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 June 30, 2009




 ̈           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 001-33937





LiveDeal,
Inc.




(Exact
name of registrant as specified in its charter)




Nevada
                (State
      or other jurisdiction of incorporation or organization)
              85-0206668
                (IRS
      Employer Identification No.)2490
      East Sunset Road, Suite 100
                Las
      Vegas, Nevada
                (Address
      of principal executive offices)
              89120
                (Zip
      Code)





(702)
939-0230


(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 þ  No  o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





 ̈           Yes                       ̈           No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


(check
one)





Large Accelerated Filer o
                  Accelerated Filer oNon-Accelerated Filer   o(do not check if a smaller reporting company)
                  Smaller reporting company  þ




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes o  No  þ




The
number of shares of the issuer’s common stock, par value $.001 per share,
outstanding as of August 1, 2009 was 6,123,432.





INDEX
TO FORM 10-Q FILING


FOR
THE QUARTER ENDED JUNE 30, 2009





TABLE
OF CONTENTS





PagePART
      IFINANCIAL
      INFORMATIONItem
      1.
                          Financial
      StatementsCondensed
      Consolidated Balance Sheets as of June 30, 2009 (unaudited) and September
      30, 2008 (as restated)
                          3Unaudited
      Condensed Consolidated Statements of Operationsfor
      the Three and Nine months Ended June 30, 2009 and 2008
                          4Unaudited
      Condensed Consolidated Statements of Cash Flowsfor
      the Nine months Ended June 30, 2009 and 2008
                          5Notes
      to Unaudited Condensed Consolidated Financial Statements
                          6Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          22Item
      4.
                          Controls
      and Procedures
                          33PART
      IIOTHER
      INFORMATIONItem
      1.
                          Legal
      Proceedings
                          34Item
      1A.
                          Risk
      Factors
                          34Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          35Item
      6.
                          Exhibits
                          35Signatures
                          36


2


PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





LIVEDEAL,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30,
                        
                        
                        September 30,2009
                        
                        
                        2008(unaudited)
                        
                        
                        (as restated,see Note 3)AssetsCash
      and cash equivalents
                        
                        $
                        9,205,343
                        
                        
                        $
                        4,639,787Certificates
      of deposit
                        
                        
                        100,000
                        
                        
                        
                        -Accounts
      receivable, net
                        
                        
                        1,644,966
                        
                        
                        
                        6,326,272Prepaid
      expenses and other current assets
                        
                        
                        437,141
                        
                        
                        
                        792,309Customer
      acquisition costs, net
                        
                        
                        -
                        
                        
                        
                        642,220Income
      taxes receivable
                        
                        
                        595,713
                        
                        
                        
                        487,532Deferred
      tax asset, net of valuation allowance
                        
                        
                        271,148
                        
                        
                        
                        949,121Total
      current assets
                        
                        
                        12,254,311
                        
                        
                        
                        13,837,241Accounts
      receivable, long term portion, net
                        
                        
                        2,701,813
                        
                        
                        
                        2,011,143Property
      and equipment, net
                        
                        
                        667,659
                        
                        
                        
                        959,854Deposits
      and other assets
                        
                        
                        81,712
                        
                        
                        
                        83,547Intangible
      assets, net
                        
                        
                        2,375,170
                        
                        
                        
                        6,736,078Goodwill
                        
                        
                        -
                        
                        
                        
                        11,706,406Deferred
      tax asset, long term, net of valuation allowance
                        
                        
                        -
                        
                        
                        
                        3,863,502Total
      assets
                        
                        $
                        18,080,665
                        
                        
                        $
                        39,197,771Liabilities
      and Stockholders' EquityLiabilities:Accounts
      payable
                        
                        $
                        635,887
                        
                        
                        $
                        1,078,712Accrued
      liabilities
                        
                        
                        1,725,711
                        
                        
                        
                        1,437,149Current
      portion of capital lease obligation
                        
                        
                        68,820
                        
                        
                        
                        61,149Total
      current liabilities
                        
                        
                        2,430,418
                        
                        
                        
                        2,577,010Long
      term portion of capital lease obligation
                        
                        
                        135,729
                        
                        
                        
                        170,838Total
      liabilities
                        
                        
                        2,566,147
                        
                        
                        
                        2,747,848Commitments
      and contingenciesStockholders'
      equity:Series
      E convertible preferred stock, $0.001 par value, 200,000 shares
      authorized,127,840
      issued and outstanding, liquidation preference $38,202
                        
                        
                        10,866
                        
                        
                        
                        10,866Common
      stock, $0.001 par value, 100,000,000 shares authorized, 6,135,933
      and6,513,687
      issued and outstanding at June 30, 2009 and September 30, 2008,
      respectively
                        
                        
                        6,136
                        
                        
                        
                        6,514Paid
      in capital
                        
                        
                        20,259,099
                        
                        
                        
                        20,884,112Retained
      earnings (accumulated deficit)
                        
                        
                        (4,761,583
                        )
                        
                        
                        15,548,431Total
      stockholders' equity
                        
                        
                        15,514,518
                        
                        
                        
                        36,449,923Total
      liabilities and stockholders' equity
                        
                        $
                        18,080,665
                        
                        
                        $
                        39,197,771





See
accompanying notes to unaudited condensed consolidated financial
statements.


3





LIVEDEAL,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





Three Months ended
                      
                      
                      Nine Months endedJune 30,
                      
                      
                      June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net
      revenues
                      
                      $
                      2,448,569
                      
                      
                      $
                      5,427,012
                      
                      
                      $
                      11,006,358
                      
                      
                      $
                      17,872,608Cost
      of services
                      
                      
                      812,321
                      
                      
                      
                      1,115,293
                      
                      
                      
                      3,879,853
                      
                      
                      
                      3,190,324Gross
      profit
                      
                      
                      1,636,248
                      
                      
                      
                      4,311,719
                      
                      
                      
                      7,126,505
                      
                      
                      
                      14,682,284Operating
      expenses:General
      and administrative expenses
                      
                      
                      3,812,983
                      
                      
                      
                      4,807,460
                      
                      
                      
                      12,126,364
                      
                      
                      
                      12,047,495Impairment
      of goodwill and intangible assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      16,111,494
                      
                      
                      
                      -Sales
      and marketing expenses
                      
                      
                      130,627
                      
                      
                      
                      1,242,050
                      
                      
                      
                      2,416,012
                      
                      
                      
                      3,915,945Total
      operating expenses
                      
                      
                      3,943,610
                      
                      
                      
                      6,049,510
                      
                      
                      
                      30,653,870
                      
                      
                      
                      15,963,440Operating
      loss
                      
                      
                      (2,307,362
                      )
                      
                      
                      (1,737,791
                      )
                      
                      
                      (23,527,365
                      )
                      
                      
                      (1,281,156
                      )Other
      income (expense):Interest
      income, net
                      
                      
                      7,487
                      
                      
                      
                      14,837
                      
                      
                      
                      27,406
                      
                      
                      
                      78,588Other
      income (expense)
                      
                      
                      77,786
                      
                      
                      
                      (18,269
                      )
                      
                      
                      7,341,784
                      
                      
                      
                      (14,637
                      )Total
      other income (expense)
                      
                      
                      85,273
                      
                      
                      
                      (3,432
                      )
                      
                      
                      7,369,190
                      
                      
                      
                      63,951Loss
      from continuing operations before income taxes
                      
                      
                      (2,222,089
                      )
                      
                      
                      (1,741,223
                      )
                      
                      
                      (16,158,175
                      )
                      
                      
                      (1,217,205
                      )Income
      tax provision (benefit)
                      
                      
                      (105,117
                      )
                      
                      
                      (221,763
                      )
                      
                      
                      4,057,695
                      
                      
                      
                      (2,486
                      )Loss
      from continuing operations
                      
                      
                      (2,116,972
                      )
                      
                      
                      (1,519,460
                      )
                      
                      
                      (20,215,870
                      )
                      
                      
                      (1,214,719
                      )Discontinued
      operations:Income
      (loss) from discontinued component, including disposal
    costs
                      
                      
                      7,422
                      
                      
                      
                      (97,760
                      )
                      
                      
                      (147,999
                      )
                      
                      
                      (58,345
                      )Income
      tax provision (benefit)
                      
                      
                      2,773
                      
                      
                      
                      (36,523
                      )
                      
                      
                      (55,293
                      )
                      
                      
                      (21,798
                      )Income
      (loss) from discontinued operations
                      
                      
                      4,649
                      
                      
                      
                      (61,237
                      )
                      
                      
                      (92,706
                      )
                      
                      
                      (36,547
                      )Net
      loss
                      
                      $
                      (2,112,323
                      )
                      
                      $
                      (1,580,697
                      )
                      
                      $
                      (20,308,576
                      )
                      
                      $
                      (1,251,266
                      )Earnings
      per share - basic1:Loss
      from continuing operations
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.24
                      )
                      
                      $
                      (3.37
                      )
                      
                      $
                      (0.20
                      )Discontinued
      operations
                      
                      
                      -
                      
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )Net
      loss
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.25
                      )
                      
                      $
                      (3.38
                      )
                      
                      $
                      (0.20
                      )Earnings
      per share - diluted1:Loss
      from continuing operations
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.24
                      )
                      
                      $
                      (3.37
                      )
                      
                      $
                      (0.20
                      )Discontinued
      operations
                      
                      
                      -
                      
                      
                      
                      (0.01
                      )
                      
                      
                      (0.02
                      )
                      
                      
                      (0.01
                      )Net
      loss
                      
                      $
                      (0.35
                      )
                      
                      $
                      (0.25
                      )
                      
                      $
                      (3.38
                      )
                      
                      $
                      (0.20
                      )Weighted
      average common shares outstanding:Basic
                      
                      
                      5,999,268
                      
                      
                      
                      6,222,351
                      
                      
                      
                      6,006,770
                      
                      
                      
                      6,214,099Diluted
                      
                      
                      5,999,268
                      
                      
                      
                      6,222,351
                      
                      
                      
                      6,006,770
                      
                      
                      
                      6,214,099





1  Certain
amounts may not total due to rounding of individual components.





See
accompanying notes to unaudited condensed consolidated financial
statements.


4




LIVEDEAL,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





Nine Months Ended June 30,2009
                            
                            
                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                            
                            $
                            (20,308,576
                            )
                            
                            $
                            (1,251,267
                            )Adjustments
      to reconcile net loss to net cash used
      in operating activities:Depreciation
      and amortization
                            
                            
                            2,088,425
                            
                            
                            
                            1,525,972Non-cash
      stock compensation expense
                            
                            
                            69,186
                            
                            
                            
                            -Amortization
      of deferred stock compensation
                            
                            
                            (207,098
                            )
                            
                            
                            859,271Deferred
      income taxes
                            
                            
                            4,541,475
                            
                            
                            
                            458,930Provision
      for uncollectible accounts
                            
                            
                            1,023,211
                            
                            
                            
                            430,880Noncash
      impairment of goodwill and other intangibles
                            
                            
                            16,111,494
                            
                            
                            
                            -Gain
      on sale of customer list
                            
                            
                            (2,815,952
                            )
                            
                            
                            -Gain
      on sale of internet domain name
                            
                            
                            (3,805,778
                            )
                            
                            
                            -Gain
      on amendment of directory services contract
                            
                            
                            (642,268
                            )
                            
                            
                            -Loss
      on disposal of property and equipment
                            
                            
                            37,943
                            
                            
                            
                            15,352Changes
      in assets and liabilities:Accounts
      receivable
                            
                            
                            2,831,757
                            
                            
                            
                            (780,126
                            )Customer
      acquisition costs
                            
                            
                            -
                            
                            
                            
                            (1,700,000
                            )Prepaid
      expenses and other current assets
                            
                            
                            104,057
                            
                            
                            
                            (151,313
                            )Deposits
      and other assets
                            
                            
                            1,835
                            
                            
                            
                            8,169Accounts
      payable
                            
                            
                            (442,825
                            )
                            
                            
                            53,341Accrued
      liabilities
                            
                            
                            170,619
                            
                            
                            
                            535,696Income
      taxes receivable and payable
                            
                            
                            (108,181
                            )
                            
                            
                            (453,035
                            )Net
      cash used in operating activities
                            
                            
                            (1,350,676
                            )
                            
                            
                            (448,130
                            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of internet domain name
                            
                            
                            3,850,000
                            
                            
                            
                            -Proceeds
      from sale of customer list
                            
                            
                            2,783,097
                            
                            
                            
                            -Proceeds
      from amendment of directory services contract
                            
                            
                            642,268
                            
                            
                            
                            -Additional
      closing costs related to acquisition of LiveDeal, Inc.
                            
                            
                            -
                            
                            
                            
                            (7,000
                            )Additional
      closing costs related to acquisition of OnCallSubscriber
      Management, Inc.
                            
