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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

|(Mark One)                                               |                                                                                         
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                        | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended November 30, 2003             
|OR                                                      
|o                                                        | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                        to

Commission file number 0-27046

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TRAFFIX, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)           |  | 22-3322277(I.R.S. Employer
Identification No.)
|-------------------------------------------------------------------------------- |  | ----------------------------------------------
|One Blue Hill Plaza
Pearl River, New York(Address of principal executive offices |  | 10965(Zip Code)                               

Registrant's
telephone number, including area code:(845) 620-1212

|                                                            |  | 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 |  |                             

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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 ý    No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes o    No ý

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

The
number of shares outstanding of the Registrant's common stock is 12,974,868 (as of 2/17/04). The aggregate market value of the voting stock held by nonaffiliates of the Registrant
was approximately $56,267,000 (as of 2/17/04, based upon a closing price of the Company's Common Stock on the Nasdaq National Market on such date of $5.61).

DOCUMENTS INCORPORATED BY REFERENCE

None.

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TRAFFIX, INC.  INDEX TO ANNUAL REPORT ON FORM 10-K  FILED WITH THE SECURITIES AND EXCHANGE COMMISSION  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2003

ITEMS IN FORM 10-K

|            |  |          |  | Page                                                                                          
|----------- |  | -------- |  | ----------------------------------------------------------------------------------------------
|Facing page |  |          |  |                                                                                               
|Part I      |  |          |  |                                                                                               
|            |  | Item 1.  |  | Business                                                                                      
|            |  | Item 2.  |  | Properties                                                                                    
|            |  | Item 3.  |  | Legal Proceedings                                                                             
|            |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                           
|Part II     |  |          |  |                                                                                               
|            |  | Item 5.  |  | Market for the Registrant's Common Equity and Related Stockholder Matters                     
|            |  | Item 6.  |  | Selected Financial Data                                                                       
|            |  | Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations         
|            |  | Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                    
|            |  | Item 8.  |  | Financial Statements and Supplementary Data                                                   
|            |  | Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|Part III    |  |          |  |                                                                                               
|            |  | Item 10. |  | Directors and Executive Officers of the Registrant                                            
|            |  | Item 11. |  | Executive Compensation                                                                        
|            |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|            |  | Item 13. |  | Certain Relationships and Related Transactions                                                
|            |  | Item 14. |  | Controls and Procedures                                                                       
|            |  | Item 15. |  | Principal Accountant Fees and Services                                                        
|Part IV     |  |          |  |                                                                                               
|            |  | Item 16. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|Signatures  |  | 59      

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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 and information relating to us 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. We do not intend to update these forward-looking statements.

Item 1. BUSINESS

Overview

We are a leading on-line database marketing company that uses our on-line media network to generate leads, customers and sales for our
proprietary product and service offers and our corporate client's product and service offers. We provide complete end-to-end marketing solutions for companies seeking to
increase sales and customers through on-line marketing programs, and database development and enhancement programs. The services we offer include the development of a complete creative
promotion to be used to market the client's product to consumers, broadcasting a promotion on-line in order to generate new customers for the client, delivery of data files from the
results of campaigns, creating and hosting the customized websites or web pages necessary to effect the consumer transaction that drives the client's sales and generating comprehensive reporting in
order for the client to analyze the effectiveness of a promotion. We use our websites, interactive games, surveys, banner advertisements, email marketing and database of permission-based, profiled
records (and the
on-line media of third parties) to generate the customers, sales and leads for our clients, and for our own product and service offers. We are paid by our clients primarily on a
success-based model, in that we receive a fee for every lead, customer or sale generated for the client.

In
addition to our third party client-based revenue, we generate revenue directly from consumers from our own products and services. In Fiscal 2003, we expanded our line of
"direct-to-consumer" products and services to include Internet based services, such as iMatchUp.com, our on-line dating service, and TXNet/WorldWebAccess, our ISP,
VOIP and email products, which comprise our LEC Billed Product segment. These specific "direct-to-consumer" generated products and services accounted for approximately
$5.5 million, or 17% of our revenue during the fiscal year ended November 30, 2003. Such services were inactive in Fiscal 2002.

We
also generate revenues from the sales and rentals (for use both on-line and off-line) of our proprietary, profiled databases.

Background

From our inception in 1993 (under the name "Quintel Entertainment, Inc.") through 1999, we generated the bulk of our revenue from direct marketing using
the traditional media of television, postal mail and telemarketing. In 2000, we repositioned our direct marketing business to the on-line 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-efficient and scaleable
manner via on-line marketing. In addition, as a result of our direct marketing background, we have been able to design on-line marketing programs to
cost-effectively generate traffic and leads for traditional direct marketing media channels, such as inbound and outbound telemarketing and direct mail.

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On-Line Marketing

We own and operate multiple on-line properties, such as our free on-line sweepstakes group of sites (sponsored by our sweepstakes
management subsidiary, PrizeDistributors, Inc.) including Prizeamerica.com and GroupLotto.com; our consumer credit site, AtlasCreditGroup.com; our automobile information and lead generation
site,
AtlasAutomotiveGroup.com; our DVD promotions site, Take 1 Entertainment.com; and our premier on-line dating service, iMatchup.com. We also operate a number of interactive games and
promotions such as Direct Deposit Promotions and Prizecade.com. We generate traffic to our websites from cross marketing, marketing to our database and marketing on the media of third parties. Our Web
properties and our marketing activities are designed to generate real-time response-based marketing results for our corporate clients, as well as for our own product and service offers.
When visiting our on-line 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 products and services.

Websites.Our PrizeDistributors, Inc. sponsored group of websites offers consumers the opportunity to win multiple
game promotions of up to $1 million daily in our free, on-line sweepstakes. The sweepstake 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. The interactive media on this
group of websites include registration pages, banner advertisements and survey questions, the purpose of which is to generate web traffic, leads and sales. Revenue is generated at this group of
websites from our own products and our corporate clients who pay for such traffic, leads and sales. We generate the bulk of our consumer traffic to this group of websites through proprietary and third
party permission-based email marketing programs, banner advertisements and other online media.

We
own and operate several other websites such as AtlasCreditGroup.com, TheBargainSpot.com, AtlasAutomotive.com, Take 1 Entertainment.com, prizecade.com and jewelclaimcenter.com. Such
websites are deployed to generate revenue for our clients in a similar manner as the PrizeDistributor, Inc. model described above. Each of these sites is designed to appeal to a specific
consumer interest category that we matched with product promotions that appeal to such interest category.

Email Marketing.Each program that we market for our clients can be implemented not only through the websites, interactive
games and "pop-ups" discussed above, 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.

FOR
A FURTHER DISCUSSION OF RECENT BUSINESS AND LEGAL DEVELOPMENTS REGARDING THIS E-COMMERCE COMPONENT, AND EVENTS IMPACTING EMAIL MARKETING, SEE "MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

One
of the attractive features for clients, and, we believe, a significant competitive advantage, is our ability to create and test a variety of marketing campaigns for prospective and
existing corporate clients at no risk to the client. Since we own, and have access to, extensive databases, manage our own internal creative department, and can deliver email at a low cost, we are
able to offer prospective and existing clients the opportunity to test market new products, services, price points and creative concepts in order to determine if an on-line campaign works
for the client, and which campaigns work most effectively.

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Even
after campaigns are fully implemented, we further analyze the marketing results to gauge whether the campaigns are continuing to generate 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 (when coupled with our proprietary databases, the other databases under our management and our delivery and reporting systems), distinguish us from many of our competitors in
the on-line marketing industry.

Syndication.We expend a significant portion of our email resources to generate sales for our own products and services and
for traffic to our websites. After we develop a campaign that works efficiently on our own media, we often "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 on-line media companies. We enter into agreements
with these other on-line media companies to run the campaigns, generally on a fee-share arrangement. We believe such media companies obtain a benefit from receiving an
immediately marketable, fully-packaged and tested marketing program. As a result, we believe we maintain the ability to leverage campaigns we have developed (including our own products and services)
so that in future fiscal periods we can generate additional revenue with reduced costs and risks associated with such business extension.

TRAFFIX'S PRODUCTS AND SERVICES

During
the fiscal year ended November 30, 2002, we introduced the on-line marketing of our own products and services through the "Thanksmuch.com" website which sells
gift items (such as DVD's, CD's and costume jewelry) directly to consumers. When a consumer selects a gift item and tenders his credit card, he is given the opportunity to purchase other, more
valuable products and services at special discounts.

We
introduced several new business units during the year ended November 30, 2003, including an on-line dating program conducted over the Internet ("iMatchup.com") and
Internet-based service products such as ISP and email accounts that are LEC Billed ("TXNet" and "WorldWebAccess, Inc."). These new business units are designed as monthly recurring revenue
billing programs, such as membership to iMatchUp.com, our dating site.

