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, 2010




 ̈           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 o  No  o





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.




Large
      accelerated filero
                  
                  Accelerated
      filer oNon-accelerated
      filero   (do
      not check if a smaller reporting company)
                  
                  Smaller
      reporting companyþ




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, 2010 was
6,053,917.





INDEX
TO FORM 10-Q FILING


FOR
THE QUARTER ENDED JUNE 30, 2010





TABLE
OF CONTENTS





PagePART
      IFINANCIAL
      INFORMATIONItem
      1.   Financial StatementsCondensed
      Consolidated Balance Sheets as of June 30, 2010 (unaudited) and September
      30, 2009
              3Unaudited
      Condensed Consolidated Statements of Operations for the Three and Nine
      Months Ended June 30, 2010and2009
              4Unaudited
      Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
      June 30, 2010and2009
              5Notes
      to Unaudited Condensed Consolidated Financial Statements
              6Item
      2.   Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              14Item
      4.   Controls and Procedures
              23PART
      IIOTHER
      INFORMATIONItem
      1.  Legal Proceedings
              24Item
      1A.   Risk Factors
              25Item
      6.   Exhibits
              25Signatures
              26


2


PART
I – FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


LIVEDEAL,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30,
                
                
                September 30,2010
                
                
                2009(unaudited)AssetsCash
      and cash equivalents
                
                $
                4,144,198
                
                
                $
                7,568,030Certificates
      of deposit
                
                
                300,000
                
                
                
                100,000Accounts
      receivable, net
                
                
                1,168,239
                
                
                
                1,478,183Prepaid
      expenses and other current assets
                
                
                348,364
                
                
                
                326,442Income
      taxes receivable
                
                
                -
                
                
                
                1,490,835Total
      current assets
                
                
                5,960,801
                
                
                
                10,963,490Accounts
      receivable, long term portion, net
                
                
                419,823
                
                
                
                1,039,403Property
      and equipment, net
                
                
                453,137
                
                
                
                615,906Deposits
      and other assets
                
                
                71,377
                
                
                
                81,212Intangible
      assets, net
                
                
                2,094,205
                
                
                
                2,336,714Total
      assets
                
                $
                8,999,343
                
                
                $
                15,036,725Liabilities
      and Stockholders' EquityLiabilities:Accounts
      payable
                
                $
                372,943
                
                
                $
                549,681Accrued
      liabilities
                
                
                809,778
                
                
                
                1,092,811Current
      portion of capital lease obligation
                
                
                60,549
                
                
                
                69,612Total
      current liabilities
                
                
                1,243,270
                
                
                
                1,712,104Long
      term portion of capital lease obligation
                
                
                53,131
                
                
                
                117,073Total
      liabilities
                
                
                1,296,401
                
                
                
                1,829,177Commitments
      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, 6,096,433 and
      6,133,433 shares issued, 6,053,917 and 6,104,327 shares outstanding at
      June 30, 2010 and September 30, 2009, respectively
                
                
                6,096
                
                
                
                6,133Treasury
      stock (42,515 and 29,106 shares carried at cost at June 30, 2010 and
      September 30, 2009, respectively)
                
                
                (70,923
                )
                
                
                (45,041
                )Paid
      in capital
                
                
                20,442,237
                
                
                
                20,280,377Accumulated
      deficit
                
                
                (12,685,334
                )
                
                
                (7,044,787
                )Total
      stockholders' equity
                
                
                7,702,942
                
                
                
                13,207,548Total
      liabilities and stockholders' equity
                
                $
                8,999,343
                
                
                $
                15,036,725





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3





LIVEDEAL,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS





Three Months Ended June 30,
                    
                    
                    Nine Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      revenues
                    
                    $
                    1,651,107
                    
                    
                    $
                    2,448,569
                    
                    
                    $
                    6,294,207
                    
                    
                    $
                    11,006,358Cost
      of services
                    
                    
                    636,358
                    
                    
                    
                    812,321
                    
                    
                    
                    2,487,510
                    
                    
                    
                    3,879,853Gross
      profit
                    
                    
                    1,014,749
                    
                    
                    
                    1,636,248
                    
                    
                    
                    3,806,697
                    
                    
                    
                    7,126,505Operating
      expenses:General
      and administrative expenses
                    
                    
                    2,357,797
                    
                    
                    
                    3,812,983
                    
                    
                    
                    9,457,739
                    
                    
                    
                    12,126,364Impairment
      of goodwill
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,350,042Impairment
      of intangible assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,516,068Sales
      and marketing expenses
                    
                    
                    1,826
                    
                    
                    
                    130,627
                    
                    
                    
                    262,937
                    
                    
                    
                    2,416,012Total
      operating expenses
                    
                    
                    2,359,623
                    
                    
                    
                    3,943,610
                    
                    
                    
                    9,720,676
                    
                    
                    
                    22,408,486Operating
      loss
                    
                    
                    (1,344,874
                    )
                    
                    
                    (2,307,362
                    )
                    
                    
                    (5,913,979
                    )
                    
                    
                    (15,281,981
                    )Other
      income (expense):Interest
      income, net
                    
                    
                    3,273
                    
                    
                    
                    7,487
                    
                    
                    
                    13,791
                    
                    
                    
                    27,406Other
      income (expense)
                    
                    
                    1,667
                    
                    
                    
                    77,786
                    
                    
                    
                    28,974
                    
                    
                    
                    7,341,784Total
      other income (expense)
                    
                    
                    4,940
                    
                    
                    
                    85,273
                    
                    
                    
                    42,765
                    
                    
                    
                    7,369,190Loss
      before income taxes
                    
                    
                    (1,339,934
                    )
                    
                    
                    (2,222,089
                    )
                    
                    
                    (5,871,214
                    )
                    
                    
                    (7,912,791
                    )Income
      tax provision (benefit)
                    
                    
                    -
                    
                    
                    
                    (105,117
                    )
                    
                    
                    (231,026
                    )
                    
                    
                    7,138,170Loss
      from continuing operations
                    
                    
                    (1,339,934
                    )
                    
                    
                    (2,116,972
                    )
                    
                    
                    (5,640,188
                    )
                    
                    
                    (15,050,961
                    )Discontinued
      operationsIncome
      (loss) from discontinued component, including disposal
    costs
                    
                    
                    -
                    
                    
                    
                    7,422
                    
                    
                    
                    1,725
                    
                    
                    
                    (8,393,384
                    )Income
      tax provision (benefit)
                    
                    
                    -
                    
                    
                    
                    2,773
                    
                    
                    
                    644
                    
                    
                    
                    (3,135,769
                    )Income
      (loss) from discontinued operations
                    
                    
                    -
                    
                    
                    
                    4,649
                    
                    
                    
                    1,081
                    
                    
                    
                    (5,257,615
                    )Net
      loss
                    
                    $
                    (1,339,934
                    )
                    
                    $
                    (2,112,323
                    )
                    
                    $
                    (5,639,107
                    )
                    
                    $
                    (20,308,576
                    )Earnings
      per share - basic and diluted1:Loss
      from continuing operations
                    
                    $
                    (0.22
                    )
                    
                    $
                    (0.35
                    )
                    
                    $
                    (0.94
                    )
                    
                    $
                    (2.51
                    )Discontinued
      operations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (0.88
                    )Net
      loss
                    
                    $
                    (0.22
                    )
                    
                    $
                    (0.35
                    )
                    
                    $
                    (0.94
                    )
                    
                    $
                    (3.38
                    )Weighted
      average common shares outstanding:Basic
                    
                    
                    5,999,118
                    
                    
                    
                    5,999,268
                    
                    
                    
                    5,997,014
                    
                    
                    
                    6,006,770Diluted
                    
                    
                    5,999,118
                    
                    
                    
                    5,999,268
                    
                    
                    
                    5,997,014
                    
                    
                    
                    6,006,770





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





The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4





LIVEDEAL,
INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





Nine Months endedJune 30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (5,639,107
                )
                
                $
                (20,308,576
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                658,957
                
                
                
