Unassociated Document

FORWARD LOOKING INFORMATION

MAY PROVE INACCURATE

This Annual Report on Form 10-K, including without limitation the Business section and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 23E of the Securities and Exchange Act of 1934, and information relating to the Company that is based on our current beliefs, as well as current assumptions made by and information currently available to us. When used in this document, the words "anticipate," "believe," "estimate," and "expect" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including those described in this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading “Risk Factors” included below and in other documents we file from time to time with the Securities and Exchange Commission. Our business and the associated risks may have changed since the date of this report; we assume no obligation to update these forward-looking statements.

Item 1. Business

Overview

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

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

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

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

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

At November 30, 2006, we determined that at the current rate of growth recognized by Hot Rocket, there exists the possibility that the second anniversary tier of contingent payment will not be attained within the second measurement period, which ended January 31, 2007. Based on that lack of absolute certainty as to the second anniversary additional purchase price liability, we have not accrued any additional contingent payments at this time. Future contingencies, if any, will be recorded when the contingency has been satisfied and the additional consideration is issued or becomes issuable.

The terms of the acquisition agreement also provide for additional contingent payments of purchase price for the periods February 1, 2006 through July 31, 2006, and August 1, 2006 through January 31, 2007, upon the attainment of certain EBITDA thresholds as specified in the Agreement. Hot Rocket did not reach the $1.35 million EBITDA threshold for the period ended July 31, 2006. As of November 30, 2006, based on the lack of absolute certainty regarding the EBITDA contingent threshold as it relates to the additional payment period ended January 31, 2007, we have not accrued any additional contingent payments at this time.

We made one asset acquisition in each of Fiscal 2004 and 2005, which accounted for approximately $6.9 million and $16.6 million of our consolidated revenues during such fiscal periods, respectively, and approximated $28.85 million, or 39.5% of consolidated revenues during the year ended November 30, 2006. Such asset acquisitions are described in further detail below and also described in the notes to the November 30, 2006 audited consolidated financial statements included herein.

Background and Available Information

From our inception in 1993 (under the name "Quintel Communications, Inc.") through Fiscal 1999, we generated the bulk of our revenue from direct marketing using the traditional media of television, postal mail and telemarketing.

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

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

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

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website, www.traffixinc.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Any and all information found on our website is not part of this or any other report we file with or furnish to the SEC.

The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding our Company that we file electronically with the SEC.

Unless the context otherwise requires, in this Annual Report on Form 10-K, the term “Traffix”, “the Company”, “we”, “us,” and “our” refer to Traffix Inc. and its subsidiaries. Our fiscal year ends on November 30 and fiscal years are referred to by the calendar year in which they end. For example, “fiscal year 2006” and “Fiscal 2006” refer to the fiscal year ended November 30, 2006.

Online Advertising and Media Services

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

Online Advertising - Website Advertising

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

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

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

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

Online Advertising - Email Marketing Programs

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

Results Analysis

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

Affiliate Marketing

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

Syndication

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

Online Advertising - Internet Media Performance Based Sales

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

Online Advertising - Data Sales, Rentals and List Management

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

Search Engine Marketing

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

Personals

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

Internet Game Development

Our Canadian subsidiary, Infiknowledge, ULC, performs work-for-hire services in the production of Internet games for third party vendors, and participates in royalties related to the development, launch and successful commercialization of such Internet games.

Our expansion in, and dependence on, our online direct marketing efforts, coupled with the potential for state and/or federal legislation limiting our ability to contact consumers online should all be considered when referring to our current fiscal year’s results, as well as prior year’s historical results, in evaluating the potential for our future operations, cash flows, and financial position.

Segment Information

We operate in one segment, Online Advertising and Media Services. In classifying the financial information for our operating activities, we rely primarily upon the evaluations of the chief operating decision maker (CODM - as managed by committee) and executive management in deciding how to allocate our resources and assess our performance. Disclosure is also required about products and services, geographic areas and major customers. At December 1, 2005, management realigned the way it views operations internally and modified the format that we distribute reports and information to the CODM. In accordance with such realignment, the LEC Billed Products and Services segment, which was principally inactive in terms of its contributions to gross margin and income from operations from the period December 1, 2002 to November 30, 2005, was collapsed into our Online Advertising and Media Service activities, and was no longer displayed as a separate segment within our CODM reporting information and, therefore, was correspondingly reflected as such in our publicly disseminated financial information. For the November 30, 2006, 2005 and 2004 Fiscal periods, the Company’s income statements and notes to the financial statements were reclassified, regarding segment disclosures and the collapse of the LEC segment into our single segment presentation of Online Advertising and Media Services Activities. All information regarding “Managements’ Discussion and Analysis of Financial Condition and Results of Operations” has been reclassified to conform with such presentation for all periods reported.

In Fiscal 2006, our Online Advertising revenue component of our Online Advertising and Media Service activities included $613,000 of legacy revenue from reserve releases from our prior LEC segment. Such reserve releases were actual cash received by us from third party service bureaus that withheld amounts from our legacy LEC segment in anticipation of bad debts; actual bad debts proved less than amounts originally withheld. At the point these monies were withheld in prior fiscal years, we had treated them as contra revenue. We do not anticipate future reserve releases, if any, will represent material amounts.

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

We had revenue from our Canadian-based subsidiary of approximately $912,000 and $647,000 during the fiscal years ended November 30, 2006 and 2005, respectively. The primary role of the Canadian subsidiary is to support back office data operations and does not directly contribute significant amounts to consolidated net income. The majority of the Canadian subsidiary’s outlays are related to the generation of our revenues. Correspondingly, we classify them within the categories of cost of sales and selling, general and administrative expenses, where appropriate.

Segment information is set forth in Note 1 to the Consolidated Financial Statements referred to in the Financial Statements and Supplementary Data section hereof. For a more detailed discussion of our segment information, also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Competition

We face intense competition in the marketing of our Online Advertising and Media services. Many of our competitors in the online direct marketing arena are well established, have reputations for success in the development and marketing of services and have significant financial, marketing, distribution, personnel and other resources. We also compete with numerous smaller private companies that are willing to take extremely aggressive marketing risks that are outside of the scope of our risk tolerance. These extremely aggressive marketing practices and other marketing capabilities permit our competitors to implement extensive advertising and promotional campaigns, both generally and in response to efforts of other competitors, to enter into new markets and introduce new services.

Seasonality and Cyclicality

We believe that the online marketing industry is subject to seasonal fluctuations, where consumers tend to spend less time at the computer during the summer months, which is apparent based on the decrease in Internet traffic during such periods. Historically, we have generally recognized the fourth and first fiscal quarters of our fiscal year to be our most active. As the acceptance of the Internet as a purchasing and transacting medium continues, we believe this will continue to minimize the affect of seasonality.

Insurance

We may be subject to substantial liability as a result of our day-to-day operations. Accordingly, we maintain a general liability insurance policy that is subject to a per occurrence limit of $1 million with a $2 million aggregate limit and an umbrella policy covering an additional $10 million of liability. In addition, we have errors and omissions insurance with a limit of $5 million. We also maintain Directors and Officers liability insurance providing aggregate coverage of $20 million for legal costs and claims. Such insurance may not be sufficient to cover all potential claims and additional insurance may not be available in future fiscal periods at reasonable costs.