No
assurances can be given, however, that these new sources of revenue will contribute material revenues and/or income from operations in future fiscal periods, if at all. During the
fiscal years ended November 30, 2003 and 2002, the combination of all of these newly introduced services generated approximately $6.4 million and $1.3 million, respectively, or
approximately 20% and 3%, respectively, of consolidated net revenue.

Our
expansion in, and dependence on, our on-line direct marketing efforts, coupled with the potential for state and/or federal legislation limiting our ability to contact
consumers on-line (see
"Government Regulations") 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

During the fiscal year ended November 30, 2003, we generated revenue from the following segments: E-Commerce, Off-Line Marketing
and LEC Billed Products. The E-Commerce segment currently represents the core of our business operations. Revenue in the E-Commerce segment is generated primarily from
marketing of third party products and services on our websites and through email. The Off-Line Marketing segment consisted of revenue generated by us through off-line direct
marketing channels, exclusively in Fiscal 2003 through our majority-owned subsidiary, Montvale Management, LLC, which was sold in Fiscal 2003. LEC Billed Products consist of our proprietary LEC

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billed
products, known as TXNet ISP and WorldWebAccess, Inc. These products were introduced during the fiscal year ended November 30, 2003. During the fiscal year ended
November 30, 2002, we only generated revenue from the E-Commerce and Off-Line Marketing segments. Historically, the Off-Line Marketing segment's activities
consisted of telemarketing services used for the acquisition of long distance and wireless phone customers for various phone service providers. During the fiscal years ended November 30, 2003
and 2002, this segment consisted exclusively of our majority owned subsidiary, Montvale Management, LLC, and the revenues and expenses of Montvale's net branch services provided to qualified mortgage
banking and lending institutions. During the fiscal year ended November 30, 2003 (specifically, in March 2003), we disposed of our interest in Montvale, all as more fully described in
Note 1 to the attached financial statements. Historically, the LEC Billed Products segment represented telecommunications-related products and services marketed by us directly to consumers who
were billed by local exchange carriers (LECs) on the consumer's telephone bill. This segment was inactive during the fiscal year ended November 30, 2002. Segment information is set forth in
Note 14 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 products and services, particularly on the Internet. Many of our competitors are well established, have
reputations for success in the development and marketing of services and have significant financial, marketing, distribution, personnel and other resources. We also compete with numerous smaller
private companies that are willing to take extremely aggressive marketing risks that we are not comfortable taking. It is such marketing practices and other capabilities that permit such companies to
implement extensive advertising and promotional campaigns, both generally and in response to efforts by additional competitors to enter into new markets and introduce new services.

Insurance

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 maintain errors and omissions insurance with a limit of $5 million. We also maintain Directors and
Officers liability insurance policies providing aggregate coverage of $12.5 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 the future at reasonable costs, if at all.

Government Regulation

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

Federal
legislation was signed into law, effective January 1, 2004, pre-empting all existing and pending state e-mail marketing legislation. The
CAN-SPAM Act of 2003 requires that certain "opt-out" procedures, including, but not limited to, a functioning return e-mail address (and a time limit of ten
(10) days to comply with all opt-out requests sent by consumers), be included in commercial e-mail marketing. The CAN-SPAM Act prohibits the sending of
e-mail containing false, deceptive or misleading subject lines, routing information, headers and / or return address information. The CAN-SPAM Act does not permit consumers to
file suit against e-mail marketers for violation of such Act. 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. The Federal Trade Commission ("FTC") is empowered by the CAN-SPAM Act to enact regulations, within the next four (4) to twenty-four
(24) months, that would implement certain provisions of the CAN-SPAM Act such as standardized subject line labeling, a "bounty" system to compensate consumers for being the first to
report a

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spammer
and a potential "do-not-spam registry." If the regulations promulgated by the FTC specifically 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.

On
September 26, 2003, we were served with a Civil Investigative Demand by the Missouri Attorney General's Office requesting certain documents and inquiring into our Company's
merchandising practices in connection with games of chance available for entry at grouplotto.com. We have responded
to the document and information requests and await a response from the Missouri Attorney General's Office.

Employees

We currently employ 106 full-time employees, including five executive officers, and 4 part-time employees. We believe that our relations
with our employees are satisfactory. None of our employees are represented by a union.

Available Information

Our Internet address is www.traffixinc.com. We make available free of charge through such website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the 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.

Continuation of trend relative to decreasing revenues and a stable or increasing overhead environment

The following charts and subsequent discussion provide the details of a known trend in revenue deterioration, and the potential effects if such trend were to
continue.

Our
quarterly net revenues for the prior nine quarterly periods are set forth in the table below:

Quarterly period ended

net revenue

% change
from previous
QuarterNovember 30, 2001

$
14,050,493February 28, 2002


12,370,897

-11.95
%(1)May 31, 2002


10,804,538

-12.66
%(1)August 31, 2002


10,664,246

-1.30
%(1)November 30, 2002


10,203,244

-4.32
%(1)February 28, 2003


9,117,229

-10.64
%(1)May 31, 2003


7,422,604

-18.59
%(1)August 31, 2003


8,503,267

14.56
%November 30, 2003


7,345,752

-13.61
%


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Quarter ended:February 28, 2002

$
866,408May 31, 2002

$
1,387,930August 31, 2002

$
1,876,069November 30, 2002

$
1,941,270February 28, 2003

$
2,211,731May 31, 2003

$
161,475


We
have been able to replace a portion of Montvale's revenue through: (a) the expansion of our direct-to-consumer based proprietary products and services;
(b) the expansion of existing client relationships; and (c) new client contact strategies.

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Our
quarterly overhead, which is the combination of selling expenses, general and administrative expenses, and bad debt expense, for the prior nine quarterly periods are set forth in the
table below:

|Quarterly
period ended |  | Selling
expense |           | G&A
expense |   | Bad Debt
expense |  | Total
Overhead |          
|---------------------- |  | --------------- | --------- | ----------- | - | ---------------- |  | -------------- | ---------
|November 30, 2001      |  | $               | 2,783,638 |             | $ | 3,185,320        |  | $              | 1,083,826
|February 28, 2002      |  |                 | 3,168,568 |             |   | 3,578,591        |  |                | 329,334  
|May 31, 2002           |  |                 | 2,370,775 |             |   | 3,949,851        |  |                | 109,172  
|August 31, 2002        |  |                 | 3,133,682 |             |   | 3,665,681        |  |                | 48,941   
|November 30, 2002      |  |                 | 2,799,663 |             |   | 4,057,299        |  |                | 160,428  
|February 28, 2003      |  |                 | 2,319,559 |             |   | 4,206,037        |  |                | 336,188  
|May 31, 2003           |  |                 | 1,777,890 |             |   | 3,978,704        |  |                | 153,860  
|August 31, 2003        |  |                 | 1,480,191 |             |   | 2,946,741        |  |                | 117,382  
|November 30, 2003      |  |                 | 918,284   |             |   | 2,515,042        |  |                | (31,080  

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Quarter ended:February 28, 2002

$
638,358May 31, 2002

$
890,686August 31, 2002

$
1,130,917November 30, 2002

$
1,233,823February 28, 2003

$
1,525,615May 31, 2003

$
33,607


Should
the trend of quarterly decreases in net revenue, as recognized to November 30, 2003, continue in future fiscal periods, and the corresponding overhead fails to
proportionately decrease, our liquidity and our capital resources could be adversely affected.

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Strategy to Return to Positive Revenue and Profit Trends

In Fiscal 2003, we commenced execution of our strategy to increase our proprietary businesses that have recurring revenue streams and are billed directly to
consumers (e.g., iMatchup). This implementation required the allocation of significant management, media and capital resources during the year. We believe that the execution of this strategy should
position us for growth and profitability. We intend to continue the development of these business lines in Fiscal 2004. In addition, we intend to utilize other media channels besides the Internet
(i.e., telemarketing, television and print) to grow our business.

Revenue Recognition, Variable Costs and Bad Debts

We currently earn the most significant portion of our revenue from the E-commerce segment pursuant to marketing agreements with marketing partners and
corporate customers. The provisions of each agreement determine the type and timing of revenue to be recorded. We invoice our customers in accordance with the terms of the underlying agreement.
Revenue is recognized at the time the marketing activity is delivered, or service is provided, net of estimated contractually specified data qualification allowances, when applicable. Such data
qualification allowances may include duplications, invalid addresses, and age restrictions, and are recorded as contra revenue. Our revenues are adjusted in later fiscal periods if actual allowances
vary from amounts previously estimated. Historically, the variance between actual allowances and previously estimated allowances has been immaterial. If events were to occur that would cause actual
allowances (which are recorded as offsets against gross revenue, as contra-revenues, in arriving at reported net revenue) to vary significantly from those originally estimated and reflected in the
financial statements, we could suffer material deterioration in future fiscal period gross margins, and, therefore, our profitability, cash flows and capital resources could be adversely affected.