                2,088,425Non-cash
      stock compensation expense
                
                
                22,739
                
                
                
                69,186Amortization
      of deferred stock compensation
                
                
                139,082
                
                
                
                (207,098
                )Deferred
      income taxes
                
                
                -
                
                
                
                4,541,475Provision
      for uncollectible accounts
                
                
                698,138
                
                
                
                1,023,211Non-cash
      impairment of goodwill and intangibles
                
                
                -
                
                
                
                16,111,494Gain
      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 and intangible
assets
                
                
                27,647
                
                
                
                37,943Changes
      in assets and liabilities:Accounts
      receivable
                
                
                231,386
                
                
                
                2,831,757Prepaid
      expenses and other current assets
                
                
                (21,922
                )
                
                
                104,057Deposits
      and other assets
                
                
                9,835
                
                
                
                1,835Accounts
      payable
                
                
                (176,738
                )
                
                
                (442,825
                )Accrued
      liabilities
                
                
                (283,033
                )
                
                
                170,619Income
      taxes receivable and payable
                
                
                1,490,835
                
                
                
                (108,181
                )Net
      cash used in operating activities
                
                
                (2,842,181
                )
                
                
                (1,350,676
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of internet domain name
                
                
                -
                
                
                
                3,850,000Proceeds
      from sale of customer list
                
                
                -
                
                
                
                2,783,097Proceeds
      from amendment of directory services contract
                
                
                -
                
                
                
                642,268Proceeds
      from sale of property and equipment
                
                
                4,999
                
                
                
                -Expenditures
      for intangible assets
                
                
                (231,405
                )
                
                
                (626,119
                )Investment
      in certificate of deposits
                
                
                (200,000
                )
                
                
                (100,000
                )Purchases
      of property and equipment
                
                
                (54,921
                )
                
                
                (91,838
                )Net
      cash provided by (used in) investing activities
                
                
                (481,327
                )
                
                
                6,457,408CASH
      FLOWS FROM FINANCING ACTIVITIES:Series
      E preferred stock dividends
                
                
                (1,437
                )
                
                
                (1,437
                )Principal
      repayments on capital lease obligations
                
                
                (73,005
                )
                
                
                (52,259
                )Purchase
      of treasury stock
                
                
                (25,882
                )
                
                
                (487,480
                )Net
      cash used in financing activities
                
                
                (100,324
                )
                
                
                (541,176
                )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (3,423,832
                )
                
                
                4,565,556CASH
      AND CASH EQUIVALENTS, beginning of period
                
                
                7,568,030
                
                
                
                4,639,787CASH
      AND CASH EQUIVALENTS, end of period
                
                $
                4,144,198
                
                
                $
                9,205,343Supplemental
      cash flow disclosures:Noncash
      financing and investing activities:Accrued
      and unpaid dividends
                
                $
                1,437
                
                
                $
                1,437Interest
      paid
                
                $
                4,877
                
                
                $
                5,997Income
      tax paid (received)
                
                $
                (1,721,217
                )
                
                $
                1,960





The
accompanying notes are an integral part of these 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 to deliver an affordable way for businesses to extend their marketing
reach to local, relevant customers via the Internet.




The
accompanying condensed consolidated balance sheet as of September 30, 2009,
which has been derived from audited consolidated financial statements, and the
accompanying unaudited condensed consolidated financial statements as of June
30, 2010 andfor the three and nine months ended June 30, 2010 and June 30,
2009 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, 2010are not necessarily indicative of the results to be expected
for the year ending September 30, 2010. 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, 2009 and for the fiscal
year then ended included in the Company’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2009.




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:  Balance Sheet Information





Balance
sheet information is as follows:


June 30,
                  
                  
                  September 30,2010
                  
                  
                  2009Receivables,
      current, net:Accounts
      receivable, current
                  
                  $
                  2,588,105
                  
                  
                  $
                  3,776,966Less:
      Allowance for doubtful accounts
                  
                  
                  (1,419,866
                  )
                  
                  
                  (2,298,783
                  )$
                  1,168,239
                  
                  
                  $
                  1,478,183Receivables,
      long term, net:Accounts
      receivable, long term
                  
                  $
                  884,628
                  
                  
                  $
                  1,581,946Less:
      Allowance for doubtful accounts
                  
                  
                  (464,805
                  )
                  
                  
                  (542,543
                  )$
                  419,823
                  
                  
                  $
                  1,039,403Total
      receivables, net:Gross
      receivables
                  
                  $
                  3,472,733
                  
                  
                  $
                  5,358,912Allowance
      for doubtful accounts
                  
                  
                  (1,884,671
                  )
                  
                  
                  (2,841,326
                  )$
                  1,588,062
                  
                  
                  $
                  2,517,586





Our
accounts receivable consist primarily of amounts due from customers of our
directory services business.


6


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





June 30,
                  
                  
                  September 30,2010
                  
                  
                  2009Property
      and equipment, net:Leasehold
      improvements
                  
                  $
                  239,271
                  
                  
                  $
                  235,056Furnishings
      and fixtures
                  
                  
                  319,004
                  
                  
                  
                  336,067Office,
      computer equipment and other
                  
                  
                  704,388
                  
                  
                  
                  692,3171,262,663
                  
                  
                  
                  1,263,440Less:
      Accumulated depreciation
                  
                  
                  (809,526
                  )
                  
                  
                  (647,534
                  )$
                  453,137
                  
                  
                  $
                  615,906





June 30,
                  
                  
                  September 30,2010
                  
                  
                  2009Intangible
      assets, net:Domain
      name and marketing related intangibles
                  
                  $
                  1,509,600
                  
                  
                  $
                  6,699,600Non-compete
      agreements
                  
                  
                  -
                  
                  
                  
                  3,465,000Website
      and technology related intangibles
                  
                  
                  1,911,382
                  
                  
                  
                  4,678,9703,420,982
                  
                  
                  
                  14,843,570Less:  Accumulated
      amortization
                  
                  
                  (1,326,777
                  )
                  
                  
                  (12,506,856
                  )$
                  2,094,205
                  
                  
                  $
                  2,336,714





During
fiscal 2009, a significant amount of the Company’s intangible assets were
determined to be impaired and for comparative purposes, the original cost and
accumulated amortization amounts were set forth in the Company’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2009.  As of June
30, 2010, the cost and accumulated amortization on all fully amortized assets
were removed from the Company’s books.





June 30,
                      
                      
                      September 30,2010
                      
                      
                      2009Accrued
      liabilities:Deferred
      revenue
                      
                      $
                      110,757
                      
                      
                      $
                      148,916Accrued
      payroll and bonuses
                      
                      
                      157,796
                      
                      
                      
                      289,944Accruals
      under revenue sharing agreements
                      
                      
                      164,087
                      
                      
                      
                      314,754Accrued
      expenses - other
                      
                      
                      377,138
                      
                      
                      
                      339,197$
                      809,778
                      
                      
                      $
                      1,092,811





Note
3:  Restructuring Activities





On
January 4, 2010, the Board of Directors of the Company (the “Board”) approved a
reduction in force that resulted in the termination of approximately 33% of the
Company's workforce, effective January 7, 2010.  On February 23, 2010,
the Board approved an additional reduction in force that resulted in the
termination of approximately 20% of the Company’s workforce, effective March 4,
2010.  These reductions in force were related to our ongoing
restructuring and cost reduction efforts as the Board continues to explore a
variety of strategic alternatives, including, but not limited to, the potential
sale of the Company or certain of its assets and/or the acquisition of other
entities or businesses.





The
Company incurred expenses of $143,000 in connection with these reductions in
force, consisting entirely of employee termination benefits.  All
amounts were paid as of June 30, 2010.





Note
4:  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.


7


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





During
the three months and nine months ended June 30, 2010, the Company recognized
compensation expense of $15,536 and $22,741, respectively, and $23,304 and
$69,186 for the three and nine months ending June 30, 2009 respectively, related
to stock option awards granted to certain employees and executives based on the
grant date fair value of the awards, net of estimated
forfeitures.  During the three months ended December 31, 2009, the
Company changed the estimated forfeiture rate of awards from 40% to 60% based on
actual forfeiture experience and other factors, resulting in a net benefit from
the expense reversal of $8,160.  There were no such changes in the
estimated forfeiture rate in the three months ending June 30, 2010.