Government Regulation

As a direct-to-consumer marketing company we are subject to a variety of federal, state and local laws and regulations designed to protect consumers that govern certain of our marketing practices.

Federal legislation was signed into law, effective January 1, 2004, substantially pre-empting existing and pending state e-mail marketing legislation. The CAN-SPAM Act of 2003 (“CAN-SPAM“) requires that certain “opt-out” procedures, including, but not limited to, a functioning return e-mail address, be included in commercial e-mail marketing. CAN-SPAM prohibits the sending of e-mail containing false, deceptive or misleading subject lines, routing information, headers and/or return address information; however, CAN-SPAM does not permit consumers to file suit against e-mail marketers for violations of CAN-SPAM. We believe that this may benefit us, as individuals will be more limited in their ability to file frivolous suits against us, as they have in the past. If any subsequent federal regulations are enacted, including, but not limited to, those implementing regulations promulgated by the FTC that limit our ability to market our offers, we could potentially realize a material adverse impact in future fiscal period net revenue growth, and, therefore, profitability and cash flows could be adversely affected.

In contrast to CAN-SPAM, most state deceptive marketing statutes contain private rights of action. Such private right of action lawsuits may have an adverse impact in future fiscal period net revenue growth, as individuals may be more inclined to file frivolous state deceptive marketing suits against us.

Under its rule-making authority, the Federal Communications Commission (“FCC”) in August 2004 adopted rules prohibiting sending of unsolicited commercial e-mails to wireless phones and pagers. To assist in compliance with the rules, the FCC published on February 7, 2005 a list of mail domain names associated with wireless devices. Senders were given thirty (30) days to come into compliance. Thereafter, it became illegal to send unsolicited commercial e-mail to a domain address on the list unless the subscriber gave prior express authorization. The effect of these rules is to create a "double opt-in" requirement for each sender of mail (advertiser and publisher). The practical consequence of these requirements on senders of commercial e-mail is that conducting compliant campaigns will necessitate the suppression of the domains listed in the FCC's list of wireless domains. Additionally, since domain suppression is now required as a practical matter by law, any campaigns that have domain suppression lists will have those lists included with the regular e-mail suppression lists. Our publishers will be required to suppress the domain lists associated with each campaign in the same manner that they already suppress the e-mail address lists. Although these new regulations do not have a material adverse impact on our current operations, there can be no assurance that they will not have a material adverse impact on our future operations.

Under its rule-making authority, in May 2005, the Department of Justice adopted rules that amend the record keeping and inspection requirements for producers of sexually explicit performances. Codified in 18 U.S.C. 2257 of the federal criminal code, Section 2257, as amended, went into effect on June 23, 2005 and requires a class referred to as “secondary producers” to comply with the record keeping and inspection requirements that apply to primary producers. On June 16, 2005, The Free Speech Coalition, Inc. brought an action challenging, among other things, the extent to which webmasters and/or web sites fall under the definition of “secondary producers” under the new Section 2257 regulations. In a ruling issued December 28, 2005, the U.S. District Court rejected the establishment of a class of “secondary producers” that would have to comply with the record-keeping and inspection requirements of Section 2257 and reaffirmed the decision in Sundance Associates v. Reno, which held that primary “producers” would be limited to those persons involved in the “hiring, contracting for, managing, or otherwise arranging for the participating of the depicted performer.” Secondary producers will likely still have to comply with the labeling requirements of Section 2257, which require that secondary producers obtain from the primary producer a letter or other correspondence indicating who the custodian of records is, where such records are kept and the date of production of the material. The ruling in this proceeding is limited to current or future members of The Free Speech Coalition, Inc. There is the risk that the definition of “secondary producers” may be reinstated and/or more broadly interpreted in the future. At this juncture, Section 2257 has had no material effect on our net revenue growth, profitability and cash flows.

The states of Michigan and Utah have passed Child Protection Registry laws that bar the transmission of commercial e-mail to registered state residents under the age of eighteen (collectively, the “Statutes”). The Statutes contain provisions for fines and jail time for violators, and create a private right of action for aggrieved parties. Under the Statutes, state residents may register any e-mail address, fax number, wireless contact information or instant message identifier assigned to the account of a minor or one to which a minor has access. Unlike other e-mail marketing statutes, there are no opt-in or pre-existing business relationship exceptions. The Statutes provide that once an address of a state resident is on the registry for thirty (30) days, commercial e-mailers are prohibited from sending to that address anything containing an advertisement, or even a link to an advertisement, for a product or service that a minor is legally prohibited from accessing. Such products and/or services include, but are not limited to, alcohol, tobacco, gambling, firearms, automotive, financial, prescription drug and adult material. This prohibition remains in force even if the e-mail or other communication is otherwise solicited. The Free Speech Coalition, Inc. has brought an action that challenges certain aspects of the Utah Child Protection Registry law; no decision on this proceeding has yet been rendered. We await the results of this action. To the extent we market these types of products and/or services, we have blocked sending such e-mail to Michigan and Utah residents. State action was initiated in 2005 and early 2006 in the respective legislative bodies in the states of Illinois, Connecticut, Georgia, Hawaii, Iowa and Wisconsin in order to pursue the enactment of legislation similar to the Statutes that will create state-level e-mail registries for minors. None of the proposed legislation has been enacted as of yet. We await the results of the respective legislative processes associated with these proposed child e-mail registry laws. Depending on the outcome, and to the extent we market these types of products and/or services, we may have to block sending such e-mail to Illinois, Connecticut, Georgia, Hawaii and/or Iowa.

Federal legislation was signed into law, effective December 1, 2006, that makes changes to the Federal Rules of Civil Procedure (“Rules”) affecting the storing, retention and production of electronically stored information (“ESI”) in connection with discovery pursuant to litigation. As a result of the changes to the Rules, attorneys will be required to advise their adversaries, during litigation, of the details of their clients’ ESI retention and management systems and, in many instances, produce ESI including, but not limited to, e-mails. As a result of these changes to the Rules, companies should: (i) identify the various forms of ESI generated in the course of business, and where such ESI is stored; (ii) implement systems and technology capable of storing and retrieving such ESI, as necessary; and (iii) adopt a clear ESI document retention program and adhere to same at all times. The requirements imposed by the changes to the Rules as detailed above could require us to change our ESI-related programs at some additional cost. In addition, any subsequent litigation could result in substantially higher costs as a result of the need to produce greater quantities of ESI, which could have a material adverse impact on profitability and cash flows.

Legislation has been passed in sixteen (16) different states that are intended to regulate “spyware” and, to a limited extent, the use of “cookies.” Of particular significance is the Revised Utah Spyware Control Act (the “Utah Act”) that bars a person or company from using a context-based trigger mechanism to display an advertisement that partially or wholly covers paid advertising or other content on a website in a way that interferes with the user's ability to view the website. The Utah Act also requires purveyors of pop-up advertising to ask whether a user is a resident of the state of Utah before downloading “spyware” software onto the user's computer and further allows a trademark owner to sue any person or company who displays a pop-up advertisement in violation of a specific trademark protection which is set forth in the Utah Act. The State of Alaska has enacted similar legislation that bars the same means of delivering advertisements as the Utah Act, and requires similar verification of residency prior to downloading “spyware” or “adware” software onto the user's computer. In practice, we do not provide or use “spyware” in our marketing, but if more restrictive legislation is adopted, we may be required to develop new technology and/or methods to provide our services or discontinue services in some jurisdictions altogether. Additionally, there is a risk that state courts will broadly interpret the term “spyware” to include legitimate ad-serving software and/or cookie technology that is currently provided or used by us.