Certain
revenue related obligations are recorded at the time revenue is recognized. They include costs payable to other on-line, as well as off-line, media
companies for generating registered users and consumer data for us, database fee sharing costs under third party database use agreements, email message delivery costs, contingent based prize
indemnification coverage (i.e., sweepstakes payout indemnification), estimated premium fulfillment costs related to a promotion and all other variable costs directly associated with completing our
obligations relative to the revenue being recognized. Our actual premium fulfillment estimates have varied from that which were accrued at the time of recording the related revenue. This is deemed a
change in management's estimate, and we take the additional cost, or benefit, on the accrual adjustment in the fiscal period that the variance
is determinable. The fiscal year ended November 30, 2003 included a benefit of approximately $629,000 on the adjustment of the premium fulfillment accruals from November 30, 2002.

Should
the Internet operating landscape change resulting in (a) higher costs of acquiring consumer data and registered users for our websites; (b) higher costs of acquiring
data for our marketing partners, compromising such marketing partners' ability to maintain adequate sized databases to allow for continued third party database use agreements; (c) the
InfiKnowledge asset acquisition failing to reduce the cost of our email delivery activities and web development and web hosting service costs, or our being required to depend on third party emailing
service bureaus, at a cost in excess of our anticipated costs, or other currently unknown third party influences on our ability to deliver email messages to the records in our databases, or the
records in our marketing affiliates' databases; (d) our contingent-based prize indemnification premiums for indemnification coverage increasing due to an increase in the number of prize winners
at the sites, or as a result of the insurance industry in general; (e) our accruals for fulfillment obligations arising out of promotions proving to be less than the actual redemptions
processed in subsequent fiscal periods; or (f) unpredictable technology changes or commercial technology applications; then, if any one, or a combination, of the above factors were to
materialize, we could suffer material deterioration in future fiscal period revenue growth and gross

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margins,
and, therefore, our profitability, cash flows and capital resources could be materially adversely affected.

Revenue
recognition is also subject to provisions based on the probability of collection of the related trade accounts receivable. We continuously evaluate the potential of the
collectibility of trade receivables by reviewing such factors as deterioration in the operating results, financial condition, or bankruptcy filings, of our customers. As a result of this review
process, we record bad debt provisions to adjust the related receivables' carrying amount to an estimated realizable value. Provisions for bad debts are also recorded due to the review of other
factors, including the length of time the receivables are past due, historical experience and other factors obtained during the conduct of collection efforts. If circumstances change regarding our
specific customers on an individual basis, or if demand for Internet direct marketing softens, our estimates for bad debt provisions could be further increased, which could adversely affect our
operating margins, profitability, cash flows and capital resources.

Major Customers and Disposition of Majority-Owned Subsidiary

During the fiscal year ended November 30, 2003, we had nine customers in our E-commerce segment which, in combination, accounted for
approximately $10.7 million, or 33% of consolidated net revenues during such period, and approximately $1.6 million, or 40% of consolidated net accounts receivable as of
November 30, 2003. The nine major customers accounted for 9.6%, 6.5%, 4.6%, 3.1%, 2.6%, 2.1%, 2.1%, 1.6% and 0.8% of consolidated net revenue for the year ended November 30, 2003.
Regarding the balance of our customer base, no single customer had net revenues that equaled, or exceeded, 0.8% of consolidated net revenues for the year ended
November 30, 2003. During the year ended November 30, 2003, our business model caused us to move away from significant single, or material multiple, customer reliance, and, therefore,
has minimized the risk regarding singular customer loss. During the fiscal years ended November 30, 2002 and 2001, we had five and six major customers who accounted for 50% and 55% of revenue,
respectively.

In
March 2003, we sold our interest, in our majority owned subsidiary, Montvale Management LLC, for $1.6 million, plus our investment. Pursuant to the terms of the sale, we
received $1 million in cash at closing on March 7, 2003. Additionally, we received a note from the Purchaser for $600,000, payable in 24 monthly installments of $25,000. We have
also received approximately $299,000, representing our GAAP basis capital account in such majority subsidiary as at November 30, 2002. We also entered into a two year Media Purchase Agreement
whereby we agreed to provide certain media lead generation and related services to the continuing owners of Montvale for consideration of $40,000 per month over the term of the agreement. We estimate
that the cash flow from the Media Purchase Agreement will equal or exceed the cash flows surrendered pursuant to the disposition of the majority owned subsidiary.

Our
revenues and profitability from operations have historically varied. Our revenues, cost of providing revenues, profit margins and overhead expenses have varied historically among
segments, as well as on a consolidated basis. The revenue allocation among our segments in future periods will most probably be different than our current revenue allocation due to several factors,
including consumer tastes, business opportunities, regulatory issues that may exist in future periods, and other currently unknown factors that could impact our revenue generating cycle or cost
structure. Therefore, it is difficult to predict revenue and gross margin trends, and their corresponding impact on liquidity and capital resources. Actual trends may cause us to adjust our operating
emphasis, which could result in continued period-to-period fluctuations in our results of operations. Historically, we have been able to rapidly react to changes in the
business environment within which we operate. Management responded to these changes as deemed appropriate at the time of change, and as dictated by the nature of such changes. Management's reaction to
such changes covered a broad range of business related adjustments, ranging from product mix repositioning and staff reductions, to entire business model overhauls. Based on our current operations and
marketing methods, as well as the dynamic, ever

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changing
status of the Internet marketing environment, it is conceivable that we would institute changes to our business practices in response to the potential of unforeseen changes in future fiscal
periods. There can be no assurance that any such potential change in response to the above would be successful in its implementation, and there can be no assurance that any such implementation would
benefit our operating margins, profitability, cash flows and capital resources.

Impairment of Goodwill, Other Intangibles and Investment Portfolios Could Impact Net Income

We carry Goodwill and other Identifiable Intangibles on our balance sheet arising from prior year acquisitions. We are required to review, at least annually, such
Goodwill and other Identifiable
Intangibles for any asset impairment. If the review of the Goodwill and Identifiable Intangibles related to the subsidiaries organized to acquire such assets determines that such assets are impaired,
then we will be required to recognize an impairment charge on such Goodwill necessary to reduce the carrying value of the Goodwill to its net realizable value. Should events occur that would give rise
to such impairment charge, we would recognize decreased profitability to the extent of such adjustment. Cash flows would not be directly affected by the impairment charge, but cash flows would, most
likely, be adversely affected as a result of the facts and circumstances that created the impairment charge.

Market Fluctuation and Debt Repayment Risk of Marketable Securities Investment Portfolio

We maintain an investment portfolio that is managed by prominent financial institutions. The portfolio includes high-grade corporate commercial paper
and auction rate securities, certificates of deposit, annuities and common stock equities, all of which are held for varying periods of time, pursuant to maturity dates, market conditions and other
factors. The fair value of our investments in the common stock of publicly traded companies as of November 30, 2003 amounted to approximately $1.5 million. These investments are subject
to market price volatility, in addition to the potential for business failure at the company level. Moreover, due to economic conditions, and difficulties that issuing companies may face, our
investment portfolio could be impaired by the failure of such companies to timely repay principal upon maturity. Interest income, and corresponding cash flows could also be negatively impacted by
continued Federal Reserve Bank interest rate reductions.

Our Company

We were organized in 1993 under the laws of the State of Delaware as Quintel Entertainment, Inc. We changed our name to Quintel Communications, Inc.
in 1998 and to Traffix, Inc. in 2000. Our executive offices are located at One Blue Hill Plaza, Pearl River, New York 10965, our Internet address is www.traffixinc.com, and our telephone number
is (845) 620-1212.

Item 2. PROPERTIES

We lease approximately 15,000 square feet of space at One Blue Hill Plaza, Pearl River, New York, all of which is currently used for our principal executive
offices. The lease for such premises expires on July 31, 2006. The base rent is $26,875 per month for the remainder of the term of the lease. We own an office building in Dieppe, New Brunswick,
Canada, acquired in Fiscal 2003, which houses the operations of our wholly-owned Canadian subsidiary, Infiknowledge, ULC. The Dieppe, New Brunswick property was purchased with cash and
does not carry a mortgage. We also lease, under two separate lease agreements, approximately 8,480 square feet of space in Moncton, New Brunswick, Canada, which is also occupied by a wholly owned
subsidiary, and is currently used for development and maintenance of our websites, and to house other data operations and the computer equipment used in our email delivery processes. The combined base
rent is approximately $5,000 per month, with two locations that have lease expiration dates of April 30, 2004 and April 30, 2005. We also lease approximately 1,000 square feet of space
in Woodmere, Long Island, New York, which is occupied by one of our wholly owned subsidiaries, and is currently used to house the sales and fulfillment

10

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operations
of such entity. The base rent is $1,300 per month and the lease expires June 30, 2004. We intend to negotiate for the extension of those leases scheduled to expire in 2004, or, if we
are unable to do so, to lease or acquire other similar space in close proximity to our existing space.