                            
                            -
                            
                            
                            
                            (16,243
                            )Expenditures
      for intangible assets
                            
                            
                            (626,119
                            )
                            
                            
                            (55,942
                            )Investment
      in certificates of deposit
                            
                            
                            (100,000
                            )
                            
                            
                            -Purchases
      of equipment
                            
                            
                            (91,838
                            )
                            
                            
                            (585,845
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            6,457,408
                            
                            
                            
                            (665,030
                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Series
      E preferred stock dividends
                            
                            
                            (1,437
                            )
                            
                            
                            (1,438
                            )Principal
      repayments on capital lease obligations
                            
                            
                            (52,259
                            )
                            
                            
                            -Purchase
      of treasury stock
                            
                            
                            (487,480
                            )
                            
                            
                            (500,901
                            )Net
      cash used in financing activities
                            
                            
                            (541,176
                            )
                            
                            
                            (502,339
                            )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                            
                            
                            4,565,556
                            
                            
                            
                            (1,615,499
                            )CASH
      AND CASH EQUIVALENTS, beginning of period
                            
                            
                            4,639,787
                            
                            
                            
                            5,674,533CASH
      AND CASH EQUIVALENTS, end of period
                            
                            $
                            9,205,343
                            
                            
                            $
                            4,059,034





See
accompanying notes to unaudited condensed consolidated financial
statements


5




LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Note 1:  Organization and
Basis of Presentation





The
accompanying unaudited condensed consolidated financial statements include the
accounts of LiveDeal, Inc. (formerly YP Corp.), a Nevada corporation, and its
wholly owned subsidiaries (collectively the “Company”).  The Company
delivers local customer acquisition services for small and medium-sized
businesses combined with an Internet Yellow Pages directory to deliver an
affordable way for businesses to extend their marketing reach to local, relevant
customers via the Internet through its online property, www.livedeal.com.




The
accompanying condensed consolidated balance sheet as of September 30, 2008 (as
restated), which has been derived from audited consolidated financial statements
(see Note 3), and the accompanying unaudited condensed consolidated financial
statements as of June 30, 2009 and for the three and nine months
ended June 30, 2009 and June 30, 2008,respectively, have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for audited
financial statements. In the opinion of the Company’s management, the interim
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. The results of operations for the three and nine months ended June 30,
2009 are not necessarily indicative of the results to be expected for the year
ending September 30, 2009. The footnote disclosures related to the interim
financial information included herein are also unaudited. Such financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto as of September 30, 2008 and for the year
then ended included in the Company’s Annual Report on Form 10-K for the year
ended September 30, 2008.




The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the
reporting period. Significant estimates and assumptions have been used by
management throughout the preparation of the condensed consolidated financial
statements including in conjunction with establishing allowances for customer
refunds, non-paying customers, dilution and fees, analyzing the recoverability
of the carrying amount of intangible assets, estimating forfeitures of
stock-based compensation and evaluating the recoverability of deferred tax
assets.  Actual results could differ from these
estimates.




Note
2:  Business Operations




In
January 2009, the Company re-evaluated its business and adopted a new business
strategy that moved away from the integration of the Yellow Pages and
classifieds businesses to one which addressed each of its business segments as
separate entities.  This re-evaluation was necessitated by the growth
of the Company’s Direct Sales – Customer Acquisition Services business line that
provides Internet-based customer acquisition strategies for small business, as
well as declining revenues from the Company’s traditional business lines (i.e.
directory services and classifieds).  Additionally, current economic
and regulatory forces, both general and specific to the Company’s industry,
impacted management’s considerations of the Company’s existing business model
and strategy.  Some of these factors included the
following:




1.
              The
      current effects of the recession and general economic
      downturn;




2.
              Management’s
      perception that the general economic downturn could lead the Company’s
      business customers to seek lower-cost customer acquisition methods,
      primarily through the
Internet;




3.
              The
      sale of the Company’s “www.yp.com” domain name in the first quarter of
      2009, which domain name was associated with the Company’s traditional
      business;




4.
              The
      reconstitution of the Company’s management team with additional capability
      in Internet-based
technologies;




5.
              The
      termination of certain significant directory business contracts related to
      the traditional business;




6.
              The
      sale of certain of the Company’s traditional business assets, including
      certain of its customer lists;
and




7.
              Continuing
      losses in the Company’s classifieds
  business.


6




LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


As a
result, the Company’s management made significant changes to its business
strategy during the second quarter of fiscal 2009.  Management has
decided to move the Company’s strategic focus away from its directory
services and classified businesses and focus its efforts on being the small
businesses “internet partner” who helps small businesses use the internet and
technology to bring them customers and grow their
business.   Additionally, the Company discontinued the
operations of its Philippines-based call center, which has historically
provided telemarketing services to support its directory services business,
specifically those directory services which were sold during the quarter ended
March 31, 2009.    These strategic changes impacted the
Company’s condensed consolidated financial statements during the second quarter
of fiscal 2009 in the following manner:




1.
            Impairment
      charges of $16,111,494 were recorded related to the write-down of the
      Company’s goodwill and other intangible assets as discussed in Note
      6;




2.
            The
      Company commenced a plan to discontinue its classifieds business and
      initiated shutdown activities, as discussed in Note 7, and has reflected
      the operating results of this line of business as discontinued operations
      in the accompanying unaudited condensed consolidated statements of
      operations;




3.
            The
      Company sold a portion of its customer list associated with its directory
      services business and recorded a gain of $2,815,952, as discussed in Note
      8; and




4.
            The
      Company established a valuation allowance of $9,713,322 related to its
      deferred tax assets, as described in Note
11.




The
Company’s new strategic focus is on delivering a suite of Internet-based, local
search driven, customer acquisition services for small businesses, sold via
telemarketing and supported by its websites and internally developed
software.





Note
3:  Accounting Policies and Restatement





While the
Company has not changed its accounting policies from those disclosed in the
Company’s Form 10-K for the year ended September 30, 2008, the growth in its
Direct Sales – Customer Acquisition Services business necessitates a further
discussion of the revenue recognition policies associated with these
contracts.





The
Company’s direct sales contracts typically involve upfront billing for an
initial payment followed by monthly billings over the contractual
period.  The Company recognizes revenue on a straight line basis over
the contractual period.  Billings in excess of recognized revenue are
included as deferred revenue in the accompanying consolidated balance
sheets.





Previously,
the Company recognized the value of the noncancelable portion of the Direct
Sales’ customer contract as a receivable and billed the customer for the amount
of the contract over the period of the contract. The Company only recognized a
portion of the contract value as revenue each month, approximately pro-rating
the contract to a monthly amount, with the remainder of the noncancelable
portion of the contract maintained as a deferred revenue
liability.  In the quarter ended June 30, 2009, the Company corrected
its balance sheet presentation related to its direct sales contracts to include
in accounts receivable only those amounts that are outstanding receivables after
having been billed in accordance with the terms of the
contract.  There was no material impact to the Company’s financial
condition, operating cash flows or results of operations as a result of this
correction.  Prior periods have been corrected to conform to the
current period presentation.





The
following table sets forth the impact of this correction on our balance sheet as
of September 30, 2008:





September 30, 2008As Originally
                    Reported
                  
                  
                  As Restated
                  
                  
                  Net ChangeAccounts
      receivable, net (current)
                  
                  $
                  6,880,492
                  
                  
                  $
                  6,326,272
                  
                  
                  $
                  (554,220
                  )Accrued
      liabilities
                  
                  $
                  1,991,369
                  
                  
                  $
                  1,437,149
                  
                  
                  $
                  (554,220
                  )





Note
4:  Restructuring Charges





In June
2009, the Company implemented a restructuring plan previously approved by the
Company’s Board of Directors that included a reduction in force that resulted in
the termination of approximately 13% of its workforce.  As part of
this plan, the Company also initiated activities to close certain of its
facilities.  The Company took these actions in order to reduce costs
and improve its cost structure in the current operating environment and in light
of changes in its strategic focus.  Substantially all restructuring
activities and actions were completed in July 2009.




7


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


In
connection with these activities, the Company incurred expenses, consisting
primarily of cash expenditures, of $327,408 which have been reflected as part of
general and administrative expenses in the accompanying consolidated statements
of operations for the three and nine months ended June 30, 2009. Of the
restructuring charges incurred, $277,059 related to severance costs and $50,349
related to office closure costs.  As of June 30, 2009, we had an
outstanding liability of $84,839 related to unpaid restructuring
costs.  All restructuring costs were related to the consolidation of
operations to one location, and were accounted for as general and administrative
expenses




Note
5:  Balance Sheet Information





Balance
sheet information is as follows:




June 30,
                                    
                                    
                                    September 30,2009
                                    
                                    
                                    2008(as
      restated,see
      Note 3)Receivables,
      current, net:Accounts
      receivable, current
                                    
                                    $
                                    2,934,886
                                    
                                    
                                    $
                                    8,369,095Less:
      Allowance for doubtful accounts
                                    
                                    
                                    (1,289,920
                                    )
                                    
                                    
                                    (2,042,823
                                    )$
                                    1,644,966
                                    
                                    
                                    $
                                    6,326,272Receivables,
      long term, net:Accounts
      receivable, long term
                                    
                                    $
                                    3,252,416
                                    
                                    
                                    $
                                    2,171,865Less:
      Allowance for doubtful accounts
                                    
                                    
                                    (550,603
                                    )
                                    
                                    
                                    (160,722
                                    )$
                                    2,701,813
                                    
                                    
                                    $
                                    2,011,143Total
      receivables, net:Gross
      receivables
                                    
                                    $
                                    6,187,302
                                    
                                    
                                    $
                                    10,540,960Allowance
      for doubtful accounts
                                    
                                    
                                    (1,840,523
                                    )
                                    
                                    
                                    (2,203,545
                                    )$
                                    4,346,779
                                    
                                    
                                    $
                                    8,337,415Components
      of allowance for doubtful accounts are as follows:June
      30,
                                    
                                    
                                    September
      30,2009
                                    
                                    
                                    2008Allowance
      for dilution and fees on amounts due from billing
    aggregators
                                    
                                    $
                                    1,766,661
                                    
                                    
                                    $
                                    1,775,276Allowance
      for customer refunds
                                    
                                    
                                    73,862
                                    
                                    
                                    
                                    428,269$
                                    1,840,523
                                    
                                    
                                    $
                                    2,203,545





The
significant reduction in accounts receivable reflects the Company’s strategic
shift away from its directory services business toward its customer acquisition
services product line that has significantly shorter payment terms.





Included
in accounts receivable at June 30, 2009 and September 30, 2008 are receivables
of $803,877 and $806,100, respectively from a LEC aggregator that is currently
in bankruptcy proceedings, against which the Company maintains allowances
totaling $723,489 and $628,449, respectively.





June 30,
                      
                      
                      September 30,2009
                      
                      
                      2008Customer
      acquisition costs, net:Customer
      acquisition costs
                      
                      $
                      1,700,000
                      
                      
                      $
                      1,700,000Less:  Accumulated
      amortization
                      
                      
                      (1,700,000
                      )
                      
                      
                      (1,057,780
                      )$
                      -
                      
                      
                      $
                      642,220





The
customer acquisition costs were amortized over their estimated life and were
fully amortized by June 30, 2009.




8


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


June 30,
                    
                    
                    September 30,2009
                    
                    
                    2008Property
      and equipment, net:Leasehold
      improvements
                    
                    $
                    235,056
                    
                    
                    $
                    233,970Furnishings
      and fixtures
                    
                    
                    336,068
                    
                    
                    
                    311,319Office,
      computer equipment and other
                    
                    
                    679,949
                    
                    
                    
                    961,9311,251,073
                    
                    
                    
                    1,507,220Less:
      Accumulated depreciation
                    
                    
                    (583,414
                    )
                    
                    
                    (547,366
                    )$
                    667,659
                    
                    
                    $
                    959,854





June 30,
                    
                    
                    September 30,2009
                    
                    
                    2008Intangible
      assets, net:Domain
      name and marketing related intangibles
                    
                    $
                    6,699,600
                    
                    
                    $
                    7,208,600Non-compete
      agreements
                    
                    
                    3,465,000
                    
                    
                    
                    3,465,000Website
      and technology related intangibles
                    
                    
                    4,676,660
                    
                    
                    
                    4,147,45914,841,260
                    
                    
                    
                    14,821,059Less:  Accumulated
      amortization
                    
                    
                    (12,466,090
                    )
                    
                    
                    (8,084,981
                    )$
                    2,375,170
                    
                    
                    $
                    6,736,078





The
decrease in intangible assets, net from September 30, 2008 to June 30, 2009 is
due primarily to the impacts of the impairment charges described in Note 6 and
the sale of one of the Company’s Internet domain names as described in Note
8.