On
November 23, 2009, the Company granted an aggregate of 250,000 options to
Richard Sommer, the Company’s then-current Chief Executive Officer, with an
exercise price equal to the stock price on the date of grant and scheduled to
vest according to the following schedule: 25% on October 29, 2010 (the first
anniversary of the date of grant) and 1/36 of the remainder each month beginning
on November 29, 2010.  In connection with Mr. Sommer’s resignation on
January 4, 2010, all such options were forfeited.  Given this
forfeiture, the Company elected not to expense such options because the effects
on the financial statements would not have been material.  No other
options were granted during the nine months ended June 30, 2010.





The
Company had stock option activity summarized as follows during the nine months
ended June 30, 2010:




Weighted
                  
                  
                  Weighted
                  
                  
                  WeightedAverage
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  AggregateNumber of
                  
                  
                  Exercise
                  
                  
                  Fair
                  
                  
                  Remaining
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Value
                  
                  
                  Contractual Life
                  
                  
                  ValueOutstanding
      at September 30, 2009
                  
                  
                  330,000Granted
      at market price
                  
                  
                  250,000
                  
                  
                  $
                  1.95
                  
                  
                  
                  n/mExercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (530,000
                  )
                  
                  $
                  1.70Outstanding
      at June 30, 2010
                  
                  
                  50,000
                  
                  
                  $
                  1.45
                  
                  
                  
                  
                  
                  
                  
                  8.4
                  
                  
                  $
                  -Exercisable
                  
                  
                  19,792
                  
                  
                  $
                  1.45
                  
                  
                  
                  
                  
                  
                  
                  8.4
                  
                  
                  $
                  -




As noted
above, Mr. Sommer’s 250,000 options were forfeited in connection with his
resignation on January 4, 2010.  The following table summarizes
information about the Company’s outstanding stock options at June 30,
2010:




Exercisable
                                          
                                          
                                          Unexercisable
                                          
                                          
                                          TotalWeighted
                                          
                                          
                                          
                                          
                                          
                                          Weighted
                                          
                                          
                                          
                                          
                                          
                                          WeightedNumber
                                          
                                          
                                          Average
                                          
                                          
                                          Number
                                          
                                          
                                          Average
                                          
                                          
                                          Number
                                          
                                          
                                          AverageRange of Exercise Prices
                                          
                                          Outstanding
                                          
                                          
                                          Exercise Price
                                          
                                          
                                          Outstanding
                                          
                                          
                                          Exercise Price
                                          
                                          
                                          Outstanding
                                          
                                          
                                          Exercise PriceLess
      than $2.00 per share
                                          
                                          
                                          19,792
                                          
                                          
                                          $
                                          1.45
                                          
                                          
                                          
                                          30,208
                                          
                                          
                                          
                                          1.45
                                          
                                          
                                          
                                          50,000
                                          
                                          
                                          $
                                          1.45




At June
30, 2010, future stock compensation expense (net of estimated forfeitures) not
yet recognized is $144,481, which the Company expects will be amortized over a
weighted-average remaining vesting period of 2.4 years.





From time
to time, the Company also has historically granted shares of restricted stock to
certain individuals.  The following table sets forth the activity with
respect to compensation-related restricted stock grants during the nine months
ended June 30, 2010:





Outstanding
      (unvested) at September 30, 2009
                  
                  
                  106,425Granted
                  
                  
                  -Forfeited
                  
                  
                  (37,000
                  )Vested
                  
                  
                  (20,000
                  )Outstanding
      (unvested) at June 30, 2010
                  
                  
                  49,425





Total
unrecognized stock compensation expense related to unvested awards totaled
$181,142 at June 30, 2010, which the Company expects will be amortized over a
weighted-average period of 1.6 years.


8


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





Note
5:  Treasury Stock




The
Company’s treasury stock consists of shares repurchased on the open market or
shares received through various agreements with third parties.  The
value of such shares is determined based on cash paid or quoted market
prices.  During the three and nine months ended June 30, 2010, the
Company acquired an aggregate of 0 and 13,310 shares of common stock for an
aggregate purchase price of $0 and $25,882, respectively.  At June 30,
2010,an aggregate of 42,515 shares of common stock were held as treasury
shares.





Note
6:  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 outstanding
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.  Preferred stock dividends are subtracted from net loss 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 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      loss from continuing operations
                  
                  $
                  (1,339,934
                  )
                  
                  $
                  (2,116,972
                  )
                  
                  $
                  (5,640,188
                  )
                  
                  $
                  (15,050,961
                  )Less:
      preferred stock dividends
                  
                  
                  (479
                  )
                  
                  
                  (479
                  )
                  
                  
                  (1,437
                  )
                  
                  
                  (1,437
                  )Net
      loss from continuing operations applicable to common stock
                  
                  
                  (1,340,413
                  )
                  
                  
                  (2,117,451
                  )
                  
                  
                  (5,641,625
                  )
                  
                  
                  (15,052,398
                  )Income
      (loss) from discontinued operations
                  
                  
                  -
                  
                  
                  
                  4,649
                  
                  
                  
                  1,081
                  
                  
                  
                  (5,257,615
                  )Net
      loss applicable to common stock
                  
                  $
                  (1,340,413
                  )
                  
                  $
                  (2,112,802
                  )
                  
                  $
                  (5,640,544
                  )
                  
                  $
                  (20,310,013
                  )Basic
      weighted average common shares outstanding:
                  
                  
                  5,999,118
                  
                  
                  
                  5,999,268
                  
                  
                  
                  5,997,014
                  
                  
                  
                  6,006,770Add
      incremental shares for:Unvested
      restricted stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Series
      E convertible preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Diluted
      weighted average common shares outstanding:
                  
                  
                  5,999,118
                  
                  
                  
                  5,999,268
                  
                  
                  
                  5,997,014
                  
                  
                  
                  6,006,770Earnings
      per share - basic and diluted1:Loss
      from continuing operations
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.94
                  )
                  
                  $
                  (2.51
                  )Discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (0.88
                  )Net
      loss
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.35
                  )
                  
                  $
                  (0.94
                  )
                  
                  $
                  (3.38
                  )





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





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 because the Company incurred net
losses during the period:





Three Months Ended June 30,
                  
                  
                  Nine Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Options
      to purchase shares of common stock
                  
                  
                  50,000
                  
                  
                  
                  330,000
                  
                  
                  
                  300,912
                  
                  
                  
                  427,554Series
      E convertible preferred stock
                  
                  
                  127,840
                  
                  
                  
                  127,840
                  
                  
                  
                  127,840
                  
                  
                  
                  127,840Shares
      of non-vested restricted stock
                  
                  
                  49,425
                  
                  
                  
                  125,175
                  
                  
                  
                  70,513
                  
                  
                  
                  167,528227,265
                  
                  
                  
                  583,015
                  
                  
                  
                  499,265
                  
                  
                  
                  722,922


9


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





Note
7:  Income Taxes





During
the year ended September 30, 2009, the Company established a valuation allowance
against its deferred tax assets.  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.





During
the nine months ended June 30, 2010, the Company recognized an income tax
benefit of $230,382 associated with a true up to our income tax receivable based
on information received during the preparation of our 2009 tax
returns.