Item 3. LEGAL PROCEEDINGS

The Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires us to describe briefly any material pending legal proceedings to which we are a
party or of which any of our property is subject. The Exchange Act further provides that no information need be given with respect to any proceeding that involves primarily a claim for damages if the
amount involved, exclusive of interest and costs, does not exceed 10% of our current assets. We believe that all of the claims made against us to date are either without merit or will ultimately
result in a judgment against us (if at all) in an amount less than 10% of our current assets. Nevertheless, as the plaintiff in theWingleraction is
seeking damages in excess of 10% of our current assets, and as certain of the remaining legal claims made against us fail to specify an amount of damages being sought by the plaintiff, and as there is
a potential that the ultimate damages awarded in a claim could exceed such 10% threshold, in compliance with the Exchange Act, we listed below the Wingleraction, as well as all legal claims made
against us for which no amount of damages has been specified. The Qwestaction seeks damages against us in an amount slightly less than 10% of our current assets.

Mavies WinglerOn or about May 9, 2001, Mavies Wingler commenced an action against Group Lotto, Inc. ("GLI"),
one of our wholly owned subsidiaries, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims to have picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States District Court, Southern District of West Virginia, and is entitledWingler v.
Grouplotto, Inc., Docket Number 2:01CV518. At the end of 2002, Ms. Wingler's attorney withdrew, and she is now representing herself. We
and GLI have a contract of indemnification with SCA Promotions, Inc. to be indemnified for prizes paid out to qualified winners. GLI winners are required to produce the Group Lotto Entry
Notification form ("GLEN") within a specified period of time after matching a drawing's winning numbers in order to qualify for receipt of the appropriate prize winnings. We do not believe that there
is any merit to Ms. Wingler's claim and intend to vigorously continue our defense thereof. Earlier this year, we filed a motion for summary judgment dismissing the complaint.

In
September 2003, the Magistrate Judge assigned by the Court to review and recommend on the motion, issued a report recommending that the complaint be dismissed.
Ms. Wingler has objected to the report. The Court is to rule on the report and the objection.

PlasmanetOn November 21, 2002, Plasmanet, Inc., one of our competitors, commenced an action alleging patent
infringement and misappropriation of trade secrets.Plasmanet, Inc. v. Apax Partners, Inc., et al.,Case No. 02 Civ 9290
(S.D.N.Y.). Plasmanet operates a website, FreeLotto.com, which is similar to one operated by GLI. Plasmanet alleged that on September 24, 2002 it obtained a patent for a "Free Remote Lottery
System" and that we infringed this patent. In addition, Plasmanet asserted that trade secrets were contained in a private placement memorandum and that we misappropriated these trade secrets after we
were allegedly shown such private placement memorandum by an agent of Plasmanet's investment banker. The complaint sought injunctive relief and unspecified money damages. We asserted counterclaims,
inter alia, to declare Plasmanet's patent invalid. In December 2003, the complaint was dismissed with prejudice with respect to Plasmanet's patent infringement claim and our counterclaims, and
without prejudice with respect to the misappropriation of trade secrets claim. Such misappropriation claim has been reasserted by Plasmanet in New York court (Sup. Ct. N.Y. Co.,
January 27, 2004, Index No. 60021-04). We believe there is no merit to the reasserted claim and intend vigorously to defend against it.

11

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Qwest CommunicationsQwest Communications, Inc. has notified us of an indemnification claim relating to a class action
filed against Qwest in Minnesota,Bindner v. LCI International Telecom Corp. et al., District Court of Minnesota, County of Sibley, Case No.
C0-00-242. In that action, plaintiffs claim that in late 1999 into mid-2000, they were misled when they were solicited to change their long distance carrier to
Qwest. They assert that they were not told that they would have to stay at certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We introduced the
promotion ("Fly Free America") to Qwest, and had been retained by Qwest to operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement terminating our
contract and settling the amount due us (the "May 2000 Agreement"). The May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any loss it may
sustain by
reason of this class action. We maintain that we have no liability in the matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false advertising claims. The
court has certified the class and Qwest is defending the action.

In
November 2002, we commenced an arbitration against Qwest to recover certain amounts due us pursuant to the May 2000 Agreement. In December 2002, Qwest filed
counterclaims in the arbitration relating to the Fly Free America program. Qwest asserts that we must indemnify Qwest for, among other things, fines and penalties amounting to approximately
$1.5 million which Qwest claims it paid in connection with a number of consent decrees it entered into with various state attorneys general, an unspecified amount of attorneys' fees, and any
and all expenses, penalties or other amounts Qwest becomes liable for in connection with the class action. Qwest also seeks reimbursement of approximately $3.1 million it paid us pursuant to
the May 2000 Agreement. A panel of arbitrators was appointed in December 2003 and a preliminary conference was held in January 2004. After the conference, a schedule was
established for substantive motions and for hearings in June 2004. The arbitrators also provided for exchanges of information in the arbitration subject to Qwest's right to seek to prevent such
exchanges. Qwest has moved to prevent exchanges of information and we have opposed that motion. The motion is still in the briefing process and will be submitted to the arbitrators. We believe that
there is no merit to Qwest's counterclaims and intend vigorously to defend against them, as well as to pursue our claim.

Columbia House/RydelIn or about August 2002, Columbia House, one of our clients, notified us of an indemnification
claim relating to a class action filed against Columbia House, among others, in Illinois,Rydel v. Comtrad Industries, Inc. et al.,
Circuit Court of Cook County, Illinois, No. 02 CH 13269. In that action, plaintiff claims to have received unsolicited commercial e-mail from, among others, Columbia House, in
violation of Illinois law. Columbia House advised us that it believes that the email in question was not approved by Columbia House when it was sent, and asserted a claim for indemnification against
us pursuant to our contract. We and Columbia House agreed to defer resolution of the indemnification claim (and reserved each of our respective rights). Columbia House is defending against the class
action. Its motion to dismiss the complaint has been denied.

In
or about January 2003, we were named as a defendant in theRydelclass action. In an additional count in the complaint, the
plaintiff asserted that we violated the Illinois Consumer Fraud and Deceptive Business Practices Act by providing to a co-defendant a list of consumers who had consented to receive
commercial e-mails when, the complaint alleges, they had not. The complaint sought injunctive relief and unspecified damages. Our motion to dismiss the complaint was granted in
June 2003, and the plaintiff has filed an appeal. We believe that there is no merit to the claim, and, in the event the dismissal of the claim is reversed on appeal, we intend to vigorously
defend against it.

Missouri Civil Investigative DemandOn September 26, 2003, we were served with a Civil Investigative Demand by the
Missouri Attorney General's Office requesting certain documents and inquiring into our Company's merchandising practices in connection with games of chance available for entry at grouplotto.com. We
have responded to the document and information requests and await a response from the Missouri Attorney General's Office.

12

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As
stated above, we are unable to determine the ultimate outcomes of any of the foregoing claims or demands, and, accordingly, no provision for loss has been recorded in the financial
statements included in this Report.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

A Proxy Statement was mailed on or about August 11, 2003 to our stockholders of record as of August 4, 2003 in connection with our 2003 Annual
Meeting of Stockholders, which was held on September 17, 2003 at our executive offices, One Blue Hill Plaza, Pearl River, New York. At the Meeting, the stockholders voted on two matters, both
of which were approved.

The
first matter was the election of the members of the Board of Directors. The six directors elected and the tabulation of the votes (both in person and by proxy) were as follows:

|Nominees For Directors |  | For       |  | Against |  | Withheld
|---------------------- |  | --------- |  | ------- |  | --------
|Jeffrey L. Schwartz    |  | 9,643,213 |  | 633,692 |  | 0       
|Andrew Stollman        |  | 9,643,213 |  | 633,692 |  | 0       
|Murray L. Skala        |  | 9,643,213 |  | 633,692 |  | 0       
|Edwin Levy             |  | 9,938,517 |  | 338,388 |  | 0       
|Lawrence Burstein      |  | 9,938,517 |  | 338,388 |  | 0       
|Jack Silver            |  | 9,938,517 |  | 338,388 |  | 0       

There
were no broker held non-voted shares represented at the Meeting with respect to this matter.

