolidated basis, decreased approximately $0.6 million, or 35%,
      to $1.2 million during the three months ended May 31, 2007 from $1.8 million
      during the three months ended May 31, 2006. The decrease resulted from an
      approximate $0.8 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 amounts owing 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 increased comparable period revenues.




37




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 May 31, 2007
      and
      May 31, 2006 are set forth below:


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




**Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              2,347,994
              
              $
              2,553,039
              
              $
              (205,045
              )
              
              -8
              %Professional
                  fees
              
              
              424,244
              
              
              435,185
              
              
              (10,941
              )
              
              -3
              %Insurance
                  costs
              
              
              230,018
              
              
              237,201
              
              
              (7,183
              )
              
              -3
              %Occupancy
                  and equipment costs
              
              
              156,805
              
              
              121,933
              
              
              34,872
              
              
              29
              %Depreciation
                  and amortization
              
              
              394,524
              
              
              384,470
              
              
              10,054
              
              
              3
              %All
                  other miscellanous G&A expenses
              
              
              491,576
              
              
              440,407
              
              
              51,169
              
              
              12
              %**Consolidated
                  totals**
              
              $
              4,045,161
              
              $
              4,172,235
              
              $
              (127,074
              )
              
              -3
              %


38




General
      and Administrative expenses ("G&A") on a consolidated basis decreased by
      $127,000, or 3%, when comparing G&A of $4.0 million for the three months
      ended May 31, 2007 to G&A of $4.2 million for the three months ended May 31,
      2006. The net decrease was attributable to a decline in compensation expense,
      principally related to a decline in SFAS 123R non-cash compensation expense
      of
      $236,000, offset by combined increases in occupancy costs, amortization and
      miscellaneous G&A of approximately $0.1 million or 10%. Depreciation and
      amortization costs had a net increase based on certain assets reaching their
      useful life, offset by additional amortization and depreciation on current
      fiscal year acquisitions.




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 basis. We incurred
      approximately $91,000 in legal fees (exclusive of disbursements) from FKIWSBR
      during the three months ended May 31, 2006.




39




***Bad
        Debt (Recapture) and Expense Components*** ***Online
        Advertising and Media Service Activities***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              (207,690
              )
              $
              (11,243
              )
              $
              (196,447
              )
              
              -1747
              %Search
                  Engine Marketing
              
              
              116,418
              
              
              17,663
              
              
              98,755
              
              
              559
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              -
              
              
              3,606
              
              
              (3,606
              )
              
              100
              %**Consolidated
                  totals**
              
              $
              (91,272
              )
              $
              10,026
              
              $
              (101,298
              )
              
              -1010
              %


Bad
      Debt
      expense decreased on a net basis by approximately $101,000, or 1010%, when
      comparing the three months ended May 31, 2007 with the three months ended May
      31, 2006. The decrease is attributable to certain customer bad debt recaptures
      arising out of current settlements and full satisfaction of prior period
      settlements, offset by the bankruptcy filing of a Search client and adjustments
      to other smaller accounts in our Online Advertising and Search Engine Marketing
      activities, resulting in a net-bad debt recapture of approximately $91,300.
      Our
      allowance for bad debt results from our assessment of the risk of collection
      embedded in our customer base as described below.




40




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**
              
              **May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****income
                  (expense):**
              
              **2007**
              
              **2006**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              294,601
              
              $
              254,380
              
              $
              40,221
              
              
              16
              %Realized
                  gains (losses) on sale ofmarketable
                  securities
              
              
              17,548
              
              
              -
              
              
              17,548
              
              
              100
              %Other
                  non-operating income:Other
                  miscellaneousincome
              
              
              2,676
              
              
              (1,710
              )
              
              4,386
              
              
              256
              %Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (10,146
              )
              
              (24,758
              )
              
              14,612
              
              
              -59
              %Minority
                  interest (income)
              
              
              -
              
              
              (87,905
              )
              
              87,905
              
              
              -100
              %**Total
                  other non-operating****income:**
              
              $
              304,679
              
              $
              140,007
              
              $
              164,672
              
              
              118
              %


41





Consolidated
      Other Non-operating Income (Expense) increased approximately $165,000, from
      approximately $140,000 for the three months ended May 31, 2006, to approximately
      $305,000 for the three months ended May 31, 2007.