June 30,
                        
                        
                        September 30,2009
                        
                        
                        2008(as
      restated,see
      Note 3)Accrued
      liabilities:Deferred
      revenue
                        
                        $
                        110,210
                        
                        
                        $
                        362,848Accrued
      payroll and bonuses
                        
                        
                        358,501
                        
                        
                        
                        306,984Accruals
      for service contracts
                        
                        
                        416,981
                        
                        
                        
                        -Accruals
      under revenue sharing agreements
                        
                        
                        254,286
                        
                        
                        
                        326,306Accrued
      expenses - other
                        
                        
                        585,733
                        
                        
                        
                        441,011$
                        1,725,711
                        
                        
                        $
                        1,437,149




Accruals
for service contracts represent accruals for services rendered by third-parties
relating to our new Direct Sales products and certain accruals pertaining to the
termination of contractual obligations with former service providers that are
still being finalized.




Note
6:  Impairment of Goodwill and Intangible Assets




In
January 2009, in connection with the strategic changes described in Note 2, the
Company’s management, at the direction of the Company’s Audit Committee,
commenced an interim reporting period review of the Company’s goodwill and
intangible assets for impairment.  In accordance with the provisions
of SFAS No. 142, “Goodwill and
Other Intangible Assets”(SFAS No. 142), and SFAS No. 144,
“Accounting for the Impairment
and Disposal of Long-Lived Assets” (SFAS No. 144), the Company evaluates
goodwill and other long-lived assets for impairment on an annual basis or
whenever facts and circumstances indicate that impairment may
exist.  Current economic and regulatory forces, both general and
specific to the Company’s industry, caused management to consider the Company’s
existing business model and strategy .  See Note 2.


9


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
  In light
of the changes in the Company’s business strategy and model as described in Note
2, the Company determined that a triggering event had occurred and
initiated an impairment analysis.




Management
conducted its analysis in accordance with the provisions of SFAS No. 142 and
SFAS No. 157 “Fair Value Measurements.”  The Company used a discounted
cash flow approach in estimating fair value as market values could not be
readily determined given the unique nature of the respective
assets.  For the assets identified as being impaired, the cash flows
associated with the underlying assets did not support a value greater than zero
given the shutdown of the classifieds business and the Philippines call-center
operation, the impacts of the sale of a portion of the Company’s customer list
and www.yp.com
domain name, and other operational changes as a result of the Company’s change
in business strategy.




Based
upon the analysis, management determined that the following items were
impaired:




1.
            The
      goodwill acquired by the Company in its acquisition of LiveDeal, Inc., the
      business focus of which was online classified advertising which was
      originally intended to be merged with the Company’s existing directory
      services business;




2.
            The
      goodwill acquired by the Company in its acquisition of a Philippines
      call-center, 247 Marketing, Inc., the business focus of which was
      providing telemarketing services to acquire customers for its
      directory services business;




3.
            Assets
      related to the Company’s call-center operations and non-compete agreements
      that were effectively made obsolete due to the sale of a portion of the
      Company’s customer list associated with its directory services business,
      as described in Note 8; and




4.
            Intangible
      assets related to the Company’s directory services business, including
      URLs, internally developed software, and other miscellaneous intangible
      assets.




The
following is a summary of these impaired assets and their net book values, which
were fully written off in the second quarter of fiscal 2009:





Goodwill
                              
                              $
                              11,706,406Domain
      name and marketing related intangibles
                              
                              
                              1,879,054Assets
      related to customer list
                              
                              
                              1,259,680Website
      and technology related intangibles
                              
                              
                              1,266,354$
                              16,111,494





Included
in the assets that became obsolete through the sale of a portion of the
Company’s customer list were $722,103 related to non-compete agreements and
$537,577 of assets associated with the Philippines call-center.





The
Company performed an initial assessment of impairment prior to filing its Form
10-Q for the period ended December 31, 2008, and disclosed an estimated
impairment charge of $14,300,000.  The Company reevaluated these
amounts and increased the corresponding impairment charge to $14,676,568 after
identifying additional impaired website and technology related intangible
assets. Since that time, the Company sold a portion of the Company’s customer
list, which resulted in an additional impairment charge of $1,400,000,
consisting of approximately $175,000 of website and technology related
intangibles and $1,200,000 of other assets made obsolete as described
above.


10




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


Note
7:  Discontinued Operations





As part
of the Company’s strategy to evaluate each of its businesses as separate
entities, management noted that the classifieds business has incurred
significant operating losses and determined that it did not fit with the
Company’s change in strategic direction.  Accordingly, in March 2009,
the Company made the strategic decision to discontinue its classifieds business
and product offerings. The Company initiated shutdown activities in March 2009
and concluded such activities in June 2009, including the shutdown of the
website previously used for classified activities.  Accordingly, the
Company does not expect any future revenues from this business
segment.





The
Company applied the provisions of SFAS No. 144 and determined that, with the
changes in the Company’s reportable segments described in Note 14, the
classified business met the definition of a component as it has separately
identifiable operations and cash flows.  Accordingly, the results of
the classifieds business are reflected as discontinued operations in the
accompanying statements of operations.   Prior year financial
statements have been restated to present the classifieds operations as a
discontinued operation.





In
conjunction with the discontinued operations, the Company recorded charges of
$27,328 in the second quarter of fiscal 2009 for certain exit costs relating to
the shutdown of these operations which is reflected as part of income (loss)
from discontinued operations in the accompanying unaudited condensed
consolidated statements of operations for the nine months ended June 30,
2009.





The
classifieds business accounted for $18,028 and $219,787 of net revenues for the
three and nine months ended June 30, 2009, respectively, and $385,129 and
$1,646,207 of net revenues for the three and nine months ended June 30, 2008,
respectively, which are now included as part of income (loss) from discontinued
operations in the accompanying unaudited condensed consolidated statements of
operations.





Note
8:  Other Income





On
November 5, 2008, the Company entered into an agreement to
sell its Internet domain name “www.yp.com” to
YellowPages.com for a cash payment of $3,850,000.  Although the Company’s
future focus is on the sale of customer acquisition services for small
businesses, a significant source of ongoing revenues is the sale of Internet
Advertising Packages, which targeted users of its www.yp.com property.
 The Company has transitioned these customers to advertising on www.yellowpages.livedeal.com





On March
9, 2009, in connection with the Company’s shift in strategic focus away from its
classified and directory services business, the Company entered into an
agreement to sell a portion of its customer list associated with its directory
services business.  This customer list was sold for $3,093,202 of
which $2,783,097 was paid by the buyer and received during the second quarter of
fiscal 2009, with the remaining amount held back in escrow until December 2009
pending the resolution of potential claims, if any.  Such claims are
contractually limited to the amount held in escrow.  Net of certain
accruals for transaction costs and transaction-related contingencies, the
Company recorded a gain of $2,815,952, which is reflected in other income in the
accompanying unaudited condensed consolidated statement of
operations.





The
Company analyzed this transaction and determined that it did not meet the
definition of a discontinued operation under SFAS No. 144 as the customer list
that was sold did not meet the definition of a component of an entity and as the
Company expects to have continuing involvement and operations in directory
services for the near future.





The
Company also amended another directory services contract in consideration of
accelerated payments on its outstanding accounts receivables and some
anticipated future billings, which resulted in an increase in other income of
$642,268 for the three and nine months ended June 30, 2009,
respectively.  Together with the partial customer list sale described
above, these customers and contracts accounted for $5,146,073 of revenue in the
first nine months of fiscal 2009.  As a result of these transactions,
the Company has no future service obligations to these customers and no longer
expects to generate future revenues from these sources.





Note
9:  Stock-based Compensation





From time
to time, the Company grants restricted stock awards and stock options to
officers, directors, employees and consultants.  Such awards are
valued based on the grant date fair-value of the instruments, net of estimated
forfeitures. The value of each award is amortized on a straight-line basis over
the requisite service period.


11




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


During
the three and nine months ended June 30, 2009, the Company recognized
compensation expense of $23,304 and $69,186, respectively, related to stock
option awards granted to certain employees and executives based on the grant
date fair value of the awards.  The awards were made prior to April 1,
2009.  There were no awards granted during the three months ended June
30, 2009.  No expense was recognized in the three and nine months
ended June 30, 2008 as no stock option awards had been granted prior to June 30,
2008.





The Black
Scholes option pricing model was used to calculate the grant date fair value
with the following weighted-average assumptions:





Quarter Ended
                        
                        
                        Nine MonthsEnded
                        
                        
                        Quarter Ended
                        
                        
                        Nine MonthsEndedJune 30, 2009
                        
                        
                        June 30, 2009
                        
                        
                        June 30, 2008
                        
                        
                        June 30, 2008Volatility
                        
                        
                        N/A
                        
                        
                        
                        97
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ARisk-free
      interest rate
                        
                        
                        N/A
                        
                        
                        
                        2.6
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/AExpected
      term
                        
                        
                        N/A
                        
                        
                        6.0
      years
                        
                        
                        
                        N/A
                        
                        
                        
                        N/AForfeiture
      rate
                        
                        
                        N/A
                        
                        
                        
                        40
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/ADividend
      yield rate
                        
                        
                        N/A
                        
                        
                        
                        0
                        %
                        
                        
                        N/A
                        
                        
                        
                        N/A





The
volatility used was based on historical volatility of the Company’s common
stock, which management considers to be the best indicator of expected future
volatility.  The risk free interest rate was determined based on
treasury securities with maturities equal to the expected term of the underlying
award.  The expected term was determined based on the simplified
method outlined in Staff Accounting Bulletin No. 110.  The Company
utilized an estimated forfeiture rate of 40% based on expected forfeiture rates
pertaining to such individuals.





During
the three and nine months ended June 30, 2009, the Company recognized stock
based compensation expense of $23,304 and $69,186 related to stock option awards
and expense reversals of $74,730 and $207,096 related to restricted stock
awards.  The expense reversals are attributable to a change in
estimated forfeiture rate of awards granted to officers, directors and key
personnel from 40% to 70% in the second quarter of fiscal 2009 and true-ups to
reflect actual forfeiture rates of awards whose vesting period has passed in the
third quarter of fiscal 2009, partially offset by the Company’s normal monthly
expensing of awards over their requisite service period. During the three and
nine months ended June 30, 2008, the Company recognized stock based compensation
expense of $402,100 and $859,270 related to restricted stock
awards.  There was no expense related to stock option awards during
the three and nine months ended June 30, 2008.





The
Company had stock option activity summarized as follows:





Weighted
                
                
                Weighted
                
                
                WeightedAverage
                
                
                Average
                
                
                Average
                
                
                AggregateNumber of
                
                
                Exercise
                
                
                Fair
                
                
                Remaining
                
                
                IntrinsicShares
                
                
                Price
                
                
                Value
                
                
                Contractual Life
                
                
                ValueOutstanding
      at September 30, 2008
                
                
                5,000Granted
      at market price
                
                
                550,000
                
                
                $
                1.45
                
                
                $
                1.13Exercised
                
                
                -
                
                
                $
                -Forfeited
                
                
                (225,000
                )
                
                $
                1.45Outstanding
      at June 30, 2009
                
                
                330,000
                
                
                
                
                
                
                
                
                
                
                
                9.3
                
                
                $
                48,750Exercisable
                
                
                30,000
                
                
                $
                1.67
                
                
                
                
                
                
                
                9.2
                
                
                $
                3,750


12




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


The
following table summarizes information about the Company’s stock options at June
30, 2009:





Exercisable
                    
                    
                    Unexercisable
                    
                    
                    TotalWeighted
                    
                    
                    
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    WeightedNumber
                    
                    
                    Average
                    
                    
                    Number
                    
                    
                    Average
                    
                    
                    Number
                    
                    
                    AverageRange of Exercise Prices
                    
                    Outstanding
                    
                    
                    Exercise Price
                    
                    
                    Outstanding
                    
                    
                    Exercise Price
                    
                    
                    Outstanding
                    
                    
                    ExercisePriceLess
      than $3.00 per share
                    
                    
                    30,000
                    
                    
                    $
                    1.67
                    
                    
                    
                    300,000
                    
                    
                    
                    1.45
                    
                    
                    
                    330,000
                    
                    
                    $
                    1.47





The
following table sets forth the activity with respect to compensation-related
restricted stock grants:





Outstanding
      (unvested) at September 30, 2008
                  
                  
                  227,425Granted
                  
                  
                  10,000Forfeited
                  
                  
                  (70,750
                  )Vested
                  
                  
                  (41,500
                  )Outstanding
      (unvested) at June 30, 2009
                  
                  
                  125,175





Note
10:  Net Loss per Share




Net loss
per share is calculated using the weighted average number of shares of common
stock outstanding during the period.  Basic weighted average common
shares outstanding do not include shares of restricted stock that have not yet
vested, although such shares are included as outstanding shares in the Company’s
unaudited condensed consolidated balance sheet.  Diluted net loss per
share is computed using the weighted average number of common shares. and if
dilutive, potential common shares outstanding during the period. Potential
common shares consist of the incremental common shares issuable from restricted
shares, stock options and convertible preferred stock. As the Company has
incurred a loss for all periods presented, the Company has excluded the effects
of all potential common shares outstanding during the period from the
computation of net loss per share, as such effects are
antidilutive.  Preferred stock dividends are subtracted from net
income to determine the amount available to common
stockholders.