The
second matter upon which the stockholders voted was the proposal to ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP as our independent certified public
accountants for 2003. The tabulation of the votes (both in person and by proxy) was as follows:

For

Against

Abstentions10,267,480

4,500

4,925


There
were no broker held non-voted shares represented at the Meeting with respect to this matter.

13

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PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information.

Our Common Stock trades on the Nasdaq National Market System. Since September 12, 2000, the date upon which we changed our name from Quintel
Communications, Inc. to Traffix, Inc., our Common Stock has traded on the under the symbol "TRFX". Prior thereto, such Common Stock traded under the symbol "QTEL". The
following table sets forth the high and low sales prices of the Common Stock as reported by Nasdaq for each full quarterly period within the two most recent fiscal years.

HIGH

LOWFiscal Year Ended November 30, 2003First Quarter

$
3.60

$
2.78Second Quarter


3.43


2.53Third Quarter


3.85


2.71Fourth Quarter


5.46


2.84Fiscal Year Ended November 30, 2002First Quarter

$
8.15

$
5.30Second Quarter


8.30


5.69Third Quarter


6.10


3.50Fourth Quarter


3.90


2.56


Security Holders.

To the best of our knowledge, at February 17, 2004, there were 64 record holders of our Common Stock. We believe there are numerous beneficial owners of
Common Stock whose shares are held in "street name."

Dividends.

We have paid a dividend of $0.08 per share of our common stock in each of the fiscal quarters ended May 31, August 31, and November 30, 2003.
The declaration of each of such dividends 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.

Recent Sales of Unregistered Securities.

On December 6, 2001, we consummated the acquisition of the assets of InfiKnowlege.com, Inc. for aggregate consideration of $1,150,000, a portion of
which consisted of $687,500 of our common stock, or 117,522 shares, valued at $6.20 per share (the average closing prices of our stock for the period December 4 to December 10, 2001). In
accordance with such Agreement, 39,174 of such shares were issued on December 6, 2003. The foregoing issuance was exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4(2) of such Act as being transactions by an issuer not involving any public offering.

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Item 6. SELECTED FINANCIAL DATA

The following table presents our selected historical financial data for each of the years in the five year period ended November 30, 2003. The financial
data set forth should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements.

Statement of Operations Data:

|                                                   |  | Year Ended November 30, |           
|-------------------------------------------------- |  | ----------------------- | ----------
|
|Net revenue                                        |  | $                       | 32,388,852
|Costs of sales                                     |  |                         | 13,080,555
|Gross profit                                       |  |                         | 19,308,297
|Selling, general and administrative expenses       |  |                         | 20,142,448
|Bad debt expense(2)                                |  |                         | 576,350   
|                                                   |  |                         |           
|(Loss) income from operations                      |  |                         | (1,410,501
|Interest expense                                   |  |                         |          
|Other income, net                                  |  |                         | 1,683,830 
|                                                   |  |                         |           
|Income before provision for income taxes (benefit) |  |                         | 273,329   
|Provision for income taxes (benefit)               |  |                         | (147,571  
|                                                   |  |                         |           
|Net income                                         |  | $                       | 420,900   
|                                                   |  |                         |           
|Basic net income per share                         |  | $                       | 0.03      
|                                                   |  |                         |           
|Diluted net income per share                       |  | $                       | 0.03      
|                                                   |  |                         |           
|Common Shares outstanding                          |  |                         |           
|Basic                                              |  |                         | 12,776,295
|Diluted                                            |  |                         | 13,085,297
|Cash dividends per common share                    |  | $                       | 0.16      
|                                                   |  |                         |           

Balance Sheet Data:

|                     |  | Year Ended November 30,
|-------------------- |  | -----------------------
|
|Working capital      |  | $                      
|Total assets         |  |                        
|Total liabilities    |  |                        
|Stockholders' equity |  |                        

---

Prior
year presentations have been changed to conform to Fiscal 2003 presentation. These changes did not impact net income.

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The matters discussed in the following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking
statements and information relating to us that are based on the current beliefs and expectations of Management, as well as assumptions made by and information currently available to us. When used in
this Management's Discussion and Analysis, and elsewhere in this Form 10-K, the words "anticipate", "believe", "estimate", and "expect" and similar expressions, as they relate to
our Company are intended to identify forward-looking statements. Such statements reflect the current views of our Company's management, with respect to future events and are subject to certain risks,
uncertainties and assumptions, which could cause the actual results to differ materially from those reflected in the forward-looking statements.

The
following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto, as well as all other related notes, and financial and
operational references, appearing elsewhere in this document.

Overview

We are a leading on-line database marketing company that uses our on-line media network to generate leads, customers and sales for our
proprietary product and service offers and our corporate client's product and service offers. We provide complete end-to-end marketing solutions for companies seeking to
increase sales and customers through on-line marketing programs, and database development and enhancement programs. The services we offer include the development of a complete creative
promotion to be used to market the client's product to consumers, broadcasting a promotion on-line in order to generate new customers for the client, delivery of data files from the
results of campaigns, creating and hosting the customized websites or web pages necessary to effect the consumer transaction that drives the client's sales and generating comprehensive reporting in
order for the client to analyze the effectiveness of a promotion. We use our websites, interactive games, surveys, banner advertisements, email marketing and database of permission-based, profiled
records (and the on-line media of third parties) to generate the customers, sales and leads for our clients, and for our own product and service offers. We are paid by our clients
primarily on a success-based model, in that we receive a fee for every lead, customer or sale generated for the client.

In
addition to our third party client-based revenue, we generate revenue directly from consumers from our own products and services. In Fiscal 2003, we expanded our line of
"direct-to-consumer" products and services to include Internet based services, such as iMatchUp.com, our on-line dating service, and TXNet/WorldWebAccess, our ISP,
VOIP and email products, which comprise our LEC Billed Product segment. These specific "direct-to-consumer" generated products and
services accounted for approximately $5.5 million, or 17% of our revenue during the fiscal year ended November 30, 2003. Such services were inactive in Fiscal 2002.

We
also generate revenues from the sales and rentals (for use both on-line and off-line) of our proprietary, profiled databases.

Background

From our inception in 1993 (under the name "Quintel Entertainment, Inc.") through 1999, we generated the bulk of our revenue from direct marketing using
the traditional media of television, postal mail and telemarketing. In 2000, we repositioned our direct marketing business to the on-line 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-efficient and scaleable
manner via on-line marketing. In addition, as a result of our direct marketing background, we have been able to design on-line marketing programs to
cost-effectively

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generate
traffic and leads for traditional direct marketing media channels, such as inbound and outbound telemarketing and direct mail.

On-Line Marketing

We own and operate multiple on-line properties, such as our free on-line sweepstakes group of sites (sponsored by our sweepstakes
management subsidiary, PrizeDistributors, Inc.) including Prizeamerica.com and GroupLotto.com; our consumer credit site, AtlasCreditGroup.com; our automobile information and lead generation
site, AtlasAutomotiveGroup.com; our DVD promotions site, Take 1 Entertainment.com; and our premier on-line dating service, iMatchup.com. We also operate a number of interactive games and
promotions such as Direct Deposit Promotions and Prizecade.com. We generate traffic to our websites from cross marketing, marketing to our database and marketing on the media of third parties. Our Web
properties and our marketing activities are designed to generate real-time response-based marketing results for our corporate clients, as well as for our own product and service offers.
When visiting our on-line 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 products and services.

Websites.Our PrizeDistributors, Inc. sponsored group of websites offers consumers the opportunity to win multiple
game promotions of up to $1 million daily in our free, on-line sweepstakes. The sweepstake 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. The interactive media on this
group of websites include registration pages, banner advertisements and survey questions, the purpose of which is to generate web traffic, leads and sales. Revenue is generated at this group of
websites from our own products and our corporate clients who pay for such traffic, leads and sales. We generate the bulk of our consumer traffic to this group of websites through proprietary and third
party permission-based email marketing programs, banner advertisements and other online media.

We
own and operate several other websites such as AtlasCreditGroup.com, TheBargainSpot.com, AtlasAutomotive.com, Take 1 Entertainment.com, prizecade.com and jewelclaimcenter.com. Such
websites are deployed to generate revenue for our clients in a similar manner as the PrizeDistributor, Inc. model described above. Each of these sites is designed to appeal to a specific consumer
interest category that we matched with product promotions that appeal to such interest category.

Email Marketing.Each program that we market for our clients can be implemented not only through the websites, interactive
games and "pop-ups" discussed above, 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.