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




(a)
            Interest
                income increased approximately $40,000, or 16%, as the result of
                more
                favorable rates available during Fiscal 2007 as compared to Fiscal
                2006 on
                principally similar cash and marketable security
                balances.




(b)
            Realized
                gains on the sale of marketable securities increased by $17,500 when
                comparing current fiscal period gains with no such trading activity
                in
                Fiscal 2006’s comparable period.




42




(c)
            Other
                miscellaneous income increased approximately $4,400 and was primarily
                the
                result of collections from various test marketing projects performed
                for
                our clients.




(d)
            Minority
                Interest resulting from our EZ-Tracks partnership with Madacy
                Entertainment decreased from approximately $88,000 in the second
                quarter
                of Fiscal 2006 to $-0- in the second quarter of Fiscal 2007 as a
                result of
                our acquisition of the related minority interest, effective January
                1,
                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 our 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 May 31,
      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.




43


***The
        following table summarizes the results of EZTracks for the periods indicated
        below:***
  **Three
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Net
                  Revenues
              
              $
              -
              
              $
              2,544,612
              
              $
              (2,544,612
              )
              
              -100
              %Cost
                  of Sales
              
              
              -
              
              
              2,288,894
              
              
              (2,288,894
              )
              
              -100
              %Gross
                  Profit
              
              
              -
              
              
              255,718
              
              
              (255,718
              )
              
              -100
              %General
                  andAdministrative
                  Expenses
              
              
              -
              
              
              77,414
              
              
              (77,414
              )
              
              -100
              %Net
                  Income
              
              $
              -
              
              $
              178,304
              (1)
              $
              (178,304
              )
              
              -100
              %Minority
                  interest
              
              $
              -
              (3)
              $
              87,904
              (2)
              $
              (87,904
              )
              
              -100
              %


(1)
        All
        items included in our Online Advertising and Media Service
        activities.
  (2)
        Represents Madacy Entertainment's 49.3% minority interest.
  (3)
        Madacy Entertainment's 49.3% minority interest was acquired by us effective
        January
        1, 2007.
  **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.




44


Our
      income tax provision for the three months ended May 31, 2007 was approximately
      $643,000, which is tax expense related to current period
      operations.




The
      current year’s estimated effective rate relationship of 45.7% differs
      immaterially from our annual effective rate of 46.2% recognized during the
      year
      ended November 30, 2006. The slight decline in the effective tax rate is
      primarily attributable to state income taxes.





SIX
      MONTHS ENDED MAY 31, 2007 AND 2006




Our
      net
      revenues, and the disclosure of our revenue components, for each of the six
      months ended May 31, 2007 and May 31, 2006, are set forth below:




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





**Six
                Months Ended**
            
            **Change**
            
            **Change****May
                31,**
            
            **May
                31,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Online
                Advertising
            
            $
            22,926,086
            
            $
            23,659,822
            
            $
            (733,736
            )
            
            -3
            %Search
                Engine Marketing
            
            
            12,848,433
            
            
            8,216,376
            
            
            4,632,057
            
            
            56
            %Personals
            
            
            1,546,941
            
            
            3,696,866
            
            
            (2,149,925
            )
            
            -58
            %Internet
                game development
            
            
            513,211
            
            
            413,880
            
            
            99,331
            
            
            24
            %**Consolidated
                totals**
            
            $
            37,834,671
            
            $
            35,986,944
            
            $
            1,847,727
            
            
            5
            %




Net
      Revenue increased approximately $1.8 million, or 5%, to $37.8 million for the
      six months ended May 31, 2007, from $36.0 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 ($4.6 million, or 56%), offset by a combined decline
      in
      our Online Advertising and our Personals business of approximately $0.7 million,
      or 3.0%, and $2.1 million, or 58%, respectively. Internet Game Development
      revenues approximated $0.5 million, for an approximate $0.1 million increase,
      or
      24%. Search Engine Marketing service 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 $15.6 million from $13.3 million,
      for
      an increase of approximately $2.3 million, or 17%, and is primarily the result
      of our increased emphasis on generating revenue via our Websites for our
      recently developed wireless client relationships, offset by declines in other
      historically traditional clientele; (b) our Email Marketing sub-set revenue
      declined to $1.9 million from $4.2 million, for a decrease of approximately
      $2.3
      million, or 55%, and resulted from internet service providers’ consumer contact
      restrictions negatively impacting our ability to deliver email and reach our
      permission based consumers; (c) revenues generated from our Hot Rocket Marketing
      subsidiary, declined to $5.4 million in revenue, from $6.1 million, representing
      an approximate $0.7 million decrease, or 12%.