The
following table presents the computation of basic and diluted net loss per
share:




Three Months Ended June 30,
                  
                  
                  Nine Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      loss from continuing operations
                  
                  $
                  (2,116,972
                  )
                  
                  $
                  (1,519,460
                  )
                  
                  $
                  (20,215,870
                  )
                  
                  $
                  (1,214,719
                  )Less:
      preferred stock dividends
                  
                  
                  (479
                  )
                  
                  
                  (480
                  )
                  
                  
                  (1,437
                  )
                  
                  
                  (1,438
                  )Loss
      from continuing operations applicable to common stock
                  
                  
                  (2,117,451
                  )
                  
                  
                  (1,519,940
                  )
                  
                  
                  (20,217,307
                  )
                  
                  
                  (1,216,157
                  )Income
      (loss) from discontinued operations
                  
                  
                  4,649
                  
                  
                  
                  (61,237
                  )
                  
                  
                  (92,706
                  )
                  
                  
                  (36,547
                  )Loss
      applicable to common stock
                  
                  $
                  (2,112,802
                  )
                  
                  $
                  (1,581,177
                  )
                  
                  $
                  (20,310,013
                  )
                  
                  $
                  (1,252,704
                  )Basic
      and diluted weighted average common shares outstanding
                  
                  
                  5,999,268
                  
                  
                  
                  6,222,351
                  
                  
                  
                  6,006,770
                  
                  
                  
                  6,214,099Earnings
      per share - basic1:Loss
      from continuing operations
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.24
                  )
                  
                  $
                  (3.37
                  )
                  
                  $
                  (0.20
                  )Discontinued
      operations
                  
                  $
                  0.00
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )Net
      loss
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.25
                  )
                  
                  $
                  (3.38
                  )
                  
                  $
                  (0.20
                  )Earnings
      per share - diluted1:Loss
      from continuing operations
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.24
                  )
                  
                  $
                  (3.37
                  )
                  
                  $
                  (0.20
                  )Discontinued
      operations
                  
                  $
                  0.00
                  
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )Net
      loss
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.25
                  )
                  
                  $
                  (3.38
                  )
                  
                  $
                  (0.20
                  )





1  Certain
amounts may not total due to rounding of individual components.


13




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


The
following potentially dilutive securities were excluded from the calculation of
diluted net loss per share because the effects were antidilutive based on the
application of the treasury stock method and/or the Company’s operating losses
during the period:





Three Months Ended June 30,
                
                
                Nine Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Shares
      of non-vested restricted stock
                
                
                125,175
                
                
                
                239,175
                
                
                
                167,561
                
                
                
                354,576Stock
      options
                
                
                330,000
                
                
                
                -
                
                
                
                427,141
                
                
                
                -Shares
      of Series E convertible preferred stock
                
                
                127,840
                
                
                
                127,840
                
                
                
                127,840
                
                
                
                127,840





Note
11:  Income Taxes





During
the nine months ended June 30, 2009, the Company established a valuation
allowance in the amount of $9,713,324 against its deferred tax
assets.  While the Company’s management has optimistic plans for its
new business strategy, the Company determined that such a valuation
allowance was necessary given the current and expected near term losses and the
uncertainty with respect to the Company’s ability to generate sufficient profits
from its new business model.  Therefore, the Company established a
valuation allowance for all deferred tax assets in excess of those expected to
be realizable through the application of operating loss carrybacks.





The
following sets forth the Company’s deferred income tax assets and liabilities at
June 30, 2009:





Deferred
      income tax asset, current:Book
      to tax differences in accounts receivable
                        
                        $
                        748,752Book
      to tax differences in prepaid expenses
                        
                        
                        (80,141
                        )Net
      operating loss carryforwards, current
                        
                        
                        271,148Total
      deferred income tax asset, current
                        
                        
                        939,759Less:  valuation
      allowance
                        
                        
                        (668,611
                        )Deferred
      income tax asset, current, net
                        
                        
                        271,148Deferred
      income tax asset, long-term:Net
      operating loss carryforwards, long-term
                        
                        
                        3,210,639Book
      to tax differences for stock based compensation
                        
                        
                        220,227Book
      to tax differences in intangible assets
                        
                        
                        7,155,336Book
      to tax differences in depreciation
                        
                        
                        (1,541,815
                        )Other
      book tax differences
                        
                        
                        326Total
      deferred income tax asset, long-term
                        
                        
                        9,044,713Less:  valuation
      allowance
                        
                        
                        (9,044,713
                        )Deferred
      income tax asset, long-term, net
                        
                        
                        -Total
      deferred income tax assets, net of valuation allowance
                        
                        $
                        271,148





In the
third quarter of fiscal 2009, as the Company had incurred a significant taxable
loss that could be applied retroactively, the Company realized a portion of
their deferred tax assets attributable to net operating losses and reclassified
such amounts from deferred tax assets to income taxes receivable in the
accompanying balance sheet at June 30, 2009.





A
reconciliation of the differences between the effective and statutory income tax
rates for the nine months ended June 30, 2009 and 2008, respectively, is as
follows:


14


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


Nine Months Ended June 30,2009
                    
                    
                    2008Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    PercentFederal
      statutory rates
                    
                    $
                    (5,493,779
                    )
                    
                    
                    34
                    %
                    
                    $
                    (413,850
                    )
                    
                    
                    34
                    %State
      income taxes
                    
                    
                    (543,107
                    )
                    
                    
                    3
                    %
                    
                    
                    (40,912
                    )
                    
                    
                    3
                    %Write
      off of deferred tax asset related to vested restricted
    stock
                    
                    
                    48,570
                    
                    
                    
                    (0
                    )%
                    
                    
                    445,022
                    
                    
                    
                    (37
                    )%Valuation
      allowance
                    
                    
                    9,713,324
                    
                    
                    
                    (60
                    )%
                    
                    
                    -
                    
                    
                    
                    0
                    %True
      up to tax returns and other
                    
                    
                    332,687
                    
                    
                    
                    (2
                    )%
                    
                    
                    7,254
                    
                    
                    
                    (1
                    )%Effective
      rate
                    
                    $
                    4,057,695
                    
                    
                    
                    (25
                    )%
                    
                    $
                    (2,486
                    )
                    
                    
                    0
                    %





Note
12:  Commitments and Contingencies





Operating Leases and Service
Contracts





As of
June 30, 2009, future minimum annual payments under operating lease agreements
and non-cancelable service contracts for fiscal years ending September 30 are as
follows:




Payments Due by Fiscal YearTotal
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    ThereafterOperating
      lease commitments
                    
                    $
                    1,533,822
                    
                    
                    $
                    158,680
                    
                    
                    $
                    551,922
                    
                    
                    $
                    427,621
                    
                    
                    $
                    316,879
                    
                    
                    $
                    78,720
                    
                    
                    $
                    -Noncanceleable
      service contracts
                    
                    
                    1,388,853
                    
                    
                    
                    524,853
                    
                    
                    
                    605,000
                    
                    
                    
                    259,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    2,922,675
                    
                    
                    $
                    683,533
                    
                    
                    $
                    1,156,922
                    
                    
                    $
                    686,621
                    
                    
                    $
                    316,879
                    
                    
                    $
                    78,720
                    
                    
                    $
                    -




This
table excludes minimum payment obligations under capital leases as such
obligations are set forth elsewhere in this footnote.


15




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


Capital
leases





As of
June 30, 2009, future obligations under non-cancelable capital leases are as
follows for the fiscal years ended September 30:





2009
                  
                  $
                  19,2192010
                  
                  
                  76,8762011
                  
                  
                  76,8762012
                  
                  
                  44,8442013
                  
                  
                  -Thereafter
                  
                  
                  -Total minimum lease payments
                  
                  
                  217,815Less imputed interest
                  
                  
                  (13,266
                  )Present value of minimum lease payments
                  
                  
                  204,549Less: current maturities of capital lease
    obligations
                  
                  
                  68,820Noncurrent maturities of capital lease obligations
                  
                  $
                  135,729





Litigation





Global
Education Services, Inc. v. LiveDeal, Inc.





On June
6, 2008, Global Education Services, Inc. (“GES”) filed a consumer fraud class
action lawsuit against the Company and its wholly owned subsidiary, Telco
Billing, Inc., in King County (Washington) Superior Court.  GES
alleged in its complaint that the Company’s use of activator checks
violated the Washington Consumer Protection Act.  GES is seeking
injunctive relief against our use of the checks, as well as a judgment in
an amount equal to three times the alleged damages sustained by GES and
the members of the class.  LiveDeal has denied the
allegations.  Legal proceedings in the matter are ongoing, and
discovery began in January 2009.The Company is currently
unable to estimate any possible losses associated with these matters and no
amounts have been accrued at June 30, 2009.





Complaint
filed by Illinois Attorney General against LiveDeal, Inc.





On
November 12, 2008, the Illinois Attorney General filed a complaint in the
Circuit Court of the Seventh Judicial Circuit of the State of Illinois (Sangamon
County) against the Company requesting money damages and injunctive relief for
claims that we employed deceptive and unfair acts and practices in
violation of the Illinois Consumer Fraud and Deceptive Business Act in a
telemarketing campaign that in part promoted premium Internet Yellow
Page listings to Illinois consumers.  LiveDeal has denied
the allegations.  Legal proceedings in the manner are ongoing and
discovery began in April, 2009.  The Company is currently unable to
estimate any possible losses associated with these matters and no amounts have
been accrued at June 30, 2009.





LiveDeal,
Inc. v. On-Call Superior Management (“OSM”)  and SMeVentures, Inc.
(“SMe”)





On April
6, 2009, LiveDeal filed a declaratory judgment to a termination of contract
claim and a complaint on May 29, 2009 against OSM and SMe, Philippines call
center managers with whom the Company entered into contracts in November of 2007
and earlier, to provide inbound and outbound telemarketing services,
respectively, alleging breach of contract.  OSM and SMe have
counterclaimed, alleging breach of contract.  Legal proceedings in the
matter are ongoing.  The Company is currently unable to estimate any
possible losses associated with these matters and no amounts have been accrued
at June 30, 2009.





Note
13:  Concentration of Credit Risk





The
Company maintains cash balances at major nationwide institutions in Arizona,
California and Nevada.  Accounts are insured by the Federal Deposit
Insurance Corporation up to $250,000.


16




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily trade accounts receivable.  The trade accounts
receivable are due primarily from business customers over widespread
geographical locations within the LEC billing areas across the United
States.  The Company historically has experienced significant dilution
and customer credits due to billing difficulties and uncollectible trade
accounts receivable.  The Company estimates and provides an allowance
for uncollectible accounts receivable.  The handling and processing of
cash receipts pertaining to trade accounts receivable is maintained primarily by
two third-party billing companies.  The net receivable due from these
entities represented 27% and 11%, respectively, of the Company’s total net
accounts receivable (excluding non-specific reserves) at June 30, 2009. The
net receivable due from these entities represented 31% and 13%, respectively, of
the Company’s total net accounts receivable (excluding non-specific reserves) at
September 30, 2008.  Additionally, the Company maintains a wholesale
fulfillment contract with a third-party which accounted for 26% of the Company’s
total net accounts receivable (excluding non-specific reserves) at June 30,
2009.  This party accounted for 13% of the Company’s total net
accounts receivable (excluding non-specific reserves) at September 30,
2008.