One
of the attractive features for clients, and, we believe, a significant competitive advantage, is our ability to create and test a variety of marketing campaigns for prospective and
existing corporate clients at no risk to the client. Since we own, and have access to, extensive databases, manage our own internal creative department, and can deliver email at a low cost, we are
able to offer prospective and existing clients the opportunity to test market new products, services, price points and creative concepts in order to determine if an on-line campaign works
for the client, and which campaigns work most effectively.

Even
after campaigns are fully implemented, we further analyze the marketing results to gauge whether the campaigns are continuing to generate adequate results for the client, whether
the media is

17

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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 (when coupled with our proprietary databases, the other databases under our management and our delivery and reporting systems), distinguish us from many of our competitors in the
on-line marketing industry.

Syndication.We expend a significant portion of our email resources to generate sales for our own products and services and
for traffic to our websites. After we develop a campaign that works efficiently on our own media, we often "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 on-line media companies. We enter into agreements
with these other on-line media companies to run the campaigns, generally on a fee-share arrangement. We believe such media companies obtain a benefit from receiving an
immediately marketable, fully-packaged and tested marketing program. As a result, we believe we maintain the ability to leverage campaigns we have developed (including our own products and services)
so that in future fiscal periods we can generate additional revenue with reduced costs and risks associated with such business extension.

TRAFFIX'S PRODUCTS AND SERVICES

During the fiscal year ended November 30, 2002, we introduced the on-line marketing of our own products and services through the
"Thanksmuch.com" website which sells gift items (such as DVD's, CD's and costume jewelry) directly to consumers. When a consumer selects a gift item and tenders his credit card, he is given the
opportunity to purchase other, more valuable products and services at special discounts.

We
introduced several new business units during the year ended November 30, 2003, including an on-line dating program conducted over the Internet ("iMatchup.com") and
Internet-based service products such as ISP and email accounts that are LEC Billed ("TXNet" and "WorldWebAccess, Inc."). These new business units are designed as monthly recurring revenue
billing programs, such as membership to iMatchUp.com, our dating site.

No
assurances can be given, however, that these new sources of revenue will contribute material revenues and/or income from operations in future fiscal periods, if at all. During the
fiscal years ended November 30, 2003 and 2002, the combination of all of these newly introduced services generated approximately $6.4 million and $1.3 million, respectively, or
approximately 20% and 3%, respectively, of consolidated net revenue.

Our
expansion in, and dependence on, our on-line direct marketing efforts, coupled with the potential for state and/or federal legislation limiting our ability to contact
consumers on-line (see "BusinessGovernment Regulation") 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.

Transactions with Major Customers

Transactions with major customers and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources,
(2) in our discussion of Critical Accounting Policy and Accounting Estimate Discussion (immediately following {1} previously mentioned) and (3) under the heading Transactions with Major
Customers in Note 1 to the Consolidated Financial Statements referred to in the Financial Statements and Supplementary Data section hereof and incorporated herein by reference.

18

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BASIS OF PRESENTATION

Certain amounts for the prior periods that are presented in the accompanying consolidated financial statements, and referred to in the discussions below, have
been reclassified in order to conform to the current period presentation.

Segment Information

During the fiscal year ended November 30, 2003, we generated revenue from the following segments: E-Commerce, Off-Line Marketing
and LEC Billed Products. The E-Commerce segment currently represents the core of our business operations. Revenue in the E-Commerce segment is generated primarily from
marketing of third party products and services on our websites and through email. The Off-Line Marketing segment consists of revenue generated by us through off-line direct
marketing channels (which, in Fiscal 2003, consisted, exclusively of revenue generated by our majority-owned subsidiary, Montvale Management, LLC, which was sold in Fiscal 2003). The LEC Billed
Products segment consisted of our proprietary LEC billed products, marketed under the brands TXNet ISP and WorldWebAccess, Inc. These products were introduced during the fiscal year ended
November 30, 2003. During the fiscal year ended November 30, 2002, we generated revenue only from the E-Commerce and Off-Line Marketing segments.

Historically,
the Off-Line Marketing segment's activities consisted of telemarketing services used for the acquisition of long distance and wireless phone customers for
various phone service providers. During the fiscal years ended November 30, 2002 and 2003, this segment consisted exclusively of our majority owned subsidiary, Montvale Management, LLC, and the
revenues and expenses of Montvale's net branch services provided to qualified mortgage banking and lending institutions. During the fiscal year ended November 30, 2003 (specifically,
March 2003), we disposed of our interest in Montvale, all as more fully described in Note 1 to the attached financial statements.

Historically,
the LEC Billed Products segment represented telecommunications-related products and services marketed by us directly to consumers who were billed by local exchange carriers
(LECs) on the consumer's telephone bill. This segment was inactive during the fiscal year ended November 30, 2002. Segment information is set forth in Note 14 to the Consolidated
Financial Statements referred to in the Financial Statements and Supplementary Data section hereof.

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RESULTS OF OPERATIONS

Our
net revenues, on a segmental basis, and with disclosure of the components of the individual segments, for each of the fiscal years ended November 30, 2003, 2002 and 2001 are
set forth in the following tables:

Segment DataNet Revenues, by Segment Component

|Year Ended November 30,                     |  | 2003 |            | 2002 |   | 2001      
|------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|E-commerce components                       |  |      |            |      |   |           
|iMatchUp.com dating sites                   |  | $    | 3,946,442  |      | $ |          
|GroupLotto.com and other websites           |  |      | 11,970,259 |      |   | 12,589,401
|Net branch commission fees                  |  |      | 355,981    |      |   | 904,810   
|Email marketing programs                    |  |      | 8,460,131  |      |   | 20,154,519
|Data sales and rentals                      |  |      | 2,031,973  |      |   | 3,383,079 
|Sales of jewelry and gifts                  |  |      | 925,897    |      |   | 1,332,331 
|Internet game development and other         |  |      | 1,108,874  |      |   | 442,979   
|                                            |  |      |            |      |   |           
|Total E-commerce                            |  | $    | 28,799,557 |      | $ | 38,807,119
|                                            |  |      |            |      |   |           
|Off-line Marketing Service components       |  |      |            |      |   |           
|Net branch commission fees                  |  | $    | 2,017,225  |      | $ | 5,166,867 
|Other off-line marketing                    |  |      |           |      |   | 68,939    
|                                            |  |      |            |      |   |           
|Total Off-line Marketing Services           |  | $    | 2,017,225  |      | $ | 5,235,806 
|                                            |  |      |            |      |   |           
|LEC Billed Products and Services components |  |      |            |      |   |           
|TXNet/WWA LEC Products                      |  | $    | 1,572,070  |      | $ |          
|Other LEC Billed Services                   |  |      |           |      |   |          
|                                            |  |      |            |      |   |           
|Total LEC Billed Products and Services      |  | $    | 1,572,070  |      | $ |          
|                                            |  |      |            |      |   |           
|TOTAL CONSOLIDATED NET REVENUE              |  | $    | 32,388,852 |      | $ | 44,042,925
|                                            |  |      |            |      |   |           

The
following table sets forth for the periods indicated the percentage of net revenues represented by the certain items reflected in our statement of operations:

Year Ended November 30,2003

2002

2001Net Revenue

100.0
%
100.0
%
100.0
%Cost of Sales

40.4
%
27.8
%
28.0
%Gross Profit

59.6
%
72.2
%
71.6
%Selling, general and administrative expenses

62.2
%
60.7
%
48.7
%Bad debt expense

1.8
%
1.5
%
3.4
%Interest Expense

0.0
%
0.2
%
0.0
%Other Income (expense)

5.2
%
0.5
%
-8.0
%Net income

1.3
%
6.2
%
1.3
%


The
following is a discussion of our financial condition and results of operations for the years ended November 30, 2003, 2002, and 2001, respectively. This discussion may contain
forward looking-statements that involve risks and uncertainties. Our actual results could differ materially from the forward looking-statements discussed herein. This discussion should be read in
conjunction with our consolidated financial statements, the notes thereto and other financial information included elsewhere in the report.