45




Our
      Personals business revenue declined as a result of decreased consumer
      enrollments based on the unprofitable values being paid for such new personals
      enrollees. We continue to generate revenues from the declining based of
      customers acquired in prior years.




Our
      cost
      of revenue during the six months ended May 31, 2007 and May 31, 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.




46





The
      cost
      of revenues, and the disclosure of the components, for each of the six-month
      periods ended May 31, 2007 and May 31, 2006, are set forth below:




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


**Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              14,917,712
              
              $
              13,239,103
              
              $
              1,678,609
              
              
              13
              %Search
                  Engine Marketing
              
              
              10,279,523
              
              
              6,990,691
              
              
              3,288,832
              
              
              47
              %Personals
              
              
              102,898
              
              
              2,470,360
              
              
              (2,367,462
              )
              
              -96
              %Internet
                  game development
              
              
              159,491
              
              
              130,015
              
              
              29,476
              
              
              23
              %**Consolidated
                  totals**
              
              $
              25,459,624
              
              $
              22,830,169
              
              $
              2,629,455
              
              
              12
              %


Cost
      of
      revenues on a consolidated basis increased $2.6 million, or 12%, to $25.4
      million for the six months ended May 31, 2007, from $22.8 million in the
      comparable prior year period.




The
      significant factors contributing to the increase in consolidated costs of
      revenue were related to an increase of $3.3 million, or 47%, 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 of $2.4 million, or 96%, which relates to the
      suspension in outlays for new Personals enrollees based on the prohibitive
      market cost of such enrollees.




47




Our
      gross
      profit in terms of dollars, on a component basis, and our gross profit
      percentage, on a component basis, for each of the six-month periods ended May
      31, 2007 and May 31, 2006, are set forth below:




***Gross
        Profit Components*** ***Online
        Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              8,008,374
              
              $
              10,420,719
              
              $
              (2,412,345
              )
              
              -23
              %Search
                  Engine Marketing
              
              
              2,568,910
              
              
              1,225,685
              
              
              1,343,225
              
              
              110
              %Personals
              
              
              1,444,043
              
              
              1,226,506
              
              
              217,537
              
              
              18
              %Internet
                  game development
              
              
              353,720
              
              
              283,865
              
              
              69,855
              
              
              25
              %**Consolidated
                  totals**
              
              $
              12,375,047
              
              $
              13,156,775
              
              $
              (781,728
              )
              
              -6
              %





***Gross
        Profit Components*** ***Online
        Advertising and Media Service Activities***
  **Six
                  Months**
              
              **Absolute**
              
              **Relative****Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              %%%
              
              %%%Online
                  Advertising
              
              
              34.9
              %
              
              44.0
              %
              
              -9.1
              %
              
              -20.7
              %Search
                  Engine Marketing
              
              
              20.0
              %
              
              14.9
              %
              
              5.1
              %
              
              34.2
              %Personals
              
              
              93.3
              %
              
              33.2
              %
              
              60.1
              %
              
              181.0
              %Internet
                  game development
              
              
              68.9
              %
              
              68.6
              %
              
              0.3
              %
              
              0.4
              %**Consolidated
                  totals**
              
              
              32.7
              %
              
              36.6
              %
              
              -3.9
              %
              
              -10.7
              %
  48





Consolidated
      Gross Profit ("gross margin") as a percentage of net revenue was 32.7% during
      the six months ended May 31, 2007, compared to 36.6% in the prior year’s
      comparable period, representing an absolute percentage point decrease of 3.9%,
      or a 10.7% decline on a relative basis when compared to the prior year’s
      comparable period.




The
      10.7%
      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. Offsetting the decline are increases
      in
      the gross profit margins of our Personals business and our Search Engine
      Marketing business.