Note
14:  Segment Reporting





Prior to
fiscal 2009, the Company operated as an integrated business and had only one
reportable segment.  During the second quarter of fiscal 2009, the
Company implemented a corporate initiative that evaluates its different product
lines as separate business units.  As part of this strategy,
management has begun evaluating operating performance by reviewing the
profitability of these product lines on a standalone
basis.  Therefore, the Company now has two reportable operating
segments (excluding the discontinued classifieds business):  Directory
Services and Direct Sales - Customer Acquisition Services.  The
Company has yet to identify and allocate operating costs or impairment charges
to its reportable segments below the gross profit
level.  Additionally, the reportable segments share many common costs,
including, but not limited to, IT support, office and administrative
expenses.  Therefore, the following table of operating results does
not allocate costs to its reportable segments below the gross profit
level:




17


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


Nine Months Ended June 30, 2009Directory
                    Services
                  
                  
                  Direct Sales -
                    Customer
                    Acquisition
                    Services
                  
                  
                  Unallocated
                  
                  
                  ConsolidatedNet
      revenues
                  
                  $
                  8,068,710
                  
                  
                  $
                  2,937,648
                  
                  
                  $
                  -
                  
                  
                  $
                  11,006,358Cost
      of services
                  
                  
                  2,518,160
                  
                  
                  
                  1,361,693
                  
                  
                  
                  -
                  
                  
                  
                  3,879,853Gross
      profit
                  
                  
                  5,550,550
                  
                  
                  
                  1,575,955
                  
                  
                  
                  -
                  
                  
                  
                  7,126,505Operating
      expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,653,870
                  
                  
                  
                  30,653,870Operating
      income (loss)
                  
                  
                  5,550,550
                  
                  
                  
                  1,575,955
                  
                  
                  
                  (30,653,870
                  )
                  
                  
                  (23,527,365
                  )Other
      income (expense)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,369,190
                  
                  
                  
                  7,369,190Income
      (loss) before income taxes and discontinued operations
                  
                  $
                  5,550,550
                  
                  
                  $
                  1,575,955
                  
                  
                  $
                  (23,284,680
                  )
                  
                  $
                  (16,158,175
                  )





Nine Months Ended June 30, 2008Directory
                  Services
                
                
                Direct Sales -
                  Customer
                  Acquisition
                  Services
                
                
                Unallocated
                
                
                ConsolidatedNet
      revenues
                
                $
                17,553,551
                
                
                $
                319,057
                
                
                $
                -
                
                
                $
                17,872,608Cost
      of services
                
                
                2,935,546
                
                
                
                254,778
                
                
                
                -
                
                
                
                3,190,324Gross
      profit
                
                
                14,618,005
                
                
                
                64,279
                
                
                
                -
                
                
                
                14,682,284Operating
      expenses
                
                
                -
                
                
                
                -
                
                
                
                15,963,440
                
                
                
                15,963,440Operating
      income
                
                
                14,618,005
                
                
                
                64,279
                
                
                
                (15,963,440
                )
                
                
                (1,281,156
                )Other
      income (expense)
                
                
                -
                
                
                
                -
                
                
                
                63,951
                
                
                
                63,951Income
      before income taxes and discontinued operations
                
                $
                14,618,005
                
                
                $
                64,279
                
                
                $
                (15,899,489
                )
                
                $
                (1,217,205
                )





Given
that the Company has only recently implemented its reportable segments, it has
yet to allocate its assets to each respective segment.  While some
software costs are specific to each business, most of the Company’s fixed assets
and software architecture are shared among its segments.  Therefore,
the Company is currently unable to provide asset information with respect to
each of its reportable segments, except as it pertains to accounts receivable as
set forth below:


18


LIVEDEAL,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)


June 30, 2009Directory
                    Services
                  
                  
                  Direct Sales -
                    Customer
                    Acquisition
                    Services
                  
                  
                  TotalAccounts
      receivable, net - short term
                  
                  $
                  1,415,814
                  
                  
                  $
                  229,152
                  
                  
                  $
                  1,644,966Accounts
      receivable, net - long term
                  
                  
                  2,701,813
                  
                  
                  
                  -
                  
                  
                  
                  2,701,813Total
      accounts receivable, net
                  
                  $
                  4,117,627
                  
                  
                  $
                  229,152
                  
                  
                  $
                  4,346,779





September 30, 2008 (as restated, see Note 3)Directory
                    Services
                  
                  
                  Direct Sales -
                    Customer
                    Acquisition
                    Services
                  
                  
                  TotalAccounts
      receivable, net - short term
                  
                  $
                  6,326,272
                  
                  
                  $
                  -
                  
                  
                  $
                  6,326,272Accounts
      receivable, net - long term
                  
                  
                  2,011,143
                  
                  
                  
                  -
                  
                  
                  
                  2,011,143Total
      accounts receivable, net
                  
                  $
                  8,337,415
                  
                  
                  $
                  -
                  
                  
                  $
                  8,337,415





The
Company has no intersegment revenues.  All of the Company’s revenues
are with external customers, are derived from operations in the United States,
and no single customer accounts for more than 10 percent of the Company’s
revenues.





Note
15:  Recent Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for
measuring fair value under generally accepted accounting procedures and expands
disclosures on fair value measurements. This statement applies under previously
established valuation pronouncements and does not require the changing of any
fair value measurements, though it may cause some valuation procedures to
change. Under SFAS No. 157, fair value is established by the price that would be
received to sell the item or the amount to be paid to transfer the liability of
the asset as opposed to the price to be paid for the asset or received to
transfer the liability. Further, it defines fair value as a market specific
valuation as opposed to an entity specific valuation, though the statement does
recognize that there may be instances when the low amount of market activity for
a particular item or liability may challenge an entity’s ability to establish a
market amount. In the instances that the item is restricted, this pronouncement
states that the owner of the asset or liability should take into consideration
what affects the restriction would have if viewed from the perspective of the
buyer or assumer of the liability. This statement is effective for all assets
valued in financial statements for fiscal years beginning after November 15,
2007.  The adoption of the pronouncement did not have a material
effect on our financial position or results of operations.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which provides companies with
an option to report selected financial assets and liabilities at fair
value.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007 with early adoption
allowed.  The adoption of the pronouncement did not have a material
effect on our financial position or results of operations.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS No. 141(R)”) and No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”).
SFAS No. 141(R) and SFAS No. 160 are products of a joint project between the
FASB and the International Accounting Standards Board.  The revised
standards continue the movement toward the greater use of fair values in
financial reporting. SFAS No. 141(R) will significantly change how business
acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. These changes include the expensing
of acquisition related costs and restructuring costs when incurred, the
recognition of all assets, liabilities and noncontrolling interests at fair
value during a step-acquisition, and the recognition of contingent consideration
as of the acquisition date if it is more likely than not to be
incurred.  SFAS No. 160 will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity.  SFAS No. 141(R) and SFAS No.
160 are effective for both public and private companies for fiscal years
beginning on or after December 15, 2008 (October 1, 2009 for the Company). SFAS
No. 141(R) will be applied prospectively. SFAS No. 160 requires retroactive
adoption of the presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS No. 160 shall be applied
prospectively. Early adoption is prohibited for both standards.  The
Company does not expect to be impacted by the implementation of this
pronouncement.


19


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS
161 modifies existing requirements to include qualitative disclosures regarding
the objectives and strategies for using derivatives, fair value amounts of gains
and losses on derivative instruments and disclosures about credit-risk-related
contingent features in derivative agreements. The pronouncement also requires
the cross-referencing of derivative disclosures within the financial statements
and notes thereto. The requirements of SFAS 161 are effective for interim and
annual periods beginning after November 15, 2008. The Company was not impacted
by the adoption of SFAS 161.





In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets. The intent of the position
is to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(R), and other GAAP. FSP
FAS 142-3 is effective for fiscal years beginning after December 15, 2008.
FSP FAS 142-3 is effective for the Company on October 1, 2009. The Company
is currently evaluating the impact that the adoption of FSP FAS 142-3 will have
on its financial condition, results of operations, and disclosures.





In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement shall be effective
60 days following the Securities and Exchange Commission’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of SFAS 162 is not expected to have a material impact
to the Company’s financial position or results of operations. .





In May of
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60 (“SFAS 163”). The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.




In May
2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP”). The FSP
specifies that issuers of convertible debt instruments that permit or require
the issuer to pay cash upon conversion should separately account for the
liability and equity components in a manner that will reflect the entity’s
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. The Company would be required to apply the guidance
retrospectively to all past periods presented, even to instruments that have
matured, converted, or otherwise been extinguished as of the effective date. The
FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years.  The Company does not believe this FSP will impact its
financial statements.





In June
2008, the Emerging Issues Task Force (“EITF”) issued Issue No. 07-05,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock” (“Issue 07-05”). EITF No. 07-05 addresses the
determination of whether an instrument (or an embedded feature) is indexed to an
entity’s own stock, if an instrument (or an embedded feature) that has the
characteristics of a derivative instrument is indexed to an entity’s own stock,
it is still necessary to evaluate whether it is classified in stockholders’
equity (or would be classified in stockholders’ equity if it were a freestanding
instrument). In addition, some instruments that are potentially subject to the
guidance in EITF Issue No. 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”
(“Issue 00-19”) but do not have all the characteristics of a derivative
instrument under paragraphs 6 through 9, it is still necessary to evaluate
whether it is classified in stockholders’ equity. It is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company does not believe this pronouncement will impact its financial
statements.


20




LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)




In May
2009 the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). This
statement establishes new terminology and disclosure requirements pertaining to
subsequent events and was effective for interim or annual periods ending after
June 15, 2009.  The Company adopted this pronouncement in the three
months ended June 30, 2009 and has provided the new disclosure
requirements.




Note
16:  Subsequent Events




On May
19, 2009, Richard F. Sommer was appointed as our new President and Chief
Executive Officer ("CEO"), effective immediately, to replace Mike Edelhart, the
outgoing CEO, whose employment as CEO terminated the same
day.   We entered into a separation agreement dated July 8, 2009
that provided for a one-time payment of $62,500 to Mr. Edelhart together with a
payment for accrued vacation and certain other expenses.  We
recognized expenses totaling $93,195 associated with Mr. Edelhart’s departure
during the quarter ended June 30, 2009.  As of June 30, 2009, we had
an outstanding liability of $78,563 related to unpaid termination
costs.




The
Company has evaluated subsequent events through August 14, 2009 which is the
date the financial statements were issued.


21




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




For a
description of our significant accounting policies and an understanding of the
significant factors that influenced our performance during the three and nine
months ended June 30, 2009, this “Item 2.  Management’s Discussion and
Analysis of Financial Condition and Results of Operations” (hereafter referred
to as “MD&A”) should be read in conjunction with the condensed consolidated
financial statements, including the related notes, appearing in Part I, Item 1
of this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K
for the year ended September 30, 2008.




Forward-Looking
Statements




This
portion of this Quarterly Report on Form 10-Q includes statements that
constitute “forward-looking statements.”  These forward-looking
statements are often characterized by the terms “may,” “believes,” “projects,”
“intends,” “expects,” or “anticipates,” and do not reflect historical
facts.  Specific forward-looking statements contained herein include,
but are not limited to, our expectation that continued investment in online
advertising to bring increased traffic to our websites will drive increased
revenues; our belief that our existing cash on hand will provide us with
sufficient liquidity to meet our operating needs for the next 12 months; that we
will experience declining revenues from our classifieds business and other
discontinued businesses; the impact of the adoption of new accounting
pronouncements; that we will continue to make capital expenditures to grow our
business consistent with our new strategy; that our customer acquisition
services will account for a larger percentage of total net revenues; and the
expectation that we will be able to realize our deferred tax assets (net of
valuation allowances) through the use of net operating loss
carrybacks.




Forward-looking
statements involve risks, uncertainties and other factors, which may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by such forward-looking
statements.  Factors and risks that could affect our results and
achievements and cause them to materially differ from those contained in the
forward-looking statements include those identified in our Annual Report on Form
10-K for the fiscal year ended September 30, 2008 under Item 1A “Risk Factors”,
as well as other factors that we are currently unable to identify or quantify,
but that may exist in the future.




In
addition, the foregoing factors may affect generally our business, results of
operations, and financial position.  Forward-looking statements speak
only as of the date the statement was made.  We do not undertake and
specifically decline any obligation to update any forward-looking
statements.




Our
Company




LiveDeal,
Inc. provides local customer acquisition services for small businesses combined
with an Internet Yellow Pages directory to deliver an affordable way for
businesses to extend their marketing reach to local, relevant customers via the
Internet. Through its online property, www.livedeal.com,
LiveDeal delivers local search engine marketing (SEM) such as its LiveClicks TM
and LiveAdvisorTM products that combine leading technology with a strong
partnership model and an inside sales team to create an efficient platform local
businesses need to create and optimize their Internet search advertising
campaigns. LiveDeal partners with Google, Yahoo!, MSN and others. LiveDeal, Inc.
is headquartered in Las Vegas, Nevada. For more information, please visit www.livedeal.com.




We have
two inter-related primary lines of business: (1) We deliver a suite of customer
acquisition services for small businesses, sold via telemarketing and supported
by our websites and software that we have developed or licensed to manage search
and other Internet services efficiently, and (2) we maintain a Yellow Pages
directory with listings in every city and zip code across the U.S.





Summary
Business Description





Direct SalesServices.Since
February 2008, we have added a new line of business that utilizes, but is not
entirely dependent on, our directory websites and billing services. This line of
business is based around using telesales and sophisticated Internet customer
acquisition technologies to deliver a suite of customer acquisition services to
small businesses.





The most
significant of these customer acquisition services is Internet search and the
tying of Internet advertising services to search. This development is intended
to enable customers to find the businesses they need without ever going to a
directory. The small business whose website information or advertising message
is associated with a successful search becomes the likely recipient of that
business. So, utilizing Internet search and related advertising is fast becoming
a necessity for small businesses.


22




Another
key Internet development is the rise of locally oriented user review sites and
services, such as Yelp.com. At these sites, consumers let each other know about
their experiences with local businesses. They rate and comment on the
businesses. The sites also tend to provide some aspects of traditional
directories as well as new services, such as placing businesses on a local map,
providing driving directions, etc. At these sites, as with Internet search,
consumers can select businesses for their commerce without ever using a
traditional directory.





With the
emergence of these new Internet capabilities, and others that are fast emerging,
the role of directories, both paper and Internet, is steadily becoming a less
preferred customer acquisition process, where search and review sites are
becoming the new standard, where we believe the greatest value for both customer
and business resides.