At the federal level, competing bills are pending which are also intended to regulate “spyware” and, to a limited extent, the use of “cookies.” “Spyware” has not been precisely defined in existing and pending legislation, but is generally considered to include software which is installed on consumers’ computers and designed to track consumers’ activities and collect and possibly disseminate information, including personally identifiable information, about those consumers without their knowledge and consent. As stated above, we do not provide or use “spyware” in our marketing practices, but there is the risk that the definition of spyware may be broadly interpreted to include legitimate ad-serving software and/or cookie technology that is currently provided or used by us. Anti-spyware legislation has 1) generally included a limited exemption for the use of cookies; and 2) focused on providing consumers with notification and the option to accept or decline the installation of spyware software. However, there can be no assurance that future legislation will not incorporate more burdensome standards by which the use of cookies will not be exempted and software downloading onto consumers’ computers will not be more strictly enforced. If more restrictive legislation is adopted, we may be required to develop new technology and/or methods to provide our services or discontinue services in some jurisdictions altogether.

Legislation has also been passed at the state level and competing bills are pending at the federal level which are intended to require that businesses and institutions provide notice to consumers of any potential theft or loss of sensitive consumer information then in possession of the applicable business or institution. At the state level, laws that recently took effect in the states of Arizona, Colorado, Hawaii, Idaho, Indiana, Kansas, Nebraska, Utah, Vermont and Wisconsin require companies, governmental agencies and private organizations to notify individuals in cases where their confidential information has been exposed to possible data thieves (the “New State Laws”). Upon taking effect on April 1, 2006, April 10, 2006, June 27, 2006, July 1, 2006, September 1, 2006, December 31, 2006 and January 1, 2007, as applicable, the New State Laws make customer notification mandatory in the event that personally identifiable information (including, but not limited to, social security numbers, driver's license numbers or bank and financial account numbers) has been accessed improperly by third parties. The New State Laws are in addition to similar laws previously in effect in at least twenty-four (24) other states including the states of Arkansas, California, Connecticut, Delaware, Florida, Georgia, Illinois, Louisiana, Maine, Michigan, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina North Dakota, Ohio, Pennsylvania, Rhode Island, Tennessee, Texas and Washington that all require consumer notification where confidential or sensitive information has been improperly accessed, lost or stolen (together with the New State Laws, the “Information Security Laws”). The Information Security Laws also impose obligations on companies that collect, store and transmit sensitive information to use secure socket and/or encryption technologies, as applicable, when performing the aforementioned tasks. To the extent that we collect such personally identifiable information, the Information Security Laws may increase our costs to protect such information.

At the Federal level, the FTC, pursuant to its enforcement authority, filed a complaint against BJ’s Wholesale Club, Inc. (“BJ's”) for violation of the FTC Act in connection with the theft of consumer credit/debit card information which was then in BJ’s possession. The FTC alleged that BJ’s failure to secure customers' sensitive information was an unfair practice under the FTC Act because it caused substantial injury that was not reasonably avoidable by consumers and not outweighed by offsetting benefits to consumers or competition. BJ’s agreed to a settlement that requires BJ’s to establish and maintain a comprehensive information security program that includes administrative, technical and physical safeguards. Although we do not anticipate that this interpretation of the FTC Act, nor the Information Security Laws requiring notice of theft or loss of sensitive consumer information, will have a material adverse impact on our current operations, we could potentially be subject to regulatory proceedings for past and current practices in connection with the storage and security of sensitive consumer information and notice of such sensitive consumer information's theft or loss. In addition, we may be required to make changes in our future practices relating to the storage, security and provision of notice in connection with sensitive consumer information.

At present, the laws and regulations governing the Internet remain largely unsettled, even in areas where there has been legislative and/or regulatory action. It is uncertain as to how long it will take to determine the extent to which existing laws, including, but not limited to, those relating to intellectual property, advertising, sweepstakes and privacy, apply to the Internet and Internet marketing. Recently, growing public concern regarding privacy and the collection, distribution and use of Internet user information has led to increased Federal and state scrutiny, as well as regulatory activity concerning data collection, record keeping, storage, security, notification of data theft, and associated use practices. The application of existing laws or the adoption or modification of laws or regulations in the future, together with increased regulatory scrutiny, could materially and adversely affect our business, prospects, results of operations and financial condition and could potentially expose us and/or our clients to fines, litigation, cease and desist orders and civil and criminal liability.

Employees

We currently employ 93 full-time employees, including four executive officers, and 2 part-time employees in the U.S. and 68 full-time employees in Canada. We believe that our relations with our employees are satisfactory. None of our employees are represented by a union.

Code of Ethics and Business Conduct

We have adopted a Code of Ethics and Business Conduct (the “Code”) for our principal executive and financial and accounting officers, and our directors, employees, agents, and consultants. The Code is publicly available on our website at www.traffixinc.com under “Investor Relations” (following the links to “Corporate Governance” and “Code of Ethics”). The Code addresses various issues regarding the practice of ethical conduct applied to all levels of our personnel in all the phases of their business activities and of their responsibility of reporting illegal or unethical behavior.

We have also established an accounting ethics complaint procedure for all employees to report concerns they might have regarding accounting, internal accounting controls and auditing matters. All complaints are treated confidentially, and we do not, and will not condone any retaliation of any kind against employees who come forward with complaints.

Item 1A. Risk Factors

From time to time, including in this Annual Report on Form 10-K, we publish forward-looking statements, as disclosed in our Disclosure Regarding Forward-Looking Statements, beginning immediately following the Table of Contents of this Annual Report. We note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or anticipated in our forward-looking statements. The factors listed below are illustrative of the risks and uncertainties that may arise and that may be detailed from time to time in our public announcements and our filings with the Securities and Exchange Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation to make any revisions to the forward-looking statements contained in this Annual Report on Form 10-K to reflect events or circumstances occurring after the date of the filing of this report.

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

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

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

The following is a summary of the unaudited quarterly results of operations for Fiscal 2006 and 2005:

	Quarter ended
	November 30,			August 31, (2)		May 31, (2)		February 28, (2)
2006:
Net revenues	$	17,158,116		$	19,698,883	$	18,964,132	$	17,022,812
Gross profit		4,580,063			7,121,978		5,702,603		7,454,172
Income (loss) before income taxes		(211,027	)		1,812,621		1,219,023		718,787
Net income (loss)		1,116			842,048		636,961		422,718
Basic income (loss) per share	$	0.00		$	0.06	$	0.04	$	0.03
Diluted income (loss) per share	$	0.00		$	0.06	$	0.04	$	0.03

2005:		November 30, (1)			August 31, (1)		May 31, (1)		February 28, (1)
Net revenues	$	16,598,155		$	16,372,442	$	16,610,569	$	13,275,816
Gross profit		5,244,557			5,614,899		6,083,820		4,861,446
Income before income taxes		639,407			578,573		1,193,277		1,059,537
Net income		780,525			316,667		707,684		623,281
Basic income per share	$	0.05		$	0.02	$	0.05	$	0.05
Diluted income per share	$	0.05		$	0.02	$	0.05	$	0.04

(1)

As described elsewhere in this Notes to Consolidated Financial Statements, the Quarterly Reports on Form 10-Q for the first and second quarters of Fiscal 2005 were filed on a different basis than that included above. The amounts as reported in our Form 10-Q’s, as filed in Fiscal 2006, are listed in the first table below (table (1)). The second table (table (2)) provides the information that agrees to the condensed information detailed above, which also agrees to the basis of presentation as included in the Form’s 10-Q, as filed in Fiscal 2005. The third table provides the variance between table (1) and table (2), effectively providing the variance between the filings. A fourth table is provided detailing the percentage variance between table (3) and table (2), effectively providing the percentage variance between the filings.