Note
8:  Commitments and Contingencies





Operating Leases and Service
Contracts





As of
June 30, 2010, 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
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012
                          
                          
                          2013
                          
                          
                          2014
                          
                          
                          ThereafterOperating
      lease commitments
                          
                          $
                          943,101
                          
                          
                          $
                          125,674
                          
                          
                          $
                          423,375
                          
                          
                          $
                          315,331
                          
                          
                          $
                          78,720
                          
                          
                          $
                          -
                          
                          
                          $
                          -Noncanceleable
      service contracts
                          
                          
                          1,008,375
                          
                          
                          
                          234,792
                          
                          
                          
                          635,583
                          
                          
                          
                          138,000
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          1,951,476
                          
                          
                          $
                          360,466
                          
                          
                          $
                          1,058,958
                          
                          
                          $
                          453,331
                          
                          
                          $
                          78,720
                          
                          
                          $
                          -
                          
                          
                          $
                          -




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




Capital
leases





As of
June 30, 2010, future obligations under non-cancelable capital leases are as
follows for the fiscal years ended September 30:




2010
                  
                  $
                  16,0362011
                  
                  
                  64,1432012
                  
                  
                  37,4172013
                  
                  
                  -2014
                  
                  
                  -Thereafter
                  
                  
                  -Total
      minimum lease payments
                  
                  
                  117,596Less
      imputed interest
                  
                  
                  (3,916
                  )Present
      value of minimum lease payments
                  
                  
                  113,680Less:
      current maturities of capital lease obligations
                  
                  
                  (60,549
                  )Noncurrent
      maturities of capital lease obligations
                  
                  $
                  53,131





Litigation





Except as
described below, as of June 30, 2010, the Company was not a party to any pending
material legal proceedings other than claims that arise in the normal conduct of
its business.  While management currently believes that the ultimate
outcome of these proceedings will not have a material adverse effect on its
consolidated financial condition or results of operations, litigation is subject
to inherent uncertainties.  If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact on the Company’s net
income in the period in which a ruling occurs.  The Company’s estimate
of the potential impact of the following legal proceedings on its financial
position and its results of operations could change in the future.





The
Company has not recorded any accruals pertaining to its legal proceedings as
they do not meet the criteria for accrual under FASB ASC 450.


10


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





Joe
Cunningham v. LiveDeal, Inc. et al.





On July
16, 2008, Joseph Cunningham, who was at the time a member of LiveDeal's Board of
Directors, filed a complaint with the U.S. Department of Labor’s Occupational
Safety and Health Administration (“OSHA”) alleging that the Company and certain
members of its Board had engaged in discriminatory employment practices in
violation of the Sarbanes-Oxley Act of 2002’s statutory protections for
corporate whistleblowers when the Board of Directors removed him as Chairman on
May 22, 2008. In his complaint, Mr. Cunningham asked OSHA to order his
appointment as Chief Executive Officer of the Company or, in the alternative, to
order his reinstatement as Chairman of the Board.  Mr. Cunningham also
sought back pay, special damages and litigation costs.  In July 2010,
OSHA notified the Company that Mr. Cunningham had amended his complaint on
May 10, 2010 to add the allegation that the shareholders’ decision not to
reelect him to the Board was also a discriminatory employment
practice.  From December 2008 to July 2010, the Company had not
received any correspondence from OSHA.





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 in King County (Washington) Superior
Court.  GES has alleged in its complaint that the Company's use of
activator checks violated the Washington Consumer Protection Act.  GES
is seeking injunctive relief against the Company’s 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.  The Company has denied the
allegations.  The court denied both parties’ dispositive
motions.  Litigation is ongoing.





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 and is vigorously defending the claim.  Legal
proceedings in the matter are ongoing.





LiveDeal,
Inc. v. OnCall Superior Management (“OSM”) and SMeVentures, Inc.
(“SME”)





On
February 3, 2010, LiveDeal, OSM and SME executed a Settlement
Agreement and Mutual Release pursuant to which LiveDeal agreed to pay OSM and
SME a total of $300,000 in cash in exchange for their agreement to terminate all
litigation with respect to the 2006 and 2007 contracts that were the basis for
this dispute.  The parties also entered into a new Services Agreement
pursuant to which OSM agreed to provide certain services to LiveDeal in
exchange for cash payments totaling $125,000.




As of
June 30, 2010, the Company has paid all amounts due under the settlement
agreement and the new services agreement. The $300,000 settlement payment was
expensed in the first quarter of fiscal 2010. No amounts have been expensed
related to the new services agreement as such services have yet to be provided
by OSM and SME, and the $125,000 payment is included as part of prepaid expenses
and other current assets in the accompanying unaudited consolidated balance
sheet at June 30, 2010.


Note
9:  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.




The
Company has concentrations of receivables with respect to certain wholesale
accounts and remaining holdbacks with Local Exchange Carrier (“LEC”) service
providers.  Four such entities accounted for 28%, 27%, 18% and 13% of
gross receivables at June 30, 2010 and three such entities accounted for 23%,
22%, and 18% of gross receivables at September 30, 2009.


11


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





Note
10:  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:





Nine Months Ended June 30, 2010DirectoryServices
                    
                    
                    Direct Sales -
                      Customer
                      Acquisition
                      Services
                    
                    
                    Unallocated
                    
                    
                    ConsolidatedNet
      revenues
                    
                    $
                    3,201,600
                    
                    
                    $
                    3,092,607
                    
                    
                    $
                    -
                    
                    
                    $
                    6,294,207Cost
      of services
                    
                    
                    221,251
                    
                    
                    
                    2,266,259
                    
                    
                    
                    -
                    
                    
                    
                    2,487,510Gross
      profit
                    
                    
                    2,980,349
                    
                    
                    
                    826,348
                    
                    
                    
                    -
                    
                    
                    
                    3,806,697Operating
      expenses
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,720,676
                    
                    
                    
                    9,720,676Operating
      income (loss)
                    
                    
                    2,980,349
                    
                    
                    
                    826,348
                    
                    
                    
                    (9,720,676
                    )
                    
                    
                    (5,913,979
                    )Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    42,765
                    
                    
                    
                    42,765Income
      (loss) before income taxes and discontinued operations
                    
                    $
                    2,980,349
                    
                    
                    $
                    826,348
                    
                    
                    $
                    (9,677,911
                    )
                    
                    $
                    (5,871,214
                    )





Nine Months Ended June 30, 2009DirectoryServices
                    
                    
                    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
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22,408,486
                    
                    
                    
                    22,408,486Operating
      income (loss)
                    
                    
                    5,550,550
                    
                    
                    
                    1,575,955
                    
                    
                    
                    (22,408,486
                    )
                    
                    
                    (15,281,981
                    )Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,369,190
                    
                    
                    
                    7,369,190Income
      (loss) before income taxes and discontinued operations
                    
                    $
                    5,550,550
                    
                    
                    $
                    1,575,955
                    
                    
                    $
                    (15,039,296
                    )
                    
                    $
                    (7,912,791
                    )




The
Company 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:


12


LIVEDEAL,
INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont)





June 30, 2010DirectoryServices
                  
                  
                  Direct Sales -
                    Customer
                    Acquisition
                    Services
                  
                  
                  TotalAccounts
      receivable, net - short term
                  
                  $
                  1,050,950
                  
                  
                  $
                  117,289
                  
                  
                  $
                  1,168,239Accounts
      receivable, net - long term
                  
                  
                  419,823
                  
                  
                  
                  -
                  
                  
                  
                  419,823Total
      accounts receivable, net
                  
                  $
                  1,470,773
                  
                  
                  $
                  117,289
                  
                  
                  $
                  1,588,062





September 30, 2009DirectoryServices
                  
                  
                  Direct Sales -
                    Customer
                    Acquisition
                    Services
                  
                  
                  TotalAccounts
      receivable, net - short term
                  
                  $
                  1,442,037
                  
                  
                  $
                  36,146
                  
                  
                  $
                  1,478,183Accounts
      receivable, net - long term
                  
                  
                  1,039,403
                  
                  
                  
                  -
                  
                  
                  
                  1,039,403Total
      accounts receivable, net
                  
                  $
                  2,481,440
                  
                  
                  $
                  36,146
                  
                  
                  $
                  2,517,586





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





Note
11:  Liquidity




While the
Company believes that its existing cash on hand will provide it with sufficient
liquidity to meet its operating needs for the next 12 months, it will not be
able to stay in business in the future without improvements in its
profitability, additional financing or a fundamental change in its
business.  As the Company continues to maintain its existing business
lines, it is simultaneously exploring other strategic initiatives.