Our
      Selling Expenses for each of the six-month periods ended May 31, 2007 and May
      31, 2006 are set forth below:




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





**Six
                Months Ended**
            
            **Change**
            
            **Change****May
                31,**
            
            **May
                31,**
            
            **Inc(Dec)**
            
            **Inc(Dec)****2007**
            
            **2006**
            
            $$$
            
            %%%Fee
                share commissions
            
            $
            491,887
            
            $
            1,702,342
            
            $
            (1,210,455
            )
            
            -71
            %Selling
                salaries and related costs
            
            
            1,634,606
            
            
            1,391,937
            
            
            242,669
            
            
            17
            %Travel,
                entertainment, shows, other
            
            
            134,914
            
            
            115,887
            
            
            19,027
            
            
            16
            %**Consolidated
                totals**
            
            $
            2,261,407
            
            $
            3,210,166
            
            $
            (948,759
            )
            
            -30
            %





Selling
      expenses, on a consolidated basis, decreased approximately $0.9 million, or
      30%,
      to $2.3 million during the six months ended May 31, 2007 from $3.2 million
      during the six months ended May 31, 2006. The decrease resulted from an
      approximate $1.2 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 amounts owing 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 $0.2 million, or 17%, in selling salaries
      and related costs attributable to increased selling commissions attributable
      to
      increased comparable period revenues.




49


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 six months ended May 31, 2007 and
      May 31, 2006 are set forth below:




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


**Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Compensation
                  and related costs
              
              $
              4,744,750
              
              $
              5,011,542
              
              $
              (266,792
              )
              
              -5
              %Professional
                  fees
              
              
              881,478
              
              
              760,585
              
              
              120,893
              
              
              16
              %Insurance
                  costs
              
              
              457,433
              
              
              479,106
              
              
              (21,673
              )
              
              -5
              %Occupancy
                  and equipment costs
              
              
              287,646
              
              
              220,493
              
              
              67,153
              
              
              30
              %Depreciation
                  and amortization
              
              
              762,297
              
              
              774,996
              
              
              (12,699
              )
              
              -2
              %All
                  other miscellanous G&A expenses
              
              
              901,169
              
              
              835,434
              
              
              65,735
              
              
              8
              %**Consolidated
                  totals**
              
              $
              8,034,773
              
              $
              8,082,156
              
              $
              (47,383
              )
              
              -1
              %





50


General
      and Administrative expenses ("G&A") on a consolidated basis remained
      relatively flat, declining by $48,000, or 1%, when comparing G&A of $8.03
      million for the six months ended May 31, 2007 to G&A of $8.08 million for
      the six months ended May 31, 2006. The net decrease was attributable to combined
      increases in professional fees, occupancy costs and miscellaneous G&A of
      approximately $0.3 million or 14%, more than offset by combined declines in
      compensation and related costs, insurance costs, and depreciation and
      amortization of approximately $0.3 million, or 5%. The decline in compensation
      costs were attributable to a decrease in stock-based compensation costs of
      approximately $0.3 million resulting from a decline in SFAS 123R non-cash
      compensation expense during the six-months ended May 31, 2007 when compared
      to
      the six months ended May 31, 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, to a lesser degree, by additional amortization and
      depreciation on current period acquisitions.




51




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 basis. We incurred
      approximately $226,000 in legal fees (exclusive of disbursements) from FKIWSBR
      during the six months ended May 31, 2006.




***Bad
        Debt (Recapture) and Expense Components*** ***Online
        Advertising and Media Service Activities***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007**
              
              **2006**
              
              $$$
              
              %%%Online
                  Advertising
              
              $
              (264,829
              )
              $
              36,575
              
              $
              (301,404
              )
              
              -824
              %Search
                  Engine Marketing
              
              
              236,978
              
              
              54,131
              
              
              182,847
              
              
              100
              %Personals
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              %Internet
                  game development
              
              
              -
              
              
              3,606
              
              
              (3,606
              )
              
              0
              %**Consolidated
                  totals**
              
              $
              (27,851
              )
              $
              94,312
              
              $
              (122,163
              )
              
              -130
              %





52




Bad
      Debt
      expense decreased on a net basis by approximately $122,000, or 130%, when
      comparing the six months ended May 31, 2007 with the six months ended May 31,
      2006. The decrease is attributable to certain customer bad debt recaptures
      arising out of current settlements and full satisfaction of prior period
      settlements, offset by the bankruptcy filing of a Search client and adjustments
      to other smaller accounts in our Online Advertising and Search Engine Marketing
      activities, resulting in a net-bad debt recapture of approximately $28,000.
      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:




53





***OTHER
        NON-OPERATING INCOME (EXPENSE)***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****Other
                  non-operating**
              
              **May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****income
                  (expense):**
              
              **2007**
              
              **2006**
              
              $$$
              
              %%%Interest
                  income and dividends
              
              $
              574,827
              
              $
              496,372
              
              $
              78,455
              
              
              16
              %Realized
                  gains (losses) on sale ofmarketable
                  securities
              
              
              36,654
              
              
              (18,352
              )
              
              55,006
              
              
              300
              %Other
                  non-operating income:Other
                  miscellaneousincome
              
              
              30,452
              
              
              7,233
              
              
              23,219
              
              
              100
              %Foreign
                  Currency Exchange RateFees
                  and interest expense
              
              
              (29,775
              )
              
              (29,584
              )
              
              (191
              )
              
              1
              %Minority
                  interest (income)
              
              
              (48,000
              )
              
              (288,000
              )
              
              240,000
              
              
              -83
              %**Total
                  other non-operating****income:**
              
              $
              564,158
              
              $
              167,669
              
              $
              396,489
              
              
              236
              %


Consolidated
      Other Non-operating Income (Expense) increased approximately $396,000, from
      approximately $168,000 for the six months ended May 31, 2006, to approximately
      $564,000 for the six months ended May 31, 2007.




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




(a)
            
            Interest
                income increased approximately $78,000, 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 $55,000 when
                comparing the current fiscal period gains of $37,000, with the prior
                period’s comparable losses of $18,000.




(c)
            
            Other
                miscellaneous income increased approximately $23,000 and primarily
                was the
                result of collections from various test marketing projects performed
                for
                our clients.




54


(d)
            
            Minority
                Interest resulting from our EZ-Tracks partnership with Madacy
                Entertainment decreased from $288,000 in the six months ended May
                31, 2006
                to $48,000 during the six months ended May 31, 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 our 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 six months ended May 31, 2007,
      and for the six months ended May 31, 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.




55




***The
        following table summarizes the results of EZTracks for the periods indicated
        below:***
  **Six
                  Months Ended**
              
              **Change**
              
              **Change****May
                  31,**
              
              **May
                  31,**
              
              **Inc(Dec)**
              
              **Inc(Dec)****2007
                  (4)**
              
              **2006**
              
              $$$
              
              %%%Net
                  Revenues
              
              $
              895,997
              
              $
              5,988,196
              
              $
              (5,092,199
              )
              
              -85
              %Cost
                  of Sales
              
              
              790,398
              
              
              5,273,859
              
              
              (4,483,461
              )
              
              -85
              %Gross
                  Profit
              
              
              105,599
              
              
              714,337
              
              
              (608,738
              )
              
              -85
              %General
                  andAdministrative
                  Expenses
              
              
              8,236
              
              
              130,159
              
              
              (121,923
              )
              
              -94
              %Net
                  Income
              
              $
              97,363
              (1)
              $
              $
                  584,178
              (1)
              $
              (486,815
              )
              
              -83
              %Minority
                  interest
              
              $
              48,000
              (3
                  )
              $
              $
                  288,000
              (2)
              $
              (240,000
              )
              
              -83
              %
  (1)
        All
        items included in our Online Advertising and Media Service
        activities.
  (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 we acquired Madacy
        Entertainment's 49.3%
        interest.
  (4)
        Represents minority interest operations for the
        period December 1, 2006 to December 31, 2006.


**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.




56




Our
      income tax provision for the six months ended May 31, 2007 was approximately
      $1,228,000, which is tax expense related to current period
      operations.




The
      current year’s estimated effective rate relationship of 46.0% differs
      immaterially from our annual effective rate of 46.2% recognized during the
      year
      ended November 30, 2006. The slight change in the effective tax rate is
      primarily attributable to state income taxes.




**LIQUIDITY
      AND CAPITAL RESOURCES**




As
      of May
      31, 2007, we had aggregate working capital of $30.5 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 $28.8 million as of May 31, 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 $2.2 million at May 31, 2007 and $1.9 million at November 30,
      2006.