F-59

(2)

The first and second quarter of Fiscal 2006, were reported on a different basis then the third and fourth quarters, relative to account classifications as they related to our preliminary interim CODM reporting (see Note 1 to the Consolidated Financial Statements) and our final reporting determinations, and due to the correction of an immaterial allocation classification error between selling salaries and general and administrative salaries (also see Note 1 to the Consolidated Financial Statements), all of such classification adjustments had no impact on Income from Operations, Pre-tax Income, or Net-income. Table (5), included below, provides the details of the our Fiscal 2006 first, second and third quarter, three-month results, as included in our three-month sections of our consolidated statements of income, included in our Form 10-Q’s as filed. Table (6) compares the nine months, as accumulated in table (5), with the nine months as included in our Form 10-Q filed for our third quarter ended August 31, 2006. Table (6) also includes the change, expressed in dollars, and as a percentage. We again note that the classification adjustments had no impact on Income from Operations, Pre-tax Income, or Net-income, and as such have been deemed immaterial.

Table 1		As reported in Fiscal 2006 Form 10-Q's - Quarter ended
2005:		November 30,			August 31,		May 31,			February 28,

Net revenues	$	16,598,155		$	16,372,442	$	16,257,112		$	12,924,931
Cost of revenues		11,353,598			10,757,543		9,360,005			7,286,476
Gross profit		5,244,557			5,614,899		6,897,107			5,638,455
Selling expenses		1,576,524			1,315,640		1,281,345			817,175
General and administrative expenses		3,763,756			3,805,339		3,961,684			4,263,951
Other operating (income) expense		-			-		(189,550	)		(175,805	)
Amortization of intangibles		-			-		476,762			275,162
Depreciation expense		-			-		171,300			174,946
Bad debt expense		(573,427	)		4,634		80,382			85,225
Income from operations	$	477,704		$	489,286	$	1,115,184		$	197,801

Table 2	As reported in Fiscal 2005 Form 10-Q's - Quarter ended
2005:	November 30,			August 31,		May 31,		February 28,

Net revenues	$	16,598,155		$	16,372,442	$	16,610,569	$	13,275,816
Cost of revenues		11,353,598			10,757,543		10,526,749		8,414,370
Gross profit		5,244,557			5,614,899		6,083,820		4,861,446
Selling expenses		1,328,611			896,697		974,120		817,175
General and administrative expenses		4,011,669			4,224,282		3,914,134		3,761,245
Other operating (income) expense		-			-		-		-
Amortization of intangibles		-			-		-		-
Depreciation expense		-			-		-		-
Bad debt expense		(573,427	)		4,634		80,382		85,225
Income from operations	$	477,704		$	489,286	$	1,115,184	$	197,801

F-60

Table 3	$$$ Variance between Reported Filings - Quarter ended
2005:	November 30,			August 31,			May 31,			February 28,

Net revenues	$	-		$	-		$	(353,457	)	$	(350,885	)
Cost of revenues		-			-			(1,166,744	)		(1,127,894	)
Gross profit		-			-			813,287			777,009
Selling expenses		247,913			418,943			307,225			-
General and administrative expenses		(247,913	)		(418,943	)		47,550			502,706
Other operating (income) expense		-			-			(189,550	)		(175,805	)
Amortization of intangibles		-			-			476,762			275,162
Depreciation expense		-			-			171,300			174,946
Bad debt expense		-			-			-			-
Income from operations	$	-		$	-		$	-		$	-

Table 4	%%% Variance between Reported Filings - Quarter ended
2005:	November 30,			August 31,			May 31,			February 28,

Net revenues		0.00	%		0.00	%		-2.13	%		-2.64	%
Cost of revenues		0.00	%		0.00	%		-11.08	%		-13.40	%
Gross profit		0.00	%		0.00	%		13.37	%		15.98	%
Selling expenses		18.66	%		46.72	%		31.54	%		0.00	%
General and administrative expenses		-6.18	%		-9.92	%		1.21	%		13.37	%
Other operating (income) expense		0.00	%		0.00	%		100.00	%		100.00	%
Amortization of intangibles		0.00	%		0.00	%		100.00	%		100.00	%
Depreciation expense		0.00	%		0.00	%		100.00	%		100.00	%
Bad debt expense		0.00	%		0.00	%		0.00	%		0.00	%
Income from operations		0.00	%		0.00	%		0.00	%		0.00	%

F-61

Table 5	As reported in Fiscal 2006 (three month reported basis) Form 10-Q's - Quarter ended
	Nine Months
	(per attached>)		Three Months
2006:	August 31,		August 31,		May 31,		February 28,

Net revenues	$	55,685,827	$	19,698,883	$	18,964,132	$	17,022,812
Cost of revenues		32,567,177		12,576,905		10,421,632		9,568,640
Gross profit		23,118,650		7,121,978		8,542,500		7,454,172
Selling expenses		4,303,604		1,473,299		1,826,296		1,004,009
General and administrative expenses		14,005,562		3,899,851		5,031,628		5,074,083
Other operating (income) expense		42,630		-		18,517		24,113
Amortization of intangibles		723,792		-		361,817		361,975
Depreciation expense		429,781		-		215,200		214,581
Bad debt expense		174,340		80,028		10,026		84,286
Income from operations	$	3,438,941	$	1,668,800	$	1,079,016	$	691,125

Table 6	Comparison of Table (5), nine month column with Fiscal 2006 nine months as reported in Fiscal 2006 third quarter Form 10-Q
	Nine Months		Nine Months		Change			Change
	(per table (5))		per Form 10-Q		Inc(Dec)			Inc(Dec)
2006:	August 31,		August 31,		$$$			%%%

Net revenues	$	55,685,827	$	55,685,827	$	-			0.00	%
Cost of revenues		32,567,177		35,407,074		(2,839,897	)		-8.72	%
Gross profit		23,118,650		20,278,753		2,839,897			12.28	%
Selling expenses		4,303,604		4,683,465		(379,861	)		-8.83	%
General and administrative expenses		14,005,562		11,982,007		2,023,555			14.45	%
Other operating (income) expense		42,630		-		42,630			100.00	%
Amortization of intangibles		723,792		-		723,792			100.00	%
Depreciation expense		429,781		-		429,781			100.00	%
Bad debt expense		174,340		174,340		-			0.00	%
Income from operations	$	3,438,941	$	3,438,941	$	-			0.00	%