Note
12:  Recent Accounting Pronouncements





In
October 2009, the FASB issued Accounting Standards Update (“ASU”)
No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU
2009-13”), which provides guidance on whether multiple deliverables exist, how
the arrangement should be separated, and the consideration allocated. ASU
2009-13 requires an entity to allocate revenue in an arrangement using estimated
selling prices of deliverables if a vendor does not have vendor-specific
objective evidence or third-party evidence of selling price. ASU 2009-13 is
effective for the first annual reporting period beginning on or after
June 15, 2010 and may be applied retrospectively for all periods presented
or prospectively to arrangements entered into or materially modified after the
adoption date. Early adoption is permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption. ASU 2009-13 will
be effective for the Company on October 1, 2010. We are currently
evaluating the impact that the adoption of ASU 2009-13 will have on our
financial condition, results of operations, and disclosures.


13


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, 2010, 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 fiscal year ended September 30, 2009.




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 belief that our existing cash on hand will provide
us with sufficient liquidity to meet our operating needs for the next 12 months;
that our customer acquisition services will account for a larger percentage of
total net revenues in the future; expectations about stock option and restricted
stock vesting; trends relating to our accounts receivable; the timing, amount
and expectations about the cost and impact of legal proceedings that we are
involved in; our expectation that we will experience declining revenues in our
Directory Services segment; trends in Internet advertising and customer
acquisition strategies; our expectation that we will continue to experience
operating losses and operating cash outflows; our plans and expectations with
respect to new product and service offerings in our Directory Services segment;
and strategic alternatives we may pursue and their potential impact on the
Company.  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, 2009 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. (the “Company”) provides local customer acquisition services for small
businesses to deliver an affordable way for businesses to extend their marketing
reach to local, relevant customers via the Internet.  LiveDeal
delivers local search engine marketing (“SEM”) utilizing an inside sales
team.  LiveDeal resells search products from Google, Yahoo!, Bing and
others as part of its SEM marketing and also provides website, hosting and
Internet syndication services.  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, distribution network, and best of breed software developed to
manage search and other Internet services efficiently, and (2) we deliver a
suite of promotional and operational support services for small businesses that
include but are not limited to submission in local online maps and directories,
webhosting, newsletters, teleconferencing, electronic fax, file storage, and
call routing sold via telemarketing and supported by an online, self service
customer portal.




Summary
Business Description





Direct Sales Services (also
known as Telesold Suite Services)





Commencing
in February 2008, we added a new line of business.  This line of
business is based around using telesales and Internet customer acquisition
technologies to deliver a suite of customer acquisition services to small
businesses.We believe the most significant of these customer acquisition
services is Internet search and search-related advertising
services.  The Company’s strategy is to position its solutions where
85-95% of Internet and mobile search activity for local business services
occurs:  search engine results, the most popular business directories,
and the top social network destinations.  This development is intended
to create a presence, and  enable individuals and businesses to find
our customers without ever going to a specific directory.  The small
business whose website information or advertising message is identified by a
search becomes the likely recipient of that business.  The Company’s
research indicates there are half a billion unique local searches a month on
Google.  On Yahoo alone, 100 million unique visitors per month search
with “local intent”. On top of that data, rapidly rising smart-phone sales will
increase mobile search utilization.  Therefore, we believe utilizing
mobile, Internet search and related advertising is fast becoming a necessity for
small businesses.


14





Another
key Internet development is the rise of user review sites and services, such as
Yelp.com and social networking sites, such as Facebook.  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.  Consumers are instead pursuaded to frequent a specific
business based on the experiences of others.





With the
emergence of these new Internet capabilities, and others that are fast emerging,
the role of directories, both paper and Internet, is becoming less relevant in
the customer acquisition process.  Search, review and social
networking sites are becoming the new standard.  We believe these
sites will provide the greatest value for both customers and
businesses.





Our
websites offer businesses and consumers an affordable and effective solution for
creating a web presence and marketing their products and services to a local
audience through these new online media.





Our suite
currently includes the following menu of services, but the range of services we
deliver is designed to shift over time, based on the needs of our small business
customers and the ever-changing state of Internet technology:





§
            Website
      URL acquisition services 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 services, which utilize sophisticated
      search engine marketing techniques, partnerships with other websites and
      other techniques to generate traffic to our customers’ websites, whether
      created by us or not;





§
            Website
      analytics and performance reports that generate information for our
      customers about activities on their websites and generate leads for their
      businesses based on Internet
activities;





§
            Directory
      services whereby we provide both basic and enhanced directory listings for
      our customers on our own directory and on partner directories;
      and





§
            Business
      listing syndication whereby we provide for our customers a single point to
      publish their information on the top directories, create their point of
      presence in the search results of the major search engines, and broadcast
      their latest “happenings” on the most popular social networking
      destinations





DirectoryServices




We use a
business model similar to print Yellow Pages publishers for our Yellow Page
directory.  We publish basic directory listings on the
Internet.  Our directory listings contain the name, address and
telephone number for almost 17 million U.S. businesses.  We strive to
maintain a listing for almost every business in America in this format and we
generate revenue from the sale of various advertising packages to listed
businesses.  Previously, we shifted our business focus away from this
line of business and sold our primary URL and a portion of our customer list,
which contributed to a 60% decrease in net revenues in the nine months ended
June 30, 2010 compared to the same period in 2009.  We expect to
continue to experience declining future revenues from this segment.




To
counter the decrease in this line of business, we have redefined our business to
business offerings to include a suite of promotional and operational support
services for small businesses. Packages have been officially released to the
marketplace.


15


Recent
Developments





Change
in Business Strategy and Risks Associated with Such Changes





In fiscal
2009, we underwent a significant change in our business strategy as a result of
declining revenues in our legacy businesses (Directory Services) and other
economic and regulatory forces.  We embarked on a transformation of
our business away from our Directory Services business and focused our efforts
toward developing our Direct Sales Services line of business.  As part
of this change in strategy, we initiated a series of key events
including:





·
            We
      shut-down our Philippines-based call
center;


·
            We
      discontinued our classified
business;


·
            We
      sold a portion of our customer list associated with our Directory Services
      business;


·
            We
      sold our www.yp.com
      Internet domain name; and


·
            We
      experienced several management changes including turnover of our most
      senior executive positions.





As a
result of these events and transactions, we have experienced a significant
decline in revenues and have incurred recent operating losses and increased
operating cash outflows.  These losses and operating cash outflows are
expected to continue indefinitely as we address our new line of
business.  The risks associated with our Company are outlined in Part
I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
September 30, 2009.  We encourage all investors, prospective investors
and other readers to refer to these risk factors.





As
discussed above, we have recently redefined ourstrategy in our Directory
Services segment to include a suite of promotional and operational support
services for small businesses, which we believe we can offer in bundles to
achieve competitive advantages as compared to our peers.  In addition,
we are currently exploring a number of other strategic
alternatives.  Such alternatives may include, but are not limited to,
potential partnership, joint venture, divestiture, or liquidation
strategies.  We make no statements with respect to the feasibility or
likelihood of such transactions, or whether any such scenario or combination of
scenarios necessarily may be in the best interest of all shareholders should
they happen to occur.





Management
Changes





On
November 23, 2009, the Company and Richard F. Sommer, our then-current Chief
Executive Officer, entered into an amendment to Mr. Sommer's Employment
Agreement dated as of May 19, 2009 (the “Employment Agreement”). This amendment,
provided that Mr. Sommer was entitled to an option to purchase 250,000 shares of
our common stock at an exercise price of $1.95 per share, which was equal to the
closing price of our common stock on the date of grant.  The option
was granted pursuant to our 2003 Stock Plan and was scheduled to vest according
to the following schedule: 25% on October 29, 2010 (the first anniversary of the
date of grant) and 1/36 of the remainder each month beginning on November 29,
2010.





Previously,
the Employment Agreement provided that Mr. Sommer was entitled to a success fee
payable in cash equal to 2% of the excess above $9,000,000 of any cash
distributed to or received by our stockholders in the form of a dividend, in the
event of liquidation or upon a change of control.  Pursuant to this
amendment, that provision was deleted and replaced with the option grant
described above.  Other than as described above, the original terms of
Mr. Sommer’s Employment Agreement remained in full force and
effect.