Cash
      provided by operating activities was approximately $2.1 million for the six
      months ended May 31, 2007, compared to approximately $3.9 million provided
      by
      operating activities during the six months ended May 31, 2006, representing
      a
      net decrease in cash provided by operations of approximately $1.8 million.
      Changes in assets and liabilities of the business, net of acquisitions, used
      approximately $0.3 million in cash when comparing the six months ended May
      31,
      2007, with approximately $0.7 million in cash provided during the six months
      ended May 31, 2006, contributing to a net-decrease of approximately $1.0 million
      in cash provided by operations. The balance of the decline in cash provided
      by
      operating activities, or approximately $0.7 million, is principally attributable
      to decreases in deprecation and amortization of approximately $0.3 million
      and a
      decrease in minority interest of $240,000.




57




Cash
      used
      in investing activities was approximately $0.7 million during the six months
      ended May 31, 2007, compared to $2.7 million of cash provided by investing
      activities during the prior year’s comparable period. The net use of cash in
      investing activities during the six months ended May 31, 2007 related to net
      proceeds used for the acquisition of marketable securities being $1.1 million
      less than the 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
      $3.9
      million during the six months ended May 31, 2006. Additionally, investing
      activity cash expended for asset acquisitions during the six months ended May
      31, 2007 was $1.6 million, which exceeded the $0.9 million in cash expended
      for
      asset acquisitions during the six months ended May 31, 2006. Investing cash
      used
      for capital expenditures remained relatively constant at approximately $0.2
      million.




Cash
      used
      in financing activities was approximately $2.1 million for the six months ended
      May 31, 2007, compared to $2.6 million used in financing activities for the
      six
      months ended May 31, 2006. Fiscal 2007 financing cash flows were: (a) $292,000
      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) $157,000 less than the prior comparable period with respect to
      payments required under capital lease obligations; with both (a) and (b) further
      supplemented by approximately $169,000 in increased financing cash flows
      provided by option exercises during the six months ended May 31, 2007. All
      of
      the above referenced increases in cash flows from financing activities were
      offset by a $71,000 increase in dividends paid.




Our
      days-sales-outstanding ("DSO") in accounts receivable at May 31, 2007 was 42
      days, compared to 44 days at February 28, 2007, 45 days at November 30, 2006,
      and 56 days at August 31, 2006. The two day, or 4.5% decrease in the current
      quarter’s DSO compared to the first quarter of this 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 42
      days (as recognized during the three months ended May 31, 2007) in future fiscal
      periods as a result of changes in the components of our client mix or other
      potential factors not currently identifiable.




58




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 35 to 40-day range. Future fiscal periods might not reflect this DSO goal,
      and might exceed the 42-day DSO recognized in the three-month period ended
      May
      31, 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 and six-month periods ended May 31, 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 $239,990 during
      the six months ended May 31, 2007 compared to $257,749 during the six months
      ended May 31, 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 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.




59




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.




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”). Our subsidiary, 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.




60





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 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 and expected to be
      completed by August 31, 2007): $2,254,000 was tentatively allocated to
      amortizable license-intangible and trade name with an assigned useful life
      of
      7.5 years (the entire license term being 10 years) and the balance of the
      purchase price, or approximately $1,583,000, was allocated to unamortizable
      goodwill.




61





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
      acquisition 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).




62




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 was settled by a cash payment of $300,000
      and
      the issuance on May 4, 2007, of 14,620 shares, then having an approximate
      fair-market value of $75,000.




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 May 31, 2007, are set forth below:




63


Operating
                  Leases
              
              Employment
                  agreements
              
              Other
              
              Total
                    Contractual
                  ObligationsDomestic
              
              Foreign
              
              Domestic
              
              Foreign
              
              Domestic
              
              Domestic
              
              Foreign2007
              
              $
              307,490
              
              
              -
              
              $
              1,023,322
              
              $
              150,000
              
              
              -
              
              $
              1,330,812
              
              $
              150,0002008
              
              
              556,269
              
              
              -
              
              
              365,463
              
              
              325,000
              
              
              -
              
              
              921,732
              
              
              325,0002009
              
              
              566,362
              
              
              -
              
              
              112,301
              
              
              350,000
              
              
              
              
              
              678,663
              
              
              350,0002010
              
              
              574,180
              
              
              -
              
              
              16,241
              
              
              -
              
              
              
              
              
              590,421
              
              
              -2011
              
              
              500,619
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              500,619
              
              
              -$
              2,504,920
              
              $
              -
              
              $
              1,517,327
              
              $
              825,000
              
              $
              -
              
              $
              4,022,247
              
              $
              825,000




**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 basis. We incurred
      approximately $226,000 in legal fees (exclusive of disbursements) from FKIWSBR
      during the six months ended May 31, 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.