Our
current Direct Sales Services Suite includes:





·
            Website
      acquisition whereby we obtain website address names on behalf of our small
      business clients.





·
            Website
      development and deployment services where we create, house and manage
      websites on behalf of our small business
  clients.





·
            Website
      traffic and audience development whereby we provide sophisticated search
      engine marketing techniques, access to our own websites, partnerships with
      other websites and other techniques to generate traffic to our customers’
      websites, whether created and housed by us or
  not.





·
            Website
      analytics and performance reports which generate information for our
      customers about activities on their websites and lead activities for their
      businesses based on Internet
activities.





·
            Directory
      services that provide both basic and enhanced directory listings for our
      customers on our own directory and on partner
  directories.





In the
aggregate, these services have grown rapidly and represented 27% of our net
revenues in the first nine months of fiscal 2009 as compared to 2% of our net
revenues in the first nine months of fiscal 2008.





Directory
Services. We maintain a Yellow Pages directory with
listings in every city and zip code across the U.S and we generate revenue from
the sale of various advertising packages to listed businesses.  As we
have shifted our business strategy away from this line of business and sold our
primary URL and a portion of our customer list, we expect to experience
declining future revenues from this segment.





Recent
Events & Transactions





Third
Quarter of Fiscal 2009





Business Strategy
Update





As
discussed below, in the second quarter of fiscal 2009, we shifted our business
strategy away from our directory services and classifieds business to our new
focus of delivering a suite of Internet-based, local search
driven, customer acquisition services for small businesses, sold via
telemarketing and supported by our websites and internally developed
software.





In
connection with this strategy, we entered into a series of transactions and
commenced a series of actions outlined below to monetize our legacy businesses
through the sale of significant assets and a portion of our customer
list.  Additionally, we have engaged in a series of cost-reduction
efforts which have continued in the third quarter of fiscal 2009.  We
have made significant investments in our new product offerings (consisting of
capitalized software development costs, software license fees and related
computer hardware) and we expect to continue to make such capital expenditures
which we believe will poise us for future growth.





Restructuring
Activities





On June
9, 2009, we implemented a restructuring plan previously approved by our Board of
Directors that included a reduction in force that resulted in the termination of
approximately 13% of our workforce. As part of this plan, we also initiated
activities to close certain of our facilities.  We took these actions
in order to reduce costs and improve our cost structure in the current operating
environment and in light of changes in our strategic
focus.  Substantially all restructuring activities were completed in
July 2009.


23


In
connection with these activities, we incurred expenses, consisting primarily of
cash expenditures, of $327,408 which have  been reflected as part of
general and administrative expenses in the accompanying consolidated statement
of operations for the three and nine months ended June 30, 2009.  Of
the restructuring charges incurred, $277,059 related to severance costs and
$50,349 related to office closure costs.  As of June 30, 2009, we had
an outstanding liability of $84,839 related to unpaid restructuring
costs.  All restructuring costs were related to the consolidation of
operations to one location, and were accounted for as general and administrative
expenses.





Management
Changes





On May
19, 2009, Richard F. Sommer was appointed as our new President and Chief
Executive Officer ("CEO"), effective immediately, to replace Mike Edelhart, the
outgoing CEO, whose employment as CEO terminated the same day. Mr. Sommer has
served as a member of our Board of Directors since June 2008. Following his
appointment as President and Chief Executive Officer, Mr. Sommer will remain a
director but will no longer be a member of our Compensation Committee or
Corporate Governance and Nominating Committee, both of which are required to
consist only of independent directors under NASDAQ Listing Rules.





Mr.
Sommer, 46, is a former Chief Executive Officer of ZipRealty and served on the
Board of Directors of ZipRealty from September 2006 until December 15, 2008.
Prior to joining ZipRealty, Mr. Sommer was the Chief Executive Officer of
HomeGain.com. In addition to his leadership of HomeGain, Mr. Sommer served as
Senior Vice President of Business Development for the mortgage banking division
of IndyMac Bank. He also served as President and Managing Director of
international real estate operations for Realtor.com. Mr. Sommer also co-founded
and was President and Chief Executive Officer of Accordus, a technology
infrastructure company serving the health care products industry. From 1988
until 1998, Mr. Sommer was founder, President and Chief Executive Officer of De
La Cruz Occupational Healthcare. He began his career with McKinsey & Co. Mr.
Sommer graduated cum laude in 1983 from Princeton University with a degree in
politics and was a Rhodes Scholar at Oxford University, where he earned a
Master's Degree in international political economy. In 1990, Mr. Sommer earned a
law degree from the Stanford Law School.





We
believe that Mr. Sommer’s experience in his past six assignments as CEO,
including Homegain.com and Realtor.com, demonstrates his ability to create
strong profitable growth and substantially increase shareholder value in
companies that were directed at bringing small-to-medium sized businesses to the
Internet which is central to our business strategy.





In
connection with Mr. Edelhart’s termination, we entered into a separation
agreement dated July 8, 2009 that provided for a one-time payment of $62,500 to
Mr. Edelhart together with a payment for accrued vacation and certain other
expenses.  We recognized expenses totaling $93,195 associated with Mr.
Edelhart’s departure during the quarter ended June 30, 2009.  As of
June 30, 2009, we had an outstanding liability of $78,563 related to unpaid
termination costs.





Also, in
connection with the restructuring activities described above and as part of
refinements to our business strategy, certain managerial positions were
eliminated in June 2009, including the positions of Vice President of Product
Management and Vice President of Technology Strategy held by Yishay Yovel and
Dean Heistad, respectively.  See “Restructuring Activities”
above.





First
and Second Quarter of Fiscal 2009





Change in Business
Strategy




In
January 2009, we evaluated our business and adopted a new business strategy that
moved away from the integration of our Yellow Pages and classifieds businesses
to one which addressed each of our business segments as separate entities. This
evaluation was necessitated by the growth in our Direct Sales - Customer
Acquisition Services business lines that provides Internet-based customer
acquisition strategies for small business, as well as declining revenues from
our traditional business lines  (i.e. directory services and
classifieds).  Additionally, current economic and regulatory forces,
both general and specific to our industry, impacted our consideration of our
existing business model and strategy. Some of these factors include the
following:




1.
              The
      current effects of the recession and general economic
      downturn;




2.
            Our
      perception that the general economic downturn could lead our business
      customers to seek lower-cost customer acquisition methods, primarily
      through the Internet;


24




3.
                The
      sale of our “www.yp.com” domain name in the first quarter of 2009, which
      domain name was associated with our traditional
  business;




4.
            The
      reconstitution of our management team with additional capability in
      Internet-based technologies;




5.
              The
      termination of certain significant directory business contracts related to
      the traditional business;




6.
            The
      sale of certain of our traditional business assets including certain of
      our customer lists; and




7.
              Continuing
      losses in our classifieds
business.




As a
result, we made significant changes to our business strategy during the second
quarter of fiscal 2009.  We decided to move our strategic focus
away from our directory services and classified
businesses.   Additionally, we discontinued the operations
of our Philippines-based call center which has historically provided
telemarketing services to support our directory services business - specifically
those directory services which were sold during the second quarter of fiscal
2009.    These strategic changes impacted our financial
statements during the second quarter of fiscal 2009 in the following
manner:




1.
            Impairment
      charges of $16,111,494 were recorded related to the write-down of our
      goodwill and other intangible
assets;




2.
            We
      commenced a plan to discontinue our classifieds business and initiated
      shutdown activities;




3.
            We
      sold our customer list associated with its directory services business and
      recorded a gain of  $2,815,952;
and




4.
            We
      established a valuation allowance of $9,713,322 related to our deferred
      tax assets.




Our new
strategic focus is on delivering a suite of Internet-based, local search
driven, customer acquisition services for small businesses, sold via
telemarketing and supported by our websites and internally developed
software.




Sale ofwww.yp.com




On
November 5, 2008, we entered into an agreement to
sell our Internet domain name “www.yp.com” to
YellowPages.com for a cash payment of $3,850,000.  Although our future
focus is on the sale of customer acquisition services for small and medium-sized
businesses, a significant source of ongoing revenues is the sale of Internet
Advertising Packages, which targeted users of our www.yp.com property.
 We have transitioned these customers to advertising on www.yellowpages.livedeal.com.





Management
Changes





On
January 20, 2009, we announced the following managerial changes, which occurred
during and shortly after the three months ended December 31, 2008:





·
            Rajeev
      Seshadri replaced Gary Perschbacher as Chief Financial Officer effective
      January 20, 2009;


·
            President
      and Chief Operating Officer, John Raven submitted his resignation
      effective February 15, 2009;


·
            Yishay
      Yovel was named Vice President of Product Management in October of
      2008;


·
            Pamela
      Sziebert was appointed Vice President of Marketing in November of
      2008;


·
            Dean
      Heistad was appointed the Company’s new Vice President of Technology
      Strategy as of January 5, 2009; and


·
            Ruben
      Atchison joined the Company as Director of Search Engine Marketing in
      December 2008.





Subsequently,
in connection with the restructuring implemented on June 9, 2009, the Company
eliminated the positions of Vice President of Product Management and Vice
President of Technology Strategy, respectively, and both Yishay Yovel and Dean
Heistad left the Company.


25


Impairment of Goodwill and
Other Intangibles




In
January 2009, in connection with the strategic changes described above and at
the direction of our Audit Committee, we commenced an interim reporting period
review of our goodwill and intangible assets for impairment.  In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets”, and SFAS No. 144, “Accounting for the Impairment and
Disposal of Long-Lived Assets”, we evaluate goodwill and other long-lived
assets for impairment on an annual basis or whenever facts and circumstances
indicate that impairment may exist.  Current economic and regulatory
forces, both general and specific to our industry, caused management to consider
our existing business model and strategy as described in “Change in Business
Strategy” included herein.




In light
of the changes in our business, we determined that a triggering event had
occurred and initiated an impairment analysis.Based upon the analysis,
management determined that the following items were impaired:




1.
            The
      goodwill acquired in our acquisition of LiveDeal, Inc., the business focus
      of which was online classified
advertising;




2.
            The
      goodwill acquired in our acquisition of a Philippines call-center, 247
      Marketing, Inc., the business focus of which was providing
      telemarketing services to acquire customers for our directory
      services business;




3.
            Assets
      related to our call-center operations and non-compete agreements that were
      effectively made obsolete by the sale of a portion of our customer list
      associated with our directory services business;
  and




4.
            Intangible
      assets related to our directory services business, including URLs,
      internally developed software, and other miscellaneous intangible
      assets.




The
following is a summary of these impaired assets and their net book values, which
were fully written off in the second quarter of fiscal 2009:





Goodwill
                          
                          $
                          11,706,406Domain
      name and marketing related intangibles
                          
                          
                          1,879,054Assets
      related to customer list
                          
                          
                          1,259,680Website
      and technology related intangibles
                          
                          
                          1,266,354$
                          16,111,494





Included
in the assets that became obsolete through the sale of a portion of our customer
list were $722,103 related to non-compete agreements and $537,577 of assets
associated with the Philippines call-center.





We
performed an initial assessment of impairment prior to filing our Form 10-Q for
the period ended December 31, 2008, and disclosed an estimated impairment charge
of $14,300,000.  We reevaluated these amounts and increased the
corresponding impairment charge to $14,676,568 after identifying additional
impaired website and technology related intangible assets related to the items
identified earlier. Since that time, we sold a portion of our customer list,
which resulted in an additional impairment charge of approximately $1,400,000,
consisting of approximately $175,000 of website and technology related
intangibles and $1,200,000 of other assets made obsolete as described
above.





Sale of Customer List and
Other Income





On March
9, 2009, in connection with our shift in strategic focus away from our
classified and directory services business, we entered into an agreement to sell
a portion of our customer list associated with our directory services
business.  This customer list was sold for $3,093,202, of which
$2,783,097 was paid by the buyer and received during the second quarter of
fiscal 2009 with the remaining amount held back in escrow pending the resolution
of potential claims, if any.  Such claims are contractually limited to
the amount held in escrow. Net of certain accruals for transaction costs and
transaction-related contingencies, we recorded a gain of $2,815,952, which is
reflected in other income in the accompanying unaudited condensed consolidated
statement of operations.





We also
amended another directory services contract in consideration of accelerated
payments on our outstanding accounts receivable and some anticipated future
billings that resulted in an increase in other income of $642,268 for the three
and nine months ended June 30, 2009, respectively.  Together with the
partial customer list sale described above, these customers and contract
accounted for $5,146,073 of revenue in the first nine months of fiscal
2009.  As a result of these transactions, we have no future service
obligations to these customers and no longer expect to generate future revenues
from these sources.