20

---

Year Ended November 30, 2003 Compared to Year Ended November 30, 2002

Our net revenues, on a segmental basis, and with disclosure of the components of the individual segments, for each of the fiscal years ended November 30,
2003 and 2002, are detailed in the following tables:

Segment DataNet Revenues, by Segment Component

|Year Ended November 30,                     |  | 2003 |            | 2002 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |            
|------------------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | -----------
|E-commerce components                       |  |      |            |      |   |                     |  |                     |            
|iMatchUp.com dating sites                   |  | $    | 3,946,442  |      | $ |                    |  | $                   | 3,946,442  
|GroupLotto.com and other websites           |  |      | 11,970,259 |      |   | 12,589,401          |  | $                   | (619,142   
|Net branch commission fees                  |  |      | 355,981    |      |   | 904,810             |  |                     | (548,829   
|Email marketing programs                    |  |      | 8,460,131  |      |   | 20,154,519          |  |                     | (11,694,388
|Data sales and rentals                      |  |      | 2,031,973  |      |   | 3,383,079           |  |                     | (1,351,106 
|Sales of jewelry and gifts                  |  |      | 925,897    |      |   | 1,332,331           |  |                     | (406,434   
|Internet game development and other         |  |      | 1,108,874  |      |   | 442,979             |  |                     | 665,895    
|                                            |  |      |            |      |   |                     |  |                     |            
|Total E-commerce                            |  |      | 28,799,557 |      |   | 38,807,119          |  |                     | (10,007,562
|                                            |  |      |            |      |   |                     |  |                     |            
|Off-line Marketing Service components       |  |      |            |      |   |                     |  |                     |            
|Net branch commission fees                  |  |      | 2,017,225  |      |   | 5,166,867           |  |                     | (3,149,642 
|Other off-line marketing                    |  |      |           |      |   | 68,939              |  |                     | (68,939    
|                                            |  |      |            |      |   |                     |  |                     |            
|Total Off-line Marketing Services           |  |      | 2,017,225  |      |   | 5,235,806           |  |                     | (3,218,581 
|                                            |  |      |            |      |   |                     |  |                     |            
|LEC Billed Products and Services components |  |      |            |      |   |                     |  |                     |            
|TXNet and WWA LEC Products                  |  |      | 1,572,070  |      |   |                    |  |                     | 1,572,070  
|                                            |  |      |            |      |   |                     |  |                     |            
|Total LEC Billed Products and Services      |  |      | 1,572,070  |      |   |                    |  |                     | 1,572,070  
|                                            |  |      |            |      |   |                     |  |                     |            
|TOTAL CONSOLIDATED NET REVENUE              |  | $    | 32,388,852 |      | $ | 44,042,925          |  | $                   | (11,654,073
|                                            |  |      |            |      |   |                     |  |                     |            

Net
Revenue decreased approximately $11.7 million, or 26%, to $32.4 million for the year ended November 30, 2003 from $44.0 million in the comparable prior
year period. Four significant factors contributed to the net decline in consolidated revenue: (1) the loss of one of our significant customers in the fourth quarter of Fiscal 2002, which
customer accounted for approximately $9.5 million, or 21.5%, of our revenue for the year ended November 30, 2002, and which customer contributed less than $0.1 million in revenue
for the fiscal year ended November 30, 2003; (2) the sale of our majority-owned subsidiary (Montvale Management, LLC) during the quarter ended May 31, 2003, which subsidiary
accounted for approximately $6.1 million, or 14% of our revenue during the year ended November 30, 2002, compared to $2.4 million during the year ended November 30, 2003,
representing a $3.7 million, or a 61% decrease; (3) our complete cessation of recognizing revenue from one of our major customers in the quarter ended May 31, 2003 based on the
absence of collection probability. Such customer, a public company, accounted for approximately $3.3 million, or 8% of our revenue during the year ended November 30, 2002, compared to
approximately $0.5 million, or 2% of our revenue during the year ended November 30, 2003. We made our collection assessment during the quarter ended May 31, 2003, based on such
customer's publicly filed information. This assessment included the consideration of AMEX's May 23, 2003 trading halt of the customer's securities, and its eventual filing for bankruptcy
protection on June 16, 2003. See "Bad Debt Expense"; and (4) a $3.8 million net revenue decrease in amounts earned in Fiscal 2003 from the remaining three major
customers reported at November 30, 2002.

21

---

Offsetting
the above referenced net revenue declines of approximately $19.8 million were: (1) increases in net revenue of approximately $3.9 million, or 12% of
consolidated net revenues for the year ended November 30, 2003, attributable to our online dating service, iMatchup.com, which was initially launched in the first quarter of Fiscal 2003;
(2) increases in net revenue of approximately $1.6 million, or 5% of consolidated net revenues for the year ended November 30, 2003, attributable to our LEC Billed Products
segment, which was reintroduced to our revenue mix in the first quarter of Fiscal 2003 and
which was inactive in Fiscal 2002; and (3) increases in net revenue of approximately $3.0 million, or 8% of consolidated net revenues for the year ended November 30, 2003
attributable to increases in our revenue earned from new clients acquired in Fiscal 2003, and increased spending by other customers existing at November 30, 2002.

See
"Transactions with Major Customers" and Securities and Exchange Commission recommended FR-60 disclosures following "Liquidity and Capital
Resources" for a further discussion of the significant customer concentrations, critical accounting policies and estimates, and other factors that could affect future results.

Our
cost of sales during the years ended November 30, 2003 and 2002 were comprised of (1) direct and indirect marketing costs associated with the acquisition and retention
of consumers for our databases, including direct response email marketing costs, data purchases, promotional costs and premium fulfillment costs, and (2) contingent-based sweepstakes
indemnification expense, billing and collection fees and customer service costs.

Our
cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the years ended November 30, 2003 and 2002, are set forth
below:

Consolidated Cost of Sales, by Segment, by Component

|Year Ended November 30,                         |                                        | 2003 |           | 2002       |   | Change
Inc(Dec)
$$$ |            | Change
Inc(Dec)
%%% |         
|----------------------------------------------- | -------------------------------------- | ---- | --------- | ---------- | - | ------------------- | ---------- | ------------------- | --------
|E-commerce                                      |                                        |      |           |            |   |                     |            |                     |         
|Advertising, promotion and fulfillment costs    |                                        |      |           |            |   |                     |            |                     |         
|Email marketing and related delivery costs      |                                        | $    | 4,525,931 |            | $ | 5,103,777           |            | $                   | (577,846
|Data and profile purchases, and premium costs   |                                        |      | 6,435,162 |            |   | 5,983,008           |            |                     | 452,154 
|Promotional, creative and other costs           |                                        |      | 366,115   |            |   | 191,960             |            |                     | 174,155 
|                                                |                                        |      |           |            |   |                     |            |                     |         
|                                                | Total E-commerce Advertising           |      | $         | 11,327,208 |   | $                   | 11,278,745 |                     | $       
|                                                |                                        |      |           |            |   |                     |            |                     |         
|Service Bureau fees                             |                                        |      |           |            |   |                     |            |                     |         
|Contingent based prize indemnification costs    |                                        | $    | 526,502   |            | $ | 345,559             |            |                     | 180,943 
|                                                |                                        |      |           |            |   |                     |            |                     |         
|                                                | Total E-commerce Cost of Sales         |      | $         | 11,853,710 |   | $                   | 11,624,304 |                     | $       
|                                                |                                        |      |           |            |   |                     |            |                     |         
|Off-line Marketing Services                     |                                        |      |           |            |   |                     |            |                     |         
|Advertising, promotion and fulfillment costs    |                                        |      |           |            |   |                     |            |                     |         
|Telemarketing, direct mail and related costs    |                                        | $    | 261,786   |            | $ | 619,331             |            | $                   | (357,545
|                                                |                                        |      |           |            |   |                     |            |                     |         
|                                                | Total Off-line Marketing Cost of Sales |      | $         | 261,786    |   | $                   | 619,331    |                     | $       
|                                                |                                        |      |           |            |   |                     |            |                     |         
|LEC Billed Products and Services                |                                        |      |           |            |   |                     |            |                     |         
|Service Bureau fees                             |                                        |      |           |            |   |                     |            |                     |         
|Service provision, billing and collection costs |                                        | $    | 965,059   |            | $ |                    |            |                     | 965,059 
|                                                |                                        |      |           |            |   |                     |            |                     |         
|                                                | Total LEC Billed Cost of Sales         |      | $         | 965,059    |   | $                   |           |                     | $       
|                                                |                                        |      |           |            |   |                     |            |                     |         
|                                                | Consolidated Cost of Sales             |      | $         | 13,080,555 |   | $                   | 12,243,635 |                     | $       
|                                                |                                        |      |           |            |   |                     |            |                     |         

22

---

Cost
of sales on a consolidated basis increased $0.8 million, or 7%, to approximately $13.1 million for the year ended November 30, 2003, from approximately $12.2 million
for the year ended November 30, 2002.