64





**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.





65




**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.




66





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.




67





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.





68




**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 May 31,
      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 May 31, 2007 amounted to approximately $2.2 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.





69





**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.





70




**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 MXFOCUS and Banca Intesa
      SpA*




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




The
      action related to a marketing agreement between Dada and Q121 Inc., our
      subsidiary. Dada alleged, *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 sought damages in an amount which
      the plaintiff alleged it believed to be in excess of ten million
      dollars.




71




This
      matter has been settled and we have received a release from Dada; we made no
      payment to Dada as part of the settlement.




Simultaneously
      with this settlement, we also settled a claim we had asserted against the parent
      of Dada USA with respect to a separate marketing agreement (Q121, Inc. v. Dada
      Mobile S.p.A., U.S. District Court, Southern District of New York, No. 06 CV.
      11342). Pursuant to that settlement, we received a payment of $350,000 and
      exchanged releases.




*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.




*Curtis
        J. Jackson/Shoot the Rapper Ads*
 
 In
        May
        2007, representatives of the rapper Curtis J. Jackson (p/k/a 50 Cent) contacted
        us with respect to certain ads which they claimed used Mr. Jackson’s image
        without authority. We thereafter ceased using that copy and replaced it with
        a
        new one.  Mr. Jackson's representatives have, however, again contacted us
        and claimed that the ads continue to run; they have advised that their client
        is
        willing to settle the matter for a payment of $500,000; and they have threatened
        to file a complaint in Supreme Court, New York County.  We believe that
        there is no merit to the claim and, in the event it is not resolved amicably,
        we
        intend vigorously to defend against any complaint that may be
        filed.




Tactara
      LLC


In
        June
        2007, Tactara LLC (“Tactara”) filed a complaint in the Superior Court of
        California, Los Angeles, alleging that we breached a service order
        agreement and seeking damages of $189,000 plus interest. Our contract with
        Tactara provides for arbitration; we have requested that the action be
        withdrawn; and counsel are currently working on a stipulation to stay the
        action. We believe that there is no merit to the claim and in the event Tactara
        commences arbitration, we intend vigorously to defend against
        it.




**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.




72





*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 sixteen
      fiscal quarters and have declared a dividend payable on or about August 10,
      2007
      to holders of record of our common stock at the close of business on August
      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.*




73





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





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




As
      a
      direct-to-consumer marketing company we are subject to a variety of federal,
      state and local laws and regulations designed to protect consumers that govern
      certain of our marketing practices, all as more fully set forth in 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 six months ended May 31, 2007 we recognized a decline in our email
      marketing revenue of approximately 55% when compared to the six months ended
      May
      31, 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.




74





*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.




75





*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.*




76





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





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





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




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




77





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.





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




78





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 2,242,267 shares of our
      outstanding common stock representing approximately 14.93% 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.




79




Item
      5.Other
      Information





On
      July
      16, 2007, we issued a press release announcing (i) our results of operations
      for
      the quarter ended May 31, 2007; and (ii) that our Board of Directors, on July
      13, 2007, had declared a dividend of $0.08 per share to shareholders of record
      as of August 1, 2007, payable on or about August 10, 2007. A copy of such
      release is filed herewith as an exhibit.




**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
              July
                  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.


80




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. SchwartzDate:July
              16, 2007
            Chairman
                and CEO
                Chairman and CEO
              (Principal Executive
                Officer)




By:
              /s/
                Daniel HarveyDaniel
                HarveyDate:July
                16, 2007
              Chief
                  Financial Officer
                (Principal
                    Financial Officer)




81




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
                *





32.3
            Section
                1350 Certification of Chief Financial Officer
                *





99.1
            July
                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.




82