26




Discontinued
Operations





As part
of the Company’s strategy to evaluate each of its business as separate entities,
management noted that the classifieds business has incurred significant
operating losses and determined that it did not fit with the Company’s change in
strategic direction.  Accordingly, in March 2009, we made the
strategic decision to discontinue our classifieds business and product
offerings.  We initiated shutdown activities in March 2009 (including
the notification of certain impacted vendors and employees)  and
expect to conclude such activities by the end of May 2009, including the
shutdown of the website previously used for classified
activities.  Accordingly, we do not expect any future revenues from
this business segment and are reflecting the results of the classifieds business
as discontinued operations.   Prior year financial statements
have been restated to present the classifieds operations as a discontinued
operation.





The
classifieds business accounted for $18,028 and $219,787 of net revenues for the
three and nine months ended June 30, 2009, respectively, and $385,129 and
$1,646,207 of net revenues for the three and nine months ended June 30, 2008,
respectively, which are now included as part of income (loss) from discontinued
operations in the accompanying unaudited condensed consolidated statements of
operations.





Results
of Operations




Net Revenues




Net Revenues2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  2,448,569
                  
                  
                  $
                  5,427,012
                  
                  
                  $
                  (2,978,443
                  )
                  
                  
                  (55
                  )%Nine
      Months Ended June 30,
                  
                  $
                  11,006,358
                  
                  
                  $
                  17,872,608
                  
                  
                  $
                  (6,866,250
                  )
                  
                  
                  (38
                  )%




Net
revenues decreased in the third quarter of fiscal 2009 as compared to the third
quarter of fiscal 2008 due primarily to a decrease of approximately $4,122,000
in sales of our directory service products, reflecting the de-emphasis of this
business line and the effects of the sale of our URL an a portion of our
customer list.  However, this decrease was partially offset by an
increase in our customer acquisition services of approximately $1,144,000 as a
result of expanded marketing efforts related to these products and the further
development in our business.




Net
revenues decreased in the first nine months of fiscal 2009 as compared to the
first nine months of fiscal 2008 for similar reasons, with a decrease of
approximately $9,485,000 in directory service products and an increase of
$2,618,000 in sales of customer acquisition services.




We expect
revenues to continue to migrate to customer acquisition services as we
de-emphasize our directory services products in order to focus on our new
business strategy.




Cost
of Services




Cost of Services2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  812,321
                  
                  
                  $
                  1,115,293
                  
                  
                  $
                  (302,972
                  )
                  
                  
                  (27
                  )%Nine
      Months Ended June 30,
                  
                  $
                  3,879,853
                  
                  
                  $
                  3,190,324
                  
                  
                  $
                  689,529
                  
                  
                  
                  22
                  %




Cost of
services decreased in the third quarter of fiscal 2009 as compared to the third
quarter of fiscal 2008 attributable to a $644,000 decrease in costs associated
with our directory services business, offset by a $341,000 increase in costs
associated with our customer acquisition services, reflecting revenue changes in
each of these business lines and our new business strategy.




Although
our revenues declined significantly in our directory services business, our cost
of sales declined by only $644,000 as we continue to experience cost increases
on a per customer basis due to increased regulatory requirements and an increase
in per-customer charges billed to us from our third party service
providers.  These factors contributed to our strategic shift away from
directory services as our primary line of business.  We also
experienced an increase of $341,000 in costs related to our customer acquisition
services, reflecting revenue growth and the development in this
business.


27




Costs of
services increased in the first nine months of fiscal 2009 as compared to the
first nine months of fiscal 2008 for similar reasons, with a $417,000 decrease
in costs related to our directory services and increased costs related to our
customer acquisition services of approximately $1,107,000.  Despite
revenue declines in our directory services business in the first and second
quarter of fiscal 2009, we experienced cost increases due to increased
regulatory requirements and an increase in per-customer charges billed to us
from our third party service providers.




Gross
Profit




Gross Profit2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  1,636,248
                  
                  
                  $
                  4,311,719
                  
                  
                  $
                  (2,675,471
                  )
                  
                  
                  (62
                  )%Nine
      Months Ended June 30,
                  
                  $
                  7,126,505
                  
                  
                  $
                  14,682,284
                  
                  
                  $
                  (7,555,779
                  )
                  
                  
                  (51
                  )%




Gross
profit decreased in the third quarter and first nine months of fiscal 2009 as
compared to the third quarter and first nine months of fiscal 2008 due to a
decrease in net revenues and a decline in gross margins.  Gross
margins decreased to 66.8% of net revenues in the third quarter of fiscal 2009
from 79.4% of net revenues in the third quarter of fiscal 2008, due primarily to
a decline in margins on the directory services business to 67.6% in the third
quarter of fiscal 2009 as compared to 80.6% in the third quarter of fiscal
2008.  Our margins on our customer acquisition
services  were 66.1% in the third quarter of fiscal
2009.  As this business was in its infancy in fiscal 2008, comparative
figures for the prior year are not meaningful. Our future margins are dependent
upon not only our business growth but also market conditions that are beyond our
control, including supplier costs and pricing pressures.




General and Administrative
Expenses




General and Administrative
      Expenses2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  3,812,983
                  
                  
                  $
                  4,807,460
                  
                  
                  $
                  (994,477
                  )
                  
                  
                  (21
                  )%Nine
      Months Ended June 30,
                  
                  $
                  12,126,364
                  
                  
                  $
                  12,047,495
                  
                  
                  $
                  78,869
                  
                  
                  
                  1
                  %




General
and administrative expenses decreased in the third quarter of fiscal 2009 as
compared to the third quarter of fiscal 2008 primarily due to the
following:




·      Decreased
compensation costs of approximately $789,000 primarily attributable to a
decrease of $453,000 of stock-based compensation charges (reflecting decreased
usage of restricted stock awards and a $118,000 true-up for cancelled stock
awards), a decrease of severance costs of $162,000 (reflecting a $496,000 charge
related to the termination of our former Chief Executive Officer in the third
quarter of fiscal 2008 as compared to a charge of $334,000 of charges for
terminated employees related to the closure of our Santa Clara facility in the
third quarter of fiscal 2009); and $187,000 of other compensation reductions
resulting from restructuring initiatives and other staffing changes, partially
offset by an increase in self-insurance accruals of $131,000;




·      A
decrease of approximately $319,000 of depreciation and amortization expense
attributable to the impairment of intangible assets in the second quarter of
fiscal 2009, partially offset by additional capitalized software development
costs relating to new product offerings; partially offset by




·      Increased
professional fees of approximately $146,000 related to increased legal expenses
incurred in response to certain legal actions brought against us;
and




·     Other miscellaneous
expense increases of $32,000.




General
and administrative expenses increased in the first nine months of fiscal 2009 as
compared to the first nine months of fiscal 2008 primarily due to the
following:




·      Increased
professional fees of approximately $542,000 related to increased legal expenses
incurred in response to certain legal actions brought against us, fees incurred
for Sarbanes-Oxley related consulting services, and increased recruitment fees
to hire key personnel in response to our change in strategic direction;
and




28




·      An
increase in software expense of $282,000 reflecting non-capitalizable expenses
incurred in connection with the development of support platforms and tools to
support our new business initiatives in the Direct Sales segment; partially
offset by




·      A
decrease of approximately $165,000 of depreciation and amortization expense
attributable to the impairment of intangible assets in the second quarter of
fiscal 2009, partially offset by additional capitalized software development
costs relating to new product offerings;




·      A
decrease in corporate expenses of $138,000 reflecting reduced investor relations
expenses and other cost containment initiatives;




·      Decreased
compensation costs of approximately $265,000 reflecting net $625,000 decrease in
the third quarter of 2009 as compared to 2008 as described above, partially
offset by increased compensation costs in the first six months of fiscal 2009 as
compared to fiscal 2008 as we were continuing to incur compensation expenses for
our directory services business during our change in strategic direction;
and




·      A
decrease in other general and administrative expenses of approximately
$24,000.




The following table sets forth our
recent operating performance for general and administrative
expenses:




Q3 2009
                
                
                
                Q2 2009
                
                
                
                Q1 2009
                
                
                
                Q4 2008
                
                
                
                Q3 2008Compensation
      for employees,leased
      employees, officers and directors
                
                $
                2,392,081
                
                
                $
                2,311,056
                
                
                $
                2,508,835
                
                
                $
                1,810,383
                
                
                $
                3,181,375Professional
      fees
                
                
                421,700
                
                
                
                411,564
                
                
                
                455,832
                
                
                
                456,180
                
                
                
                275,638Depreciation
      and amortization
                
                
                186,077
                
                
                
                560,383
                
                
                
                559,289
                
                
                
                588,718
                
                
                
                505,095Other
      general and administrative costs
                
                
                813,125
                
                
                
                771,351
                
                
                
                735,070
                
                
                
                692,314
                
                
                
                845,352$
                3,812,983
                
                
                $
                4,054,354
                
                
                $
                4,259,026
                
                
                $
                3,547,595
                
                
                $
                4,807,460




29




Sales and Marketing
Expenses




Sales and Marketing
Expenses2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  130,627
                  
                  
                  $
                  1,242,050
                  
                  
                  $
                  (1,111,423
                  )
                  
                  
                  (89
                  )%Nine
      Months Ended June 30,
                  
                  $
                  2,416,012
                  
                  
                  $
                  3,915,945
                  
                  
                  $
                  (1,499,933
                  )
                  
                  
                  (38
                  )%




Sales and
marketing expenses decreased in the third quarter of fiscal 2009 as compared to
the third quarter of fiscal 2008 primarily due to the following:




·
            $1,118,000
      of decreased telemarketing and other customer acquisition costs as we
      began transitioning away from marketing activities geared toward our
      directory services business; and




·
            $27,000
      of reduced branding and miscellaneous sales and marketing expenses;
      partially offset by




·
            $34,000
      of increased expenditures for click traffic that we believe is more cost
      effective than online advertising.




Sales and
marketing expenses decreased in the first nine months of fiscal 2009 as compared
to the first nine months of fiscal 2008 primarily due to the
following:




·
            $1,828,000
      of decreased telemarketing and other customer acquisition costs as we
      began transitioning away from marketing activities geared toward our
      directory services business; and




·
            $97,000
      of reduced branding and miscellaneous sales and marketing expenses;
      partially offset by




·
            $425,000
      of increased expenditures for click traffic that we believe is more cost
      effective than online advertising.




Impairment
of Goodwill and Other Intangible Assets




Impairment of Goodwill and Other Intangible
      Assets2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  n/aNine
      Months Ended June 30,
                  
                  $
                  16,111,494
                  
                  
                  $
                  -
                  
                  
                  $
                  16,111,494
                  
                  
                  
                  n/a




As described previously, we incurred an
impairment charge in the second quarter of fiscal 2009 to write-down goodwill
and other intangible assets.  No such charges were incurred in fiscal
2008.




Operating
Loss




Operating Income (Loss)2009
                      
                      
                      2008
                      
                      
                      Change
                      
                      
                      PercentThree
      Months Ended June 30,
                      
                      $
                      (2,307,362
                      )
                      
                      $
                      (1,737,791
                      )
                      
                      $
                      (569,571
                      )
                      
                      
                      33
                      %Nine
      Months Ended June 30,
                      
                      $
                      (23,527,365
                      )
                      
                      $
                      (1,281,156
                      )
                      
                      $
                      (22,246,209
                      )
                      
                      
                      1,736
                      %





The
decrease in operating income for the third quarter and first nine months of
fiscal 2009 as compared to the third quarter and first nine months of fiscal
2008 is primarily due to the impairment charge, decreased gross profit and
changes in operating expenses, each of which is described above.




Total
Other Income (Expense)




Total Other Income
(Expense)2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  85,273
                  
                  
                  $
                  (3,432
                  )
                  
                  $
                  88,705
                  
                  
                  
                  (2,585
                  )%Nine
      Months Ended June 30,
                  
                  $
                  7,369,190
                  
                  
                  $
                  63,951
                  
                  
                  $
                  7,305,239
                  
                  
                  
                  11,423
                  %




30




During
the second quarter of fiscal 2009, we entered into an agreement to sell a
portion of our customer list associated with our directory services business,
resulting in a gain of $2,815,952.  We also amended another directory
services contract in consideration of accelerated payments on our outstanding
accounts receivables and some anticipated future billings that resulted in an
increase in other income of $642,268 for the nine months ended June 30, 2009,
respectively.




During
the first quarter of fiscal 2009, we entered into an agreement to
sell our Internet domain name “www.yp.com” to
YellowPages.com for a cash payment of $3,850,000.   We had net
gain from the sale of that asset of $3,805,778, which is reflected in other
income.




The
remaining activity in fiscal 2009 and fiscal 2008 consisted primarily of
interest income on cash balances and short-term investments.