Effective
January 2, 2010, Rajeev Seshadri resigned as our Chief Financial Officer and was
replaced by Lawrence W. Tomsic.  Mr. Tomsic recently served as
Controller for Alliance Residential Company, an apartment complex with 3,221
units and $90 million in annual sales.  Previously, he was a
Controller and Chief Financial Officer for various clients of JKL Consulting
(including a planned unit development and a concrete contractor) from 2006-2008
and Chief Financial Officer of John R. Wood, Inc. (a real estate brokerage
focusing on luxury residential housing and commercial properties) from
1997-2006.  Mr. Tomsic worked as a financial officer and in other
management positions for various companies (including U.S. Home Corporation and
Collier Enterprises) from 1983-1997.  He was also a senior auditor for
Deloitte & Touche for three years.  Mr. Tomsic holds a B.S. in
Accounting from the University of Delaware and an M.B.A. from the University of
Denver.


16





On
January 4, 2010, Mr. Sommer resigned as our Chief Executive
Officer.  As a result of his departure, Mr. Sommer also resigned as a
member of our Board.  Following Mr. Sommer’s departure, Kevin A. Hall
was appointed as our interim Chief Operating Officer (COO).  Mr. Hall
has been serving as our General Counsel and Vice President of Human Resources
and Business Development since April 2009, and he continues to serve in those
capacities.On May 20, 2010, the Board appointed Mr. Hall as President and Chief
Operating Officer of the Company.





Restructuring
Activities




On
January 4, 2010, our Board approved a reduction in force that resulted in the
termination of approximately 33% of the Company's workforce, effective January
7, 2010.  On February 23, 2010, our Board approved an additional
reduction in force that resulted in the termination of approximately 20% of our
workforce, effective March 4, 2010.  These reductions in force were
related to our ongoing restructuring and cost reduction efforts as the Board
continues to explore a variety of strategic alternatives, including, but not
limited to, the potential sale of the Company or certain of its assets and/or
the acquisition of other entities or businesses.




We
incurred charges of $143,000 in connection with the reductions in force,
consisting of one-time employee termination benefits.  All amounts
were paid as of June 30, 2010.





Results
of Operations




The
following sets forth a discussion of our financial results for the three and
nine monthsended June 30, 2010 as compared to the three andnine monthsended June
30, 2009.  In evaluating our business, management reviews several key
performance indicators including new customer signups, total customers in each
line of business, revenues per customer, customer retention rates,
etc.  However, given the changing nature of our business strategy, the
decline in emphasis on our Directory Services segment and the infancy of our new
Direct Sales Services line of business, we do not believe that presentation of
such metrics would reveal any meaningful trends in our operations that are not
otherwise apparent from the discussion of our financial results
below.




Net
Revenues




Net Revenues2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  1,651,107
                  
                  
                  $
                  2,448,569
                  
                  
                  $
                  (797,462
                  )
                  
                  
                  (33
                  )%Nine
      Months Ended June 30,
                  
                  $
                  6,294,207
                  
                  
                  $
                  11,006,358
                  
                  
                  $
                  (4,712,151
                  )
                  
                  
                  (43
                  )%




Net
revenues decreased in the thirdquarter of fiscal 2010 as compared to the third
quarter of fiscal 2009 due primarily to a decrease of approximately $318,000 in
sales of our Directory Service products, reflecting the de-emphasis of this
business line and the effects of the sale of our URL and a portion of our
customer list during fiscal 2009.  We also experienced a decrease in
sales of our customer acquisition services of approximately $479,000 as we have
been undergoing strategic shifts in our product line and substantially decreased
sales personnel during the staff reductions and retrained and supplemented the
remaining sales staff.




Net
revenues decreased in the first nine months of fiscal 2010 as compared to the
first nine months of fiscal 2009 due to a decrease of approximately $4,900,000
in sales of our Directory Service products, partially offset by an increase in
sales of our Direct Sale Services of $155,000.  The significant
decrease in the Directory Service products reflects the sale of our URL and a
portion of our customer list during fiscal 2009.




Cost
of Services




Cost of Services2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  636,358
                  
                  
                  $
                  812,321
                  
                  
                  $
                  (175,963
                  )
                  
                  
                  (22
                  )%Nine
      Months Ended June 30,
                  
                  $
                  2,487,510
                  
                  
                  $
                  3,879,853
                  
                  
                  $
                  (1,392,343
                  )
                  
                  
                  (36
                  )%




Cost of
services decreased in the thirdquarter of fiscal 2010 as compared to the
thirdquarter of fiscal 2009 attributable to a $353,000 decrease in costs
associated with our Directory Services business, offset by a $177,000 increase
in costs associated with our Direct Sales Services.  A portion of the
change in these costsreflects changes in our revenue mixas a result of our new
business strategy.


17




Costs of
services decreased in the first nine months of fiscal 2010 as compared to the
first nine months of fiscal 2009 for similar reasons, with a $2,297,000 decrease
in costs related to our Directory Services segment offset by increased costs
related to our Direct Sales Services segment of approximately
$905,000.




Gross
Profit




Gross Profit2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  1,014,749
                  
                  
                  $
                  1,636,248
                  
                  
                  $
                  (621,499
                  )
                  
                  
                  (38
                  )%Nine
      Months Ended June 30,
                  
                  $
                  3,806,697
                  
                  
                  $
                  7,126,505
                  
                  
                  $
                  (3,319,808
                  )
                  
                  
                  (47
                  )%







Gross
profit decreased in the thirdquarter and first nine months of fiscal 2010 as
compared to the thirdquarter and first nine months of fiscal 2009 due to a
decline in revenues offset by changes in gross margins in our various lines of
business.  The following table sets forth changes in our gross margin
by business segment:




Three Months Ended June 30,2010
                        
                        
                        2009Direct
      sales -customer
      acquisition services -Gross
      profit
                        
                        $
                        58,944
                        
                        
                        $
                        715,263Gross
      margin
                        
                        
                        8.9
                        %
                        
                        
                        62.8
                        %Directory
      services -Gross
      profit
                        
                        $
                        955,805
                        
                        
                        $
                        920,985Gross
      margin
                        
                        
                        96.3
                        %
                        
                        
                        70.3
                        %




Nine Months Ended June 30,2010
                        
                        
                        2009Direct
      sales -customer
      acquisition services -Gross
      profit
                        
                        $
                        826,348
                        
                        
                        $
                        1,575,955Gross
      margin
                        
                        
                        26.7
                        %
                        
                        
                        53.6
                        %Directory
      services -Gross
      profit
                        
                        $
                        2,980,349
                        
                        
                        $
                        5,550,550Gross
      margin
                        
                        
                        93.1
                        %
                        
                        
                        68.8
                        %




The
decrease in gross profit for Direct Sales is primarily due to an increase in bad
debt as a result of a full review and cleanup of all customer
accounts.  The Directory Services increases in Gross Profit are due to
a reduction in bad debt expense caused by higher collections of accounts
receivable reserves.




General
and Administrative Expenses




General and Administrative Expenses2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  2,357,797
                  
                  
                  $
                  3,812,983
                  
                  
                  $
                  (1,455,186
                  )
                  
                  
                  (38
                  )%Nine
      Months Ended June 30,
                  
                  $
                  9,457,739
                  
                  
                  $
                  12,126,364
                  
                  
                  $
                  (2,668,625
                  )
                  
                  
                  (22
                  )%




General
and administrative expenses decreased in the thirdquarter of fiscal 2010 as
compared to the third quarter of fiscal 2009 primarily due to the
following:




·      Decreased
compensation costs of approximately $1,425,000 primarily attributable to
reductions in our workforce resulting from actions taken in fiscal 2009
including the closure of our Santa Clara office and reductions in the workforce
in January 2010 and March 2010; and




·      Other
expense decreases of $315,000, including, but not limited  to, rent
and utilities, services and fees, office and supplies expenses, office closure
expenses, travel and entertainment and other corporate expenses associated with
our office closures, reductions in force and other cost containment initiatives;
partially offset by


18




·      Increased
professional fees of approximately $255,000 related to increased legal expenses
incurred in response to certain legal actions brought against us;
and




·      Increased
depreciation and amortization expense of $29,000.