	Title of Class	Exchange on Which Registered
Securities registered pursuant to Section 12(b) of the Act:	Common Stock $.001 Par Value	NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act:	Common Stock $.001 Par Value

			Page
Facing page

Part I

Item 1. Business			1

Item 1A. Risk Factors			21

Item 1B. Unresolved Staff Comments			None

Item 2. Properties.			30

Item 3. Legal Proceedings			30

Item 4. Submission of Matters to a Vote of Security Holders			None

Part II

Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			33

Item 6. Selected Financial Data			34

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations			37

Item 7A. Quantitative and Qualitative Disclosures About Market Risk			None

Item 8. Financial Statements and Supplementary Data			99

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			None

Item 9A. Controls and Procedures			99

Item 9B. Other Information			None

Part III

Item 10. Directors and Executive Officers of the Registrant			100

Item 11. Executive Compensation			110

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			118

Item 13. Certain Relationships and Related Transactions			121

Item 14. Principal Accountant Fees and Services			121

Part IV

Item 15. Exhibits and Financial Statement Schedules			124

Signatures			126

	HIGH		LOW
Fiscal Year Ended November 30, 2006
First Quarter	$	5.92	$	5.01
Second Quarter		6.35		5.20
Third Quarter		5.91		5.09
Fourth Quarter		5.46		5.09

Fiscal Year Ended November 30, 2005
First Quarter	$	7.00	$	5.59
Second Quarter		5.73		4.35
Third Quarter		6.47		4.58
Fourth Quarter		6.20		5.07

	Year Ended November 30,
	2006 (1)(2)		2005 (1)(2)			2004 (1)(2)			2003 (2)(3)			2002 (2)(3)
Net revenue	$	72,843,943	$	62,856,982		$	37,281,214		$	32,388,852		$	44,042,925
Costs of sales		47,985,127		41,052,260			22,052,610			13,080,555			12,243,635

Gross profit		24,858,816		21,804,722			15,228,604			19,308,297			31,799,290
Selling, general and administrative expenses
		21,248,532		19,927,933			15,155,749			20,142,448			26,724,110
Bad debt expense		539,155		(403,186	)		406,699			576,350			647,875
Income (loss) from operations		3,071,129		2,279,975			(333,844	)		(1,410,501	)		4,427,305
Interest expense		-		-			-			-			(101,385	)
Other income, net		468,275		1,190,819			1,752,661			1,683,830			202,364

Income before provision (benefit) for income taxes		3,539,404		3,470,794			1,418,817			273,329			4,528,284
Provision (benefit) for income taxes		1,636,561		1,042,637			404,603			(147,571	)		1,786,894

Net income	$	1,902,843	$	2,428,157		$	1,014,214		$	420,900		$	2,741,390

Basic net income per share	$	0.13	$	0.17		$	0.08		$	0.03		$	0.21
Diluted net income per share	$	0.13	$	0.17		$	0.07		$	0.03		$	0.19
Common Shares outstanding
Basic		14,332,598		13,973,899			13,257,869			12,776,295			13,350,794
Diluted		14,514,232		14,344,584			13,928,375			13,085,297			14,247,450
Cash dividends per common share	$	0.32	$	0.32		$	0.32		$	0.16		$	-

	Year Ended November 30,
	2006		2005		2004		2003		2002
Working capital	$	31,707,360	$	30,720,637	$	34,558,222	$	38,246,883	$	39,344,095
Total assets		52,725,627		56,262,764		51,958,510		50,012,944		51,190,993
Total liabilities		9,083,597		11,421,388		8,436,075		6,674,031		7,404,985
Stockholders’ equity		43,328,393		44,475,739		43,522,435		43,338,913		43,786,008

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

	Year Ended November 30,				Change Inc(Dec)			Change Inc(Dec)
	2006		2005		$$$			%%%

Online Advertising	$	28,110,977	$	26,301,370	$	1,809,607			7	%
Search Engine Marketing		15,155,117		7,770,651		7,384,466			95	%
Personals		4,432,433		6,776,885		(2,344,452	)		-35	%
Internet game development		286,600		203,354		83,246			41	%

Consolidated totals	$	47,985,127	$	41,052,260	$	6,932,867			17	%

							Absolute Change			Relative Change
	Year Ended November 30,						Inc(Dec)			Inc(Dec)
	2006			2005			%%%			%%%

Online Advertising		41.0	%		40.5	%		0.5	%		1.4	%
Search Engine Marketing		15.1	%		19.1	%		-4.0	%		-20.5	%
Personals		30.7	%		19.6	%		11.1	%		56.4	%
Internet game development		68.6	%		68.6	%		0.0	%		0.0	%

Consolidated totals		34.1	%		34.7	%		-0.6	%		-1.6	%

	Year					January 21,
	Ended					2005 to				Change	Change
	November 30,					November 30,				Inc(Dec)	Inc(Dec)
	2006					2005				$$$	%%%

Net Revenues	$	10,262,347			$	8,369,797			$	1,892,550	23	%
Cost of Sales		8,913,489				7,286,976				1,626,513	22	%
Gross Profit		1,348,858				1,082,821				266,037	25	%
General and
Administrative Expenses		180,501				79,712				100,789	126	%
Net Income	$	1,168,357	(1	)	$	1,003,109	(1	)	$	165,248	16	%
Minority interest	$	576,000	(2	)	$	494,533	(2	)	$	81,467	16	%
Distributions to
Minority Interest	$	628,000			$	128,896

							Absolute			Relative
							Change			Change
	Year Ended November 30,						Inc(Dec)			Inc(Dec)
	2005			2004			%%%			%%%

Online Advertising		40.5	%		44.2	%		-3.7	%		-8.5	%
Search Engine Marketing		19.1	%		21.2	%		-2.1	%		-10.0	%
Personals		19.6	%		31.6	%		-12.0	%		-37.8	%
Internet game development		68.6	%		68.0	%		0.6	%		0.8	%


Consolidated totals		34.7	%		40.8	%		-6.1	%		-15.1	%

											Total Contractual
	Operating Leases				Employment agreements				Other		Obligations
	Domestic		Foreign		Domestic		Foreign		Domestic		Domestic		Foreign


2007	$	489,910		-	$	1,978,157	$	300,000		-	$	2,468,067	$	300,000
2008		450,500		-		398,827		325,000				849,327		325,000
2009		351,625		-		198,168		350,000				549,793		350,000
2010		353,001		-		28,658		-		-		381,659		-
2011		292,142										292,142
	$	1,937,178	$	-	$	2,603,810	$	975,000	$	-	$	4,540,988	$	975,000

Name	Age	Position
Jeffrey L. Schwartz	58	Chairman of the Board and Chief Executive Officer
Andrew Stollman	41	President, Secretary and Director
Daniel Harvey	48	Chief Financial Officer
Richard Wentworth	57	Chief Operating Officer
Lawrence Burstein	64	Director
Mark Gutterman	51	Director
Robert B. Machinist	54	Director