A
combination of several offsetting factors contributed to the net increase in cost of sales. We recognized an approximate $0.4 million increase in data, profile and premium
costs. Such increase was attributable to increases in data and profile costs of approximately $2.5 million, offset by decreases in premium costs of approximately $2.1 million. The
premium cost decline was related to our loss of a significant customer, which customer's enrollment-based marketing program offered a premium to entice enrollments. We discontinued conducting business
with this significant customer in the fourth quarter of Fiscal 2002. Therefore, Fiscal 2003 was not burdened with such premium obligation costs. In addition, Fiscal 2003 received an approximate
benefit of $0.6 million from the reversal of a portion of the prior year's related premium accrual. The increase in data and profile costs in Fiscal 2003 was mainly attributable to the cost of
consumer data and profile acquisitions, both directly associated with our increased website activities, specifically at the iMatchUp.com website, the "Atlas" websites, PrizeAmerica.com and the
PrizeDistributors.com newly introduced group of sites. Additional increases in the cost of sales were attributable to billing, collection and customer service costs of approximately
$1.0 million associated with our LEC Billed Product activities, which activities were dormant during the fiscal year ended November 30, 2002. The above mentioned increases were offset
by: (1) an approximate $0.6 million decrease in email marketing and delivery costs resulting from reduced mailing volumes and improved pricing arrangements with our third party email
delivery vendors; and (2) a $0.4 million decrease in advertising promotion and fulfillment costs associated with the sale of our majority interest in Montvale Management, LLC in the
second quarter of Fiscal 2003.

Our
gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the years ended November 30, 2003 and 2002 are set
forth below:

Consolidated Gross Profit, by Segment

|Year Ended November 30,          |  | 2003 |            | 2002 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |            
|-------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | -----------
|E-commerce                       |  | $    | 16,945,847 |      | $ | 27,182,815          |  | $                   | (10,236,968
|Off-line Marketing services      |  | $    | 1,755,439  |      |   | 4,616,475           |  |                     | (2,861,036 
|LEC Billed products and services |  |      | 607,011    |      |   |                    |  |                     | 607,011    
|                                 |  |      |            |      |   |                     |  |                     |            
|CONSOLIDATED TOTALS              |  | $    | 19,308,297 |      | $ | 31,799,290          |  | $                   | (12,490,993
|                                 |  |      |            |      |   |                     |  |                     |            

Consolidated Gross Profit Percentages, by segment

|Year Ended November 30,              |  | 2003  |   | 2002 |   | Absolute
percentage
change
inc(dec) |   | Relative
percentage
change
inc(dec) |  
|------------------------------------ |  | ----- | - | ---- | - | ----------------------------------- | - | ----------------------------------- | -
|E-commerce                           |  | 58.84 | % | 70.0 | % | -11.2                               | % | -15.9                               | %
|Customer Acquisition services        |  | 87.0  | % | 88.2 | % | -1.2                                | % | -1.3                                | %
|LEC Billed products and services     |  | 38.6  | % | 0.0  | % | 38.6                                | % | 100.0                               | %
|                                     |  |       |   |      |   |                                     |   |                                     |  
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 59.6  | % | 72.2 | % | -12.6                               | % | -17.4                               | %
|                                     |  |       |   |      |   |                                     |   |                                     |  

Consolidated
Gross Profit Percentage ("Gross Margin") as a percentage of net revenue was 59.6% during the year ended November 30, 2003, compared to 72.2% in the prior year's
comparable fiscal period, representing an absolute percentage point decrease of 12.6%, or a 17.4% decrease on a relative basis.

23

---

The
decline in gross profit is primarily attributable to increased data acquisition costs for our iMatchUp.com on-line dating site and increased marketing and related data
acquisition costs for our other website properties and the reintroduction of the LEC Billed Products segment
activity, which has a gross profit lower than our historical gross profit. The impact on gross profit from iMatchUp.com results from the expensing of the costs of customer acquisition during the
current period (e.g. we pay a third party website a fee for its generating an iMatchUp free membership account), while recognition of the corresponding revenue is dependent upon whether or not a free
account converts to a paying membership, the date of such conversion and the type of membership (i.e. one month, three month or annual memberships). The iMatchUp.com free profiles that convert to
billable members generally do so over a period subsequent to their month of acquisition. Therefore, we expect that these future conversions of profiles to billable members, coupled with the
amortization of the revenue deferred at November 30, 2003, as well as the anticipated renewal revenues from such acquired customers, should allow us to report improved consolidated gross profit
relationships from iMatchUp in future fiscal quarters.

Our
Selling Expenses and General and Administrative Expenses for each of the years ended November 30, 2003 and 2002 are presented, on a segmental basis, and with the components of
the individual segments, in the tables set forth below:

Segment DataSelling Expenses

Consolidated Selling Expenses, by segment, by component

|Year Ended November 30,               |  | 2003 |           | 2002 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |           
|------------------------------------- |  | ---- | --------- | ---- | - | ------------------- |  | ------------------- | ----------
|E-commerce                            |  |      |           |      |   |                     |  |                     |           
|Fee share commissions                 |  | $    | 4,096,037 |      | $ | 5,711,535           |  | $                   | (1,615,498
|Other commissions                     |  |      |          |      |   | 1,595,209           |  |                     | (1,595,209
|Selling salaries and related expenses |  |      | 1,421,749 |      |   | 1,671,661           |  |                     | (249,912  
|Occupancy and equipment costs         |  |      |          |      |   | 22,715              |  |                     | (22,715   
|Travel and entertainment              |  |      | 131,496   |      |   | 243,789             |  |                     | (112,293  
|                                      |  |      |           |      |   |                     |  |                     |           
|TOTAL SellingE-commerce segment      |  |      | 5,649,282 |      |   | 9,244,909           |  |                     | (3,595,627
|                                      |  |      |           |      |   |                     |  |                     |           
|Off-line Marketing Services           |  |      |           |      |   |                     |  |                     |           
|Fee share commissions                 |  |      |          |      |   |                    |  |                     |          
|Other commissions                     |  |      |          |      |   |                    |  |                     |          
|Selling salaries and related expenses |  |      | 796,014   |      |   | 2,048,015           |  |                     | (1,252,001
|Occupancy and equipment costs         |  |      | 45,623    |      |   | 143,959             |  |                     | (98,336   
|Travel and entertainment              |  |      | 5,005     |      |   | 35,805              |  |                     | (30,800   
|                                      |  |      |           |      |   |                     |  |                     |           
|TOTAL SellingOff-line segment        |  |      | 846,642   |      |   | 2,227,779           |  |                     | (1,381,137
|                                      |  |      |           |      |   |                     |  |                     |           
|Consolidated Totals                   |  | $    | 6,495,924 |      | $ | 11,472,688          |  | $                   | (4,976,764
|                                      |  |      |           |      |   |                     |  |                     |           

Selling
expenses on a consolidated basis decreased approximately $5.0 million, or 43%, from approximately $11.5 million during the year ended November 30, 2002, to
approximately $6.5 million during the year ended November 30, 2003. The decrease was primarily attributable to an approximate $3.2 million decrease in database fee share
commissions and other sales based commissions. Such selling expense item's decreases were primarily related to our ceasing to do business with a significant customer during the fourth quarter of
Fiscal 2002. Additional selling expense reductions amounted to approximately $1.4 million, and related to a reduction in selling expenses attributable to the sale of our majority owned
subsidiary, Montvale Management, LLC on March 6, 2003. Such majority owned subsidiary was active for the year ended November 30, 2002.

24

---



Segment DataGeneral and Administrative Expenses

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

Our
General and Administrative Expenses for each of the years ended November 30, 2003 and November 30, 2002 are presented, on a segmental basis, and with the components of
the individual segments, in the tables set forth below:

Consolidated General and Administrative Expenses, by segment, by component

|Year Ended November 30,                         |  | 2003 |            | 2002 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |           
|----------------------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | ----------
|E-commerce                                      |  |      |            |      |   |                     |  |                     |           
|Compensation costs and related expenses         |  | $    | 4,102,192  |      | $ | 4,668,160           |  | $                   | (565,968  
|Professional fees                               |  |      | 1,336,416  |      |   | 1,408,053           |  |                     | (71,637   
|Insurance costs                                 |  |      | 492,566    |      |   | 477,656             |  |                     | 14,910    
|Occupancy and equipment costs                   |  |      | 320,351    |      |   | 347,170             |  |                     | (26,819   
|Site development, maintenance and modifications |  |      | 1,580,553  |      |   | 868,755             |  |                     | 711,798   
|All other G&A expenses                          |  |      | 1,238,338  |      |   | 1,592,736           |  |                     | (354,398  
|                                                |  |      |            |      |   |                     |  |                     |           
|TOTAL G&AE-commerce segment                    |  | $    | 9,070,416  |      | $ | 9,362,530           |  | $                   | (292,114  
|                                                |  |      |            |      |   |                     |  |                     |           
|Off-line Marketing Services                     |  |      |            |      |   |                     |  |                     |           
|Compensation costs and related expenses         |  | $    |           |      | $ |                    |  | $                   |