General
and administrative expenses decreased in the first nine months of fiscal 2010 as
compared to the first nine months of fiscal 2009 for similar reasons, as
outlined below:





·      Decreased
compensation costs of approximately $2,651,000 primarily attributable to
reductions in our workforce resulting from actions taken in fiscal 2009 and
fiscal 2010, including the closure of our Santa Clara office and reductions in
the workforce in January 2010 and March 2010, partially offset by payments of
$70,000 for separation expenses related to changes in management in the first
quarter of fiscal 2010and $143,000 of termination benefits related to our
restructuring activities in the second quarter of fiscal 2010;




·      A
decrease of approximately $647,000 of depreciation and amortization expense
primarily attributable to the impairment of intangible assets in the second
quarter of fiscal 2009; and




·      Other
expense decreases of $271,000, including rent and utilities, services and fees,
office and supplies, office closure expenses, travel and entertainment and other
corporate expenses associated with our office closures, reductions in force and
other cost containment initiatives; partially offset by




·      Increased
professional fees of approximately $901,000 related to increased legal expenses
incurred in response to certain legal actions brought against us.




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




Q3 2010
                    
                    
                    
                    Q2 2010
                    
                    
                    
                    Q1 2010
                    
                    
                    
                    Q4 2009
                    
                    
                    
                    Q3 2009
                    
                    
                    
                    Q2 2009
                    
                    
                    
                    Q1 2009Compensation
      for employees,
                      officers
      and directors
                    
                    $
                    967,323
                    
                    
                    $
                    1,352,108
                    
                    
                    $
                    2,241,198
                    
                    
                    $
                    2,054,709
                    
                    
                    $
                    2,392,081
                    
                    
                    $
                    2,311,056
                    
                    
                    $
                    2,508,836Professional
      fees
                    
                    
                    677,507
                    
                    
                    
                    1,023,582
                    
                    
                    
                    488,993
                    
                    
                    
                    336,273
                    
                    
                    
                    421,700
                    
                    
                    
                    411,564
                    
                    
                    
                    455,832Depreciation
      and amortization
                    
                    
                    215,102
                    
                    
                    
                    218,200
                    
                    
                    
                    225,653
                    
                    
                    
                    211,336
                    
                    
                    
                    186,077
                    
                    
                    
                    560,383
                    
                    
                    
                    559,289Other
      general and administrative costs
                    
                    
                    497,865
                    
                    
                    
                    544,162
                    
                    
                    
                    1,006,046
                    
                    
                    
                    451,300
                    
                    
                    
                    813,124
                    
                    
                    
                    771,352
                    
                    
                    
                    735,070




Included
in other general and administrative expenses for the first quarter of fiscal
2010 was an accrual of $300,000 related to a legal settlement with OSM and
SMe.  See Part II, Item 1.  Legal Proceedings in this report
for further information.




Impairment
of Goodwill and Intangible Assets




Impairment of Goodwill and Intangible Assets2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  n/aNine
      Months Ended June 30,
                  
                  $
                  -
                  
                  
                  $
                  7,866,110
                  
                  
                  $
                  (7,866,110
                  )
                  
                  
                  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 first nine months of fiscal 2010.




Sales
and Marketing Expenses




Sales and Marketing Expenses2010
                    
                    
                    2009
                    
                    
                    Change
                    
                    
                    PercentThree
      Months Ended June 30,
                    
                    $
                    1,826
                    
                    
                    $
                    130,627
                    
                    
                    $
                    (128,801
                    )
                    
                    
                    (99
                    )%Nine
      Months Ended June 30,
                    
                    $
                    262,937
                    
                    
                    $
                    2,416,012
                    
                    
                    $
                    (2,153,075
                    )
                    
                    
                    (89
                    )%




Sales and
marketing expenses decreased in the third quarter of fiscal 2010 as compared to
the third quarter of fiscal 2009 primarily due to cost containment
initiatives.  Virtually all of our sales and marketing activities in
the third quarter of fiscal 2010 consisted of in-house personnel activities
whose costs are included in general and administrative
expenses.


19




Operating
Loss




Operating Loss2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  (1,344,874
                  )
                  
                  $
                  (2,307,362
                  )
                  
                  $
                  962,488
                  
                  
                  
                  (42
                  )%Nine
      Months Ended June 30,
                  
                  $
                  (5,913,979
                  )
                  
                  $
                  (15,281,981
                  )
                  
                  $
                  9,368,002
                  
                  
                  
                  (61
                  )%




The
decreasein operating lossfor the third quarter of fiscal 2010 as compared to the
third quarter of fiscal 2009 is primarily due to decreases in general and
administrative expenses and sales and marketing expenses as a result of our cost
containment initiatives, partially offset by a decrease in our gross profit each
of which is described above.  The decrease in operating loss for the
first nine months of fiscal 2010 as compared to the first nine months of fiscal
2010 was due to the factors described above as well as the impacts of the
impairment charges that occurred in the second quarter of fiscal 2009, which is
described above.




Total
Other Income (Expense)




Total Other Income (Expense)2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  4,940
                  
                  
                  $
                  85,273
                  
                  
                  $
                  (80,333
                  )
                  
                  
                  (94
                  )%Nine
      Months Ended June 30,
                  
                  $
                  42,765
                  
                  
                  $
                  7,369,190
                  
                  
                  $
                  (7,326,425
                  )
                  
                  
                  (99
                  )%




During
the first quarter of fiscal 2010, we recognized $50,000 of income related to the
adjustment of certain accruals associated with the sale of a portion of our
customer list that occurred in the previous year.




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 which resulted in an
increase in other income of $642,268 for the three and nine months ended June
30, 2009, respectively.




During
the first quarterof 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 for the
first quarter of fiscal 2009.




The
remaining activity in fiscal 2010 and fiscal 2009 consisted primarily of
interest income on cash balances and short-term investments.




Income
Tax Provision (Benefit)




Income Tax Provision (Benefit)2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  -
                  
                  
                  $
                  (105,117
                  )
                  
                  $
                  105,117
                  
                  
                  
                  (100
                  )%Nine
      Months Ended June 30,
                  
                  $
                  (231,026
                  )
                  
                  $
                  7,138,170
                  
                  
                  $
                  (7,369,196
                  )
                  
                  
                  (103
                  )%




In the
second quarter of fiscal 2009, the Company established a valuation allowance
against all deferred tax assets given the uncertainty with respect to future
operations and we continue to maintain a full valuation allowance against such
assets.  Accordingly, there is no tax expense or benefit for the third
quarter of fiscal 2010.  The income tax provision during the first
nine monthsof fiscal 2010 reflects a true up to our income tax receivable that
occurred in the second quarter of fiscal 2010 based on information received
during the finalization of our 2009 tax returns.  The income tax
provision in the thirdquarter of fiscal 2009 and first nine months of fiscal
2009 reflects the tax impacts of changes in our pre-tax income, coupled with the
establishment of a valuation allowance in the second quarter of fiscal 2009,
which increased our income tax provision by $9,392,488.  The income
tax benefit for the three months ended June 30, 2009 relates to the effects of a
true up for the fiscal 2008 tax return, resulting in a greater-than-expected
refund.While we are optimistic about our 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.


20




Income
(Loss) from Discontinued Operations




Income (Loss) from Discontinued Operations2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  -
                  
                  
                  $
                  4,649
                  
                  
                  $
                  (4,649
                  )
                  
                  
                  (100
                  )%Nine
      Months Ended June 30,
                  
                  $
                  1,081
                  
                  
                  $
                  (5,257,615
                  )
                  
                  $
                  5,258,696
                  
                  
                  
                  (100
                  )%




During
the second quarter of fiscal 2009, we discontinued our Directory Services
business.  All prior periods have been restated to reflect the
classifieds operating results, net of tax, as discontinued
operations.  The decrease in loss in the first nine monthsof fiscal
2010 as compared to the first nine monthsof fiscal 2009 reflects the wind down
of this line of business and the effects of the impairment charges (and related
tax effects) which were incurred during fiscal 2009.