	Annual Compensation Awards										Long Term Compensation Payouts
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)		(i)
							Other				Securities				All Other
							Annual		Restricted		Underlying		Plan		Compen-
			Salary		Bonus		Compensa-		Stock		Options		Payouts		Sation
Name and Principal Position	Year		($)		($)		Tion($)		Awards		(#)		($)		($)(1)
Jeffrey L. Schwartz		2006	$	605,000	$	106,758		-		-		60,000		-	$	21,916
Chairman and		2005	$	605,000	$	-		-		-		-		-	$	20,779
Chief Executive Officer		2004	$	605,000	$	-		-		-		185,000		-	$	29,625

Andrew Stollman		2006	$	544,500	$	136,758		-		-		-		-	$	20,552
President and		2005	$	544,500	$	30,000		-		-		-		-	$	18,793
Secretary		2004	$	544,500	$	-		-		-		405,000		-	$	22,928

Daniel Harvey		2006	$	223,000	$	27,000		-		-		-		-	$	12,000
Chief Financial		2005	$	213,000	$	24,000		-		-		40,000		-	$	12,000
Officer		2004	$	208,667	$	24,000		-		-		-		-	$	9,000

Richard Wentworth		2006	$	216,000	$	35,000		-		-		-		-		-
Chief Operating		2005	$	213,539	$	35,000		-		-		50,000		-		-
Officer		2004	$	200,000	$	25,000		-		-		-		-		-

(a)	(b)				(c)
	Number of Securities				Value of Unexercised
	Underlying Unexercised				In-the-Money Options
	Options At Fiscal Year-End (#)				at Fiscal Year-End (1)($)
Name	Exercisable		Unexercisable		Exercisable		Unexercisable
Jeffrey L. Schwartz		460,000		30,000	$	398,500		-
Andrew Stollman		635,000		110,000		358,650		-
Daniel Harvey		33,333		6,667		-		-
Richard Wentworth		76,666		8,334		80,150		-

	(b)	110,000 shares vested upon the determination that we had Operating Cash Flow (as defined in the First Amendment) for Fiscal 2005 equal to or greater than $4.0 million;

	(c)	110,000 shares vested upon the determination that we had Operating Cash Flow (as defined in the First Amendment) for Fiscal 2006 equal to or greater than $4.65 million; and

	(d)	110,000 shares will vest if we have Operating Cash Flow for Fiscal 2007 equal to or greater than $5.29 million;

					Change			Change
	Year Ended November 30,				Inc(Dec)			Inc(Dec)
	2006		2005		$$$			%%%

Compensation and related costs	$	9,251,400	$	8,933,727	$	317,673			4	%
Professional fees		1,291,921		1,647,399		(355,478	)		-22	%
Insurance costs		945,810		936,385		9,425			1	%
Occupancy and equipment costs		457,206		406,261		50,945			13	%
Depreciation and amortization		1,443,704		1,525,425		(81,721	)		-5	%
All other miscellanous G&A expenses		1,775,240		1,245,378		529,862			43	%


Consolidated totals	$	15,165,281	$	14,694,575	$	470,706			3	%

							Change			Change
	Year Ended November 30,						Inc(Dec)			Inc(Dec)
Other non-operating income (expense):	2006			2005			$$$			%%%

Interest income and dividends	$	1,068,538		$	957,069		$	111,469			12	%
Realized gains on sale of
marketable securities		16,835			561,359			(544,524	)		-97	%
Realized gain on sale of subsidiary		-			195,000			(195,000	)		-100	%
Other non-operating income:
Other miscellaneous								-
income (expense)		23,996			(6,832	)		30,828			-451	%
Foreign Currency Exchange Rate
Fees and interest expense		(51,192	)		(21,244	)		(29,948	)		141	%
Interest and penalties - tax
audits and settlements		(13,902	)		-			(13,902	)		100	%
Minority interest income		(576,000	)		(494,533	)		(81,467	)		16	%

Total consolidated other
non-operating income:	$	468,275		$	1,190,819		$	(722,544	)		-61	%

					Change			Change
	Year Ended November 30,				Inc(Dec)			Inc(Dec)
	2005		2004		$$$			%%%

Compensation and related costs	$	8,933,727	$	7,616,368	$	1,317,359			17	%
Professional fees		1,647,399		1,710,824		(63,425	)		-4	%
Insurance costs		936,385		1,065,603		(129,218	)		-12	%
Occupancy and equipment costs		406,261		296,494		109,767			37	%
Depreciation and amortization		1,525,425		807,354		718,071			89	%
All other miscellanous G&A expenses		1,245,378		1,114,768		130,610			12	%


Consolidated totals	$	14,694,575	$	12,611,411	$	2,083,164			17	%

							Change			Change
	Year Ended November 30,						Inc(Dec)			Inc(Dec)
Other non-operating income (expense):	2005			2004			$$$			%%%

Interest income and dividends	$	957,069		$	544,153		$	412,916			76	%
Realized gains on sale of
marketable securities		561,359			25,490			535,869			2102	%
Realized gain on sale of subsidiary		195,000			784,900			(589,900	)		-75	%
Other non-operating income:
Other miscellaneous								-
income (expense)		(6,832	)		104,311			(111,143	)		-107	%
Vendor settlement on prior year								-
year marketing fee		-			350,000			(350,000	)		-100	%
Foreign Currency Exchange Rate
Fees and interest expense		(21,244	)		(20,793	)		(451	)		2	%
Interest and penalties - tax
audits and settlements		-			(69,581	)		69,581			100	%
Reduction of prior years's
LEC reserve		-			34,181			(34,181	)		100	%
Minority interest income		(494,533	)		-			(494,533	)		100	%

Total consolidated other
non-operating income:	$	1,190,819		$	1,752,661		$	(561,842	)		-32	%

Name and Address of Beneficial Owner (1)	Number of Shares Beneficially Owned (2)			Percent of Class (2)
Jeffrey L. Schwartz		2,123,615	(3)		14.25	%

Andrew Stollman		1,180,000	(4)		7.90

Dimensional Fund Advisors, L.P. (f/k/a Dimentional Fund Advisors, Inc.) 1299 Ocean Avenue 11th Floor Santa Monica, CA 92651		1,081,186	(5)		7.50

Al Frank Asset Management, Inc. 32392 Coast Highway, Suite 260 Laguna Beach, CA. 92651		890,669	(6)		6.18


Richard Wentworth		145,000	(7)		*

Lawrence Burstein		133,125	(8)		*
245 Fifth Avenue
New York, NY 10016

Mark Gutterman 115 Broadway 2nd Floor New York, NY 10006		89,375	(9)		*

Robert Machinist 555 Theodore Fremd Avenue, Suite B302 Rye, NY 10580		70,625	(10)		*

Daniel Harvey		40,000	(11)		*

All executive officers and directors as a group (7 persons)		3,781,740	(12)		23.79	%

(2)	The number of shares of Common Stock beneficially owned by each person or entity is determined under the rules promulgated by the Securities and Exchange Commission (the "Commission"). Under such rules, beneficial ownership includes any shares as to which the person or entity has sole or shared voting power or investment power. The percentage of our outstanding shares is calculated by including among the shares owned by such person any shares which such person or entity has the right to acquire within 60 days after February 26, 2007. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of such shares.

(3)	Includes 490,000 shares of Common Stock issuable upon the exercise of options held by Mr. Schwartz.

(4)	Includes 525,000 shares of Common Stock issuable upon the exercise of options held by Mr. Stollman.