Income
Tax Provision (Benefit)




Income Tax Provision
    (Benefit)2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  (105,117
                  )
                  
                  $
                  (221,763
                  )
                  
                  $
                  116,646
                  
                  
                  
                  (53
                  )%Nine
      Months Ended June 30,
                  
                  $
                  4,057,695
                  
                  
                  $
                  (2,486
                  )
                  
                  $
                  4,060,181
                  
                  
                  
                  (163,322
                  )%




The
change in our income tax provision (benefit) is due primarily to corresponding
changes in our pre-tax income, coupled with the establishment of a valuation
allowance during fiscal 2009, which increased our income tax provision by
$9,713,322.  While we have optimistic plans for our new business
strategy, we determined that such a valuation allowance was necessary given
the current and expected near term losses and the uncertainty with respect to
our ability to generate sufficient profits from our new business
model.  Therefore, we established a valuation allowance for all
deferred tax assets in excess of those expected to be realizable through the
application of operating loss carrybacks.




Income
(Loss) from Discontinued Operations




Income (Loss) from Discontinued
      Operations2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  4,649
                  
                  
                  $
                  (61,237
                  )
                  
                  $
                  65,886
                  
                  
                  
                  (108
                  )%Nine
      Months Ended June 30,
                  
                  $
                  (92,706
                  )
                  
                  $
                  (36,547
                  )
                  
                  $
                  (56,159
                  )
                  
                  
                  154
                  %




During
the second quarter of fiscal 2009, we discontinued our classifieds business, as
described above.  All prior periods have been restated to reflect the
classifieds operating results, net of tax, as discontinued
operations.  The decrease in income in the first nine months of fiscal
2009 as compared to the first nine months of fiscal 2008 reflects the effects of
our corporate strategy to de-emphasize and ultimately abandon this line of
business.




Net
Income (Loss)




Net Income (Loss)2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  (2,112,323
                  )
                  
                  $
                  (1,580,697
                  )
                  
                  $
                  (531,626
                  )
                  
                  
                  34
                  %Nine
      Months Ended June 30,
                  
                  $
                  (20,308,576
                  )
                  
                  $
                  (1,251,266
                  )
                  
                  $
                  (19,057,310
                  )
                  
                  
                  1,523
                  %




Changes
in net income (loss) are primarily attributable to changes in operating income,
income tax expense and discontinued operations, each of which is described
above.




Liquidity and Capital
Resources




Net cash
used in operating activities was approximately $1,351,000 for the first nine
months of fiscal 2009 as compared to approximately $448,000 for the first nine
months of fiscal 2008.  The increase of cash used in operations is
primarily due to a decrease in gross profit of $7,556,000 reflecting declines in
our legacy businesses, partially offset by $3,612,000 of increased collections
of accounts receivable, $1,111,000 of reduced sales and marketing expenses,
$1,700,000 of reduced customer acquisition costs, and $230,000 of changes in
other operating expenses and working capital balances.




Our
primary source of cash inflows has historically been net remittances from
directory services customers processed in the form of ACH billings and LEC
billings.  In the nine months ended September 30, 2009, we have been
transitioning away from directory services toward our Direct Sales Services,
whose billings experience shorter collection times.  Accordingly we
have been able to reduce our collection times and our outstanding accounts
receivable balances.  As of June 30, 2009, no single customer
accounted for greater than 10 percent of accounts receivable.


31




With
respect to our Direct Sales Services, we generally receive upfront payments
averaging approximately one-sixth of the gross contract
amount.  Subsequent payments are received on an installment basis
after the application of the initial payment amounts and are billed ratably over
the remainder life of the contract. Most customers purchasing these services
elect to use their credit cards to effect payments, and therefore our
collections are usually made within a few days of the installment due
date.




With
respect to our discontinued operations, our historical cash flows have
approximated our income (loss) from discontinued operations as set forth on our
unaudited condensed consolidated statements of operations, except with respect
to the accrued disposal costs that were recorded during the second quarter of
fiscal 2009.




Our most
significant cash outflows include payments for marketing expenses and general
operating expenses.  General operating cash outflows consist of
payroll costs, income taxes, and general and administrative expenses that
typically occur within close proximity of expense recognition.




Net cash
provided by investing activities totaled approximately $6,457,000 for the first
nine months of fiscal 2009 compared to net cash used for investing activities of
approximately $665,000 for the first nine months of fiscal 2008.  The
primary sources of the cash provided by our investing activities in fiscal 2009
were the sale of our Internet domain name www.yp.com, the sale
of a portion of our customer list related to our directory services business,
and an amendment to an existing directory services contract which provided
aggregate cash inflows of $7,275,000.  Additionally, in the first nine
months of fiscal 2009, we had expenditures for purchases of equipment and
intangible assets totaling approximately $718,000, an increase of approximately
$76,000 compared to the first nine months of fiscal 2008.  During the
first nine months of 2009 we also invested $100,000 in certificates of
deposit.  During the first nine months of fiscal 2008, we also had
approximately $23,000 of cash outflows related to the two acquisitions that took
place during fiscal 2007.




Net cash
used for financing activities was approximately $542,000 during the first nine
months of fiscal 2009 compared to approximately $502,000 for the first nine
months of fiscal 2008.  During the first nine months of fiscal 2009,
we repurchased 317,004 shares of our common stock, which were valued at $487,480
in the aggregate.  During the first quarter of fiscal 2008, we made
treasury stock repurchases of 137,925 shares valued at
$500,901.  During the first nine months of fiscal 2009, we made
payments on our capital lease obligations for telecommunications equipment of
$52,259.  Financing activities also included $1,437 and $1,438 of
preferred stock dividends during the first nine months of fiscal 2009 and fiscal
2008, respectively.




We had
working capital of $9,823,893 as of June 30, 2009, compared to $11,260,231 as of
September 30, 2008, with current assets decreasing by $1,582,930 and current
liabilities decreasing by $146,592 from September 30, 2008 to June 30,
2009.  Our cash position increased to $9,205,343 at June 30, 2009
compared to $4,639,787 at September 30, 2008 due to the effects of our results
of operations and cash flows from the sale of intangible assets and our partial
customer list and expenditures for equipment.




The
following table summarizes our contractual obligations at June 30, 2009 and the
effect such obligations are expected to have on our future liquidity and cash
flows:




Payments
      Due by Fiscal YearTotal
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      ThereafterOperating
      lease commitments
                      
                      $
                      1,533,822
                      
                      
                      $
                      158,680
                      
                      
                      $
                      551,922
                      
                      
                      $
                      427,621
                      
                      
                      $
                      316,879
                      
                      
                      $
                      78,720
                      
                      
                      $
                      -Capital
      lease commitments
                      
                      
                      217,815
                      
                      
                      
                      19,219
                      
                      
                      
                      76,876
                      
                      
                      
                      76,876
                      
                      
                      
                      44,844
                      
                      
                      
                      -
                      
                      
                      
                      -Noncanceleable
      service contracts
                      
                      
                      1,388,853
                      
                      
                      
                      524,853
                      
                      
                      
                      605,000
                      
                      
                      
                      259,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -$
                      3,140,490
                      
                      
                      $
                      702,752
                      
                      
                      $
                      1,233,798
                      
                      
                      $
                      763,497
                      
                      
                      $
                      361,723
                      
                      
                      $
                      78,720
                      
                      
                      $
                      -





We
believe that our existing cash on hand and additional cash generated from
operations will provide us with sufficient liquidity to meet our operating needs
for the next 12 months.





At June
30, 2009, we had no other off-balance sheet arrangements, commitments or
guarantees that require additional disclosure or measurement.


32


ITEM 4.
CONTROLS AND PROCEDURES




Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission.  Disclosure
controls are also designed with an objective of ensuring that such information
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, in order to allow timely consideration
regarding required disclosures.




The
evaluation of our disclosure controls by our principal executive officer and
principal financial officer included a review of the controls’ objectives and
design, the operation of the controls, and the effect of the controls on the
information presented in this Quarterly Report.  Our management,
including our chief executive officer and chief financial officer, does not
expect that disclosure controls can or will prevent or detect all errors and all
fraud, if any.  A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.  Also, projections of any
evaluation of the disclosure controls and procedures to future periods are
subject to the risk that the disclosure controls and procedures may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Based on
their review and evaluation as of the end of the period covered by this Form
10-Q, and subject to the inherent limitations as described above, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective as of the end of the
period covered by this report.  They are not aware of any significant
changes in our disclosure controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.  During the period covered by this Form 10-Q, there have
not been any changes in our internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting.


33


PART
II – OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS




Global
Education Services, Inc. v. LiveDeal, Inc.





On June
6, 2008, Global Education Services, Inc. (“GES”) filed a consumer fraud class
action lawsuit against the Company and its wholly owned subsidiary, Telco
Billing, Inc., in King County (Washington) Superior Court.  GES
alleged in its complaint that the Company’s use of activator checks
violated the Washington Consumer Protection Act.  GES is seeking
injunctive relief against our use of the checks, as well as a judgment in
an amount equal to three times the alleged damages sustained by GES and
the members of the class.  LiveDeal has denied the
allegations.  Legal proceedings in the matter are ongoing, and
discovery began in January 2009.





Complaint
filed by Illinois Attorney General against LiveDeal, Inc.





On
November 12, 2008, the Illinois Attorney General filed a complaint in the
Circuit Court of the Seventh Judicial Circuit of the State of Illinois (Sangamon
County) against the Company requesting money damages and injunctive relief for
claims that we employed deceptive and unfair acts and practices in
violation of the Illinois Consumer Fraud and Deceptive Business Act in a
telemarketing campaign that in par promoted premium Internet Yellow
Page listings to Illinois consumers.  LiveDeal has denied
the allegations.  Legal proceedings in the manner are ongoing and
discovery began in April, 2009.





LiveDeal, Inc. v. On-Call Superior
Management (“OSM”)  and SMeVentures, Inc. (“SMe”)





On April
6, 2009, LiveDeal filed a declaratory judgment to a termination of contract
claim and a complaint on May 29, 2009 against OSM and SMe, Philippines call
center managers with whom the Company entered into contracts in November of 2007
and earlier, to provide inbound and outbound telemarketing services,
respectively, alleging breach of contract.  OSM and SMe have
counterclaimed, alleging breach of contract.  Legal proceedings in the
matter are ongoing.




ITEM
1A.   RISK FACTORS




The
following represent material changes to the factors disclosed in Item 1A “Risk
Factors” in our Annual Report on Form 10-K for the year ended September 30,
2008.




We
have sold a significant portion of our assets and customer list associated with
our directory services business.





During
fiscal 2009, as part of our changing business strategy away from directory
services, we sold our primary URL, www.yp.com, as well
as a portion of our customer list.  These transactions will result in
a significant loss of future revenue which could adversely impact our financial
condition and results of operations.





The
discontinuance of our classifieds business could adversely impact our financial
condition.





We
recently made the strategic decision to discontinue our classifieds business and
product offerings which have historically generated significant
revenues.  This discontinuance not only will reduce our revenues that
were generated from this product line but could also cause erosion of our Yellow
Pages customer base, particularly with respect to those customers who sought an
integrated Yellow Pages and classifieds product.  Further, we will
make cash outlays to wind down our business including the termination of
affected employees and office closures.  This loss of revenues
combined with the wind-down costs could have an adverse impact on our financial
condition and results of operations.





The
closure of our Philippines-based call center operations could adversely impact
our financial condition.





We
discontinued the operations of our Philippines-based call center,
which had historically provided telemarketing services to support our
directory services business.  To the extent that we incur additional
closure costs or that the execution of our current or future business strategies
necessitates that we develop similar functions in the future, our business could
be adversely affected.


34




Our
new business strategy is unproven.


Our new
strategic focus is on delivering a suite of Internet-based, local search
driven, customer acquisition services for small businesses, sold via
telemarketing and supported by our websites and internally developed
software. This strategy is unproven at this time and will require continued
expenditures to develop products and offerings and develop marketing and support
functions.  These expenditures may not be offset by corresponding
increases in revenues, leading to adverse impacts on our financial condition and
results of operations.





The
demand and market acceptance for our services may be subject to a high level of
uncertainty.   Advertisers and users may not adopt or continue to
use our Internet-base marketing services and other online services that we may
offer in the future.  Advertisers may find our Internet-based
marketing services to be less effective for meeting their business needs than
other methods of advertising and marketing.  Our business, prospects,
financial condition or results of operations will be materially and adversely
affected if we do not execute our strategy or our services are not adopted by a
sufficient number of advertisers.





ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During
June 2009, the Company engaged a broker to enact a stock repurchase plan of up
to an aggregate of $500,000 previously authorized by the Company’s Board of
Directors.  No repurchases were made under such plan during the three
months ended June 30, 2009.




ITEM 6.
EXHIBITS




The
following exhibits are either attached hereto or incorporated herein by
reference as indicated:





Exhibit
                  Number
                
                Description10.1
                
                Employment
      Agreement by and between the Company and Richard F. Sommer dated May 19,
      200910.2
                
                Separation
      Agreement and Full Release of Claims by and between the Company and Mike
      Edelhart dated July 9, 200931
                
                Certifications
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232
                
                Section
      1350 Certifications


35


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.




LiveDeal,
      Inc.Dated:  August
      14, 2009
            /s/ Rajeev SeshadriRajeev
      SeshadriChief
      Financial Officer


36