Net
Income (Loss)




Net income (loss)2010
                  
                  
                  2009
                  
                  
                  Change
                  
                  
                  PercentThree
      Months Ended June 30,
                  
                  $
                  (1,339,934
                  )
                  
                  $
                  (2,112,323
                  )
                  
                  $
                  772,389
                  
                  
                  
                  (37
                  )%Nine
      Months Ended June 30,
                  
                  $
                  (5,639,107
                  )
                  
                  $
                  (20,308,576
                  )
                  
                  $
                  14,669,469
                  
                  
                  
                  (72
                  )%




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




Liquidity
and Capital Resources




Net cash
used in operating activities was approximately $2,842,000 for the first nine
monthsof fiscal 2010 as compared to approximately $1,351,000 for the first nine
monthsof fiscal 2009.  While our net loss decreased by $14,669,000 in
the first nine monthsof fiscal 2010 as compared to the first nine monthsof
fiscal 2009, the net loss for the prior period included a non- cash impairment
charge of $16,111,000 offset by gains on the sale of our domain name and
customer list of $6,622,000, which are not included as part of operating cash
flows.  Other factors contributing to the change in operating cash
flows include a decrease in non-cash expenses of $5,365,000(including
depreciation and amortization, stock-based compensation, deferred income taxes,
provisions for uncollectible accounts and other non-cash gains and losses) in
the first nine monthsof fiscal 2010 as compared to the first nine monthsof
fiscal 2009 and changes in working capital and other asset balances which
negatively impacted cash flows by $1,307,000, consisting primarily of
significant accounts receivable collections in the first nine months of fiscal
2009 offset primarily by income tax refunds received in the first nine months of
fiscal 2010.  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 first nine monthsof fiscal 2010, we
have been transitioning away from our previous Directory Services offerings
toward our Direct Sales Services and new business to business services
offerings, including our newly defined business to business self service
options. While we have experienced significant revenue declines in the Directory
Services segment, our accounts receivable have not shrunk commensurately as we
have holdback accounts with our LEC billing service providers that are remitted
to us over an extended period of time – typically between 120 and 180 days. We
have concentrations of receivables with respect to certain wholesale accounts
and remaining holdbacks with LEC service providers.  As of June 30,
2010, four such entities accounted for 28%, 27%, 18% and 13% of gross accounts
receivable.




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 remaining life of the contract.  Most customers purchasing these
services elect to use their credit cards to make payments, and therefore our
collections are usually made within a few days of the installment due
date.




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


21


Net cash
used for investing activities totaled approximately $481,000 for the first nine
monthsof fiscal 2010 consisting of  $286,000 for equipment and
software development costs and $200,000 to purchase a certificate of
deposit.  Net cash provided by investing activities was $6,457,000 for
the first nine monthsof fiscal 2009 which was attributable to 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, partially offset by purchases of
equipment and software development costs of $718,000 and the purchase of a
certificate of deposit of $100,000.




Net cash
used for financing activities was approximately $100,000 during the first nine
monthsof fiscal 2010 compared to approximately $541,000 during the first nine
monthsof fiscal 2009, primarily attributable to a reduction in the amount of
treasury stock repurchases due to a suspension of the program.  The
timing of stock repurchases is influenced by market forces and our cash needs
and requirements.




We had
working capital of $4,718,000 as of June 30, 2010 compared to $9,251,000 as of
September 30, 2009 with current assets decreasing by $5,003,000 and current
liabilities decreasing by $469,000 from September 30, 2009 to June 30,
2010.  Declines in working capital are primarily attributable to our
operating net loss.




Contractual
Obligations




The
following table summarizes our contractual obligations at June 30, 2010 and the
effect such obligations are expected to have on our future liquidity and cash
flows:




Payments Due by Fiscal YearTotal
                        
                        
                        2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014
                        
                        
                        ThereafterOperating
      lease commitments
                        
                        $
                        943,101
                        
                        
                        $
                        125,674
                        
                        
                        $
                        423,375
                        
                        
                        $
                        315,331
                        
                        
                        $
                        78,720
                        
                        
                        $
                        -
                        
                        
                        $
                        -Capital
      lease commitments
                        
                        
                        117,595
                        
                        
                        
                        16,036
                        
                        
                        
                        64,143
                        
                        
                        
                        37,417
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Noncanceleable
      service contracts
                        
                        
                        1,008,375
                        
                        
                        
                        234,792
                        
                        
                        
                        635,583
                        
                        
                        
                        138,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -$
                        2,069,071
                        
                        
                        $
                        376,502
                        
                        
                        $
                        1,123,101
                        
                        
                        $
                        490,748
                        
                        
                        $
                        78,720
                        
                        
                        $
                        -
                        
                        
                        $
                        -





This
table includes the service contract associated with the litigation settlement
entered into on February 3, 2010 as previously described.  While 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, we will not be able to stay in business in the future
without improvements in our profitability, additional financing or a fundamental
change in our business.





At June
30, 2010, we had no off-balance sheet arrangements, commitments or guarantees
that require additional disclosure or measurement.


22





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 principal
executive officer and principal 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 principal executive officer and principal 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
Quarterly Report, 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.  During
the period covered by this Quarterly Report, 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.


23


PART
II – OTHER INFORMATION




ITEM
1.  LEGAL PROCEEDINGS




Except as
described below, as of June 30, 2010, the Company was not a party to any pending
material legal proceedings other than claims that arise in the normal conduct of
its business.  While management currently believes that the ultimate
outcome of these proceedings will not have a material adverse effect on its
consolidated financial condition or results of operations, litigation is subject
to inherent uncertainties.  If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact on the Company’s net
income in the period in which a ruling occurs.  The Company’s estimate
of the potential impact of the following legal proceedings on its financial
position and its results of operations could change in the future.





The
Company has not recorded any accruals pertaining to its legal proceedings as
they do not meet the criteria for accrual under FASB ASC 450.





Joe
Cunningham v. LiveDeal, Inc. et al.





On July
16, 2008, Joseph Cunningham, who was at the time a member of LiveDeal's Board of
Directors, filed a complaint with the U.S. Department of Labor’s Occupational
Safety and Health Administration (“OSHA”) alleging that the Company and certain
members of its Board had engaged in discriminatory employment practices in
violation of the Sarbanes-Oxley Act of 2002’s statutory protections for
corporate whistleblowers when the Board of Directors removed him as Chairman on
May 22, 2008. In his complaint, Mr. Cunningham asked OSHA to order his
appointment as Chief Executive Officer of the Company or, in the alternative, to
order his reinstatement as Chairman of the Board.  Mr. Cunningham also
sought back pay, special damages and litigation costs.  In July 2010,
OSHA notified the Company that Mr. Cunningham had amended his complaint on
May 10, 2010 to add the allegation that the shareholders’ decision not to
reelect him to the Board was also a discriminatory employment
practice.  From December 2008 to July 2010, the Company had not
received any correspondence from OSHA.





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 in King County (Washington) Superior
Court.  GES has alleged in its complaint that the Company's use of
activator checks violated the Washington Consumer Protection Act.  GES
is seeking injunctive relief against the Company’s 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.  The Company has denied the
allegations.  The court denied both parties’ dispositive
motions.  Litigation is ongoing.





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 and is vigorously defending the claim.  Legal
proceedings in the matter are ongoing.


24


ITEM
1A.  RISK FACTORS





There
have been no material changes to the factors disclosed in Item 1A “Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended September 30,
2009.





ITEM
6. EXHIBITS




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





Exhibit
                Number
              
              Description31
              
              Certifications
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232
              
              Section
      1350 Certifications


25


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
      12, 2010
            /s/ Lawrence W. TomsicLawrence
      W. TomsicChief
      Financial Officer


26