(5)	All the information presented with respect to this beneficial owner was extracted solely from the Schedule 13G/A filed on February 9, 2007.

(6)	Possesses sole voting power with respect to 576,278.60 of such shares and sole dispositive power with respect to all of such shares. All the information presented with respect to this beneficial owner was extracted solely from the Schedule 13G filed on January 30, 2007.

(7)	Represents 131,250 shares of Common Stock issuable upon the exercise of options held by Mr. Wentworth.

(8)	Includes 1,875 shares of Common Stock and 131,250 shares of Common Stock issuable upon the exercise of options held by Mr. Burstein.

(9)	Includes 1,875 shares of Common Stock and 87,500 shares of Common Stock issuable upon the exercise of options held by Mr. Gutterman.

(10)	Includes 1,875 shares of Common Stock and 68,750 shares of Common Stock issuable upon the exercise of options held by Mr. Machinist.

(11)	Represents shares of Common Stock issuable upon the exercise of options held by Mr. Harvey.

(12)	Includes 1,487,500 shares of Common Stock issuable upon the exercise of options held by our executive officers and directors. See footnotes (3) and (4) and (7) through (11), above.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights ( a )		Weighted-average exercise price of outstanding options, warrants and rights ( b )		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) ( c )
Equity compensation plans approved by security holders		2,783,677	$	4.40		1,282,145
Equity compensation plans not approved by security holders		0	$	0.00		0
Total		2,783,677	$	4.40		1,282,145

	2006

Audit Fees	$	239,540
Audit - Related Fees	$	1,389
Tax Fees	$	17,220
All Other Fees	$	3,894

3.1.1		Articles of Incorporation of the Company, as amended.(1)

3.1.2		Amendment to the Articles of Incorporation of the Company.(2)

3.2		Bylaws of the Company.(3)

10.1		Sixth Amended and Restated 1996 Employee Incentive Plan.(4)

10.2.1		Lease of the Company's offices at One Blue Hill Plaza, Pearl River, New York.(5)

10.2.2*		Feburary 3, 2006 Amendment to Lease of the Company's Offices at One Blue Hill Plaza, Pearl River, New York

10.3.1		December 1, 2001 Employment Agreement by and between the Company and Andrew Stollman(6)

10.3.2		Amendment No. 1 to December 1, 2001 Employment Agreement by and between the Company and Andrew Stollman(7)

10.3.3		Amendment No. 2 to December 1, 2001 Employment Agreement by and between the company and Andrew Stollman(7)

10.4		December 1, 2005 Employment Agreement by and between the Company and Jeffrey L. Schwartz (8)

14.1		Code of Ethics(9)

21.1	*	Subsidiaries of the Company

31.1	*	Rule 13a-14(a)/15d-14(a) Certification of Jeffrey L. Schwartz

31.2	*	Rule 13a-14(a)/15d-14(a) Certification of Daniel Harvey

32.1	*	Section 1350 Certification of Jeffrey L. Schwartz

32.2	*	Section 1350 Certification of Daniel Harvey


Dated: February 28, 2007	Traffix, Inc.

	By:	/s/ Jeffrey L. Schwartz
		Jeffrey L. Schwartz
		Chairman and CEO

Signature	Title	Date

/s/ Jeffrey L. Schwartz Jeffrey L. Schwartz	Chairman and Chief Executive Officer (Principal Executive Officer)	February 28, 2007

/s/ Daniel Harvey Daniel Harvey	Chief Financial Officer (Principal Financial and Accounting Officer)	February 28, 2007

/s/ Andrew Stollman Andrew Stollman	President, Secretary and Director	February 28, 2007

/s/ Lawrence Burstein Lawrence Burstein	Director	February 28, 2007

/s/ Mark Gutterman Mark Gutterman	Director	February 28, 2007

/s/ Robert B. Machinist Robert B. Machinist	Director	February 28, 2007

									Page

Reports of Independent Registered Public Accounting Firms									F-1 - F-2

Consolidated Balance Sheets as of November 30, 2006 and 2005									F-3

Consolidated Statements of Operations for the years ended November 30, 2006, 2005 and 2004									F-4

Consolidated Statements of Shareholders' Equity for the years ended November 30, 2006, 2005 and 2004									F-5

Consolidated Statements of Cash Flows for the years ended November 30, 2006, 2005 and 2004									F-6

Notes to Consolidated Financial Statements									F-7 - F-60

Schedule II - Valuation and Qualifying Accounts and Reserves									F-61

	2006		2005
Assets

Current assets:
Cash and cash equivalents	$	8,972,197	$	9,335,723
Marketable securities		21,433,775		18,908,064
Accounts receivable, trade, net of allowance for doubtful accounts
of $1,079,661 and $1,025,661 in 2006 and 2005, respectively		8,975,402		11,137,275
Deferred income taxes		451,909		1,379,877
Prepaid expenses and other current assets		957,674		1,078,621
Total current assets		40,790,957		41,839,560

Marketable securities		-		2,662,905
Property and equipment, at cost, net of accumulated depreciation		1,965,183		2,317,690
Goodwill		7,913,007		6,426,336
Other intangibles, net		1,210,257		2,538,223
Deferred income taxes		846,223		478,050

Total assets	$	52,725,627	$	56,262,764
Liabilities and shareholders' equity

Current liabilities:
Accounts payable	$	4,692,374	$	5,426,797
Accrued expenses		3,831,223		4,269,995
Reserve for customer chargebacks		-		302,175
Due to related parties		90,000		110,076
Income taxes payable		470,000		1,009,880
Total current liabilities		9,083,597		11,118,923

Deferred income taxes		-		302,465
Total liabilities		9,083,597		11,421,388

Minority interest		313,637		365,637
Commitments and contingencies (Notes 2, 10, 11 and 15)

Shareholders' equity

Preferred stock - $.001 par value; 1,000,000 shares authorized;
none issued and outstanding		-		-
Common stock - $.001 par value; authorized 50,000,000 shares; issued
14,365,671 shares and 14,208,486 shares, respectively		14,365		14,208
Additional paid-in capital		42,286,760		43,584,229
Retained earnings		-		-
Accumulated other comprehensive income		1,027,268		877,302

Total shareholders' equity		43,328,393		44,475,739
Total liabilities and shareholders' equity	$	52,725,627	$	56,262,764

														Accumulated
					Common			Additional						Other			Total
	Common Stock				Stock			Paid-in			Retained			Comprehensive			Shareholders'
	Shares		Amounts		Issuable			Capital			Earnings			Income(loss)			Equity


Balance, November 30, 2003		12,882,992	$	12,882	$	242,879		$	37,916,110		$	4,319,356		$	847,686		$	43,338,913
Net income for the year												1,014,214						1,014,214
Unrealized gains on available-for-sale securities															59,143			59,143
Foreign currency translation adjustment															240,167			240,167
Comprehensive income																		1,313,524
Dividends declared												(4,281,293	)					(4,281,293	)
Stock option exercises		411,640		412					1,737,129									1,737,541
Tax benefit from exercise of
stock options									328,297									328,297
Common stock issued in connection
with a current year acquisitions		215,973		216		(242,879	)		1,328,116									1,085,453

Balance, November 30, 2004		13,510,605		13,510		-			41,309,652			1,052,277			1,146,996			43,522,435
Net income for the year												2,428,157						2,428,157
Unrealized gains on available-for-sale securities															65,616			65,616
Reclassification adjustment for gains realized in
net income															(360,584	)		(360,584	)
Foreign currency translation adjustment															25,274			25,274
Comprehensive income																		2,158,463
Dividends declared									(989,749	)		(3,480,434	)					(4,470,183	)
Stock option exercises		584,060		584					2,057,826									2,058,410
Tax benefit from exercise of
stock options									524,334									524,334
Common stock issued in connection
with current year acquisition		113,821		114					682,166									682,280


Balance, November 30, 2005		14,208,486		14,208		-			43,584,229			-			877,302			44,475,739
Net income for the year												1,902,843						1,902,843
Unrealized gains on available-for-sale securities															110,062			110,062
Reclassification adjustment for gains realized in
net income															(8,834	)		(8,834	)
Foreign currency translation adjustment															48,738			48,738
Comprehensive income																		2,052,809
Stock-based compensation expense									517,717									517,717
Dividends declared									(2,674,102	)		(1,902,843	)					(4,576,945	)
Stock option exercises		53,831		54					248,086									248,140
Tax benefit from exercise of
stock options									30,335									30,335
Common stock issued in connection
with terms of prior year acquisition		103,354		103					580,495									580,598


Balance, November 30, 2006		14,365,671	$	14,365	$	-		$	42,286,760		$	-		$	1,027,268		$	43,328,393

TRAFFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended November 30, 2006, 2005 and 2004

	For the Year Ended November 30,
	2006			2005			2004

Net income	$	1,902,843		$	2,428,157		$	1,014,214

Other comprehensive income (loss) , net of tax:
Foreign currency translation adjustment		48,738			25,274			240,167
Unrealized gain from available-for-sale
securities, arising during the period, net of
income taxes of $121,373, $66,512 and $224,684
for 2006, 2005 and 2004, respectively		110,062			65,616			59,143
Add: reclassification adjustments for gains realized in
net income, net of tax effect of $-0- and $224,684
for the years ended November 30, 2006 and 2005,
respectively		(8,834	)		(360,584	)		-

Comprehensive income	$	2,052,809		$	2,158,463		$	1,313,524

	For the fiscal years ended November 30,
	2006		2005		2004
Supplemental disclosures:
Cash paid during the year for:

Income taxes paid (refunds received), net	$	1,787,097	$	39,141	$	155,684

		As of November 30, 2006				As of November 30, 2005
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization
Unamortized intangible assets:
Goodwill	$	7,913,007			$	6,426,336

Amortizable Intangible Assets:
GroupLotto identifiable intangibles:
GroupLotto Site Brand Recognition	$	722,922	$	722,922	$	722,922	$	630,808
GroupLotto Database		433,754		433,754		433,754		378,486
Intellectual Property Assets		289,169		289,169		289,169		252,323
Marketing Right License Fee		246,915		131,756		252,915		80,590

Infiknowledge identifiable intangibles:
Internet Game Suite		269,169		266,523		263,241		207,717
Intellectual Property Assets		201,876		199,891		197,430		155,788
Market Position Acquired		224,307		222,102		219,367		173,098

Thanksmuch identifiable intangibles:
Profiled customer data		50,000		50,000		50,000		50,000
Restrictive Covenants		10,000		10,000		10,000		8,878

SendTraffic identifiable intangibles:
Restrictive Covenants		523,109		422,609		523,109		221,609
Software		963,951		716,672		963,951		420,118

Hot Rocket identifiable intangibles
Restrictive Covenants		569,394		212,257		569,394		98,379
Software		1,012,257		628,911		1,012,257		291,492

Total amortizable intangible assets	$	5,516,823	$	4,306,566	$	5,507,509	$	2,969,286

	2007		2008		2009		2010		2011

GroupLotto Identifiable
Intangible amortization:
Site Brand Recognition	$	-	$	-	$	-	$	-	$	-
Database		-		-		-		-		-
Intellectual Property Assets		-		-		-		-		-
Licenses		59,353		45,806		10,000		-		-

Total Group's amortization		59,353		45,806		10,000		-		-

Infiknowledge Identifiable
Intangible amortization:
Internet Game Suite		1,733		509		404		-		-
Intellectual Property Assets		1,300		382		303		-		-
Market Position Acquired		1,444		424		337		-		-
Total Group's amortization		4,477		1,315		1,044		-		-

SendTraffic Identifiable
Intangible amortization:
Restrictive Covenants		100,500		-		-		-		-
Software		234,898		12,381		-		-		-

		335,398		12,381		-		-		-

Hot Rocket Identifiable
Intangible amortization:
Restrictive Covenants		113,879		113,879		113,879		15,500		-
Software		337,419		45,927		-		-		-

		451,298		159,806		113,879		15,500		-
Summary of Identifiable
Intangibles:
GroupLotto:		59,353		45,806		10,000		-		-
Infiknowledge:		4,477		1,315		1,044		-		-
SendTraffic:		335,398		12,381		-		-		-
Hot Rocket:		451,298		159,806		113,879		15,500		-

Totals	$	850,526	$	219,308	$	124,923	$	15,500	$	-

	2006		2005

Furniture and fixtures	$	564,658	$	448,395
Computers and equipment		5,450,211		5,110,240
Land and Building		728,612		712,566
Leasehold improvements		338,555		242,536
		7,082,036		6,513,737
Less: accumulated depreciation and amortization		5,116,853		4,196,047
	$	1,965,183	$	2,317,690

	2006		2005

Accrued payroll and bonuses	$	1,553,107	$	972,280
Advances from customers		634,353		623,847
Accrued fee share liabilities		309,494		327,511
Capital lease obligations		6,844		237,417
Accrued marketing media costs		690,729		1,376,053
Accrued search engine marketing costs		119,153		9,411
Accrued professional fees		289,244		380,696
Accrued service bureau fees		-		85,058
Accrued property taxes		30,380		29,237
Accrued straight-line rent concession		82,705		29,660
Other accrued liabilities		115,214		198,825

Total accrued liabilities	$	3,831,223	$	4,269,995

Other income (expense):		2006			2005			2004

Interest income and dividends	$	1,068,538		$	957,069		$	544,153
Realized gains on sale of
marketable securities		16,835			561,359			25,490
Realized gain on sale of subsidiary		-			195,000			784,900
Other non-operating income:
Vendor settlement on prior year
marketing fee		-			-			350,000
Foreign Currency Exchange Rate
Fees and interest expense		(51,192	)		(21,244	)		(20,793	)
Interest and penalties - tax
audits and settlements		(13,902	)		-			(69,581	)
Reduction to prior year's
LEC reserve		-			-			34,181
Other miscellaneous		.
income (expense)		23,996			(6,832	)		104,311
Minority interest income		(576,000	)		(494,533	)		-
Total consolidated Other Income, net	$	468,275		$	1,190,819		$	1,752,661

	(c)	110,000 shares vested upon the determination that the Company had Operating Cash Flow (as defined in the Second Amendment) for Fiscal 2006 equal to or greater than $4.65 million; and

	(d)	110,000 shares will vest if the Company has Operating Cash Flow for Fiscal 2007 equal to or greater than $5.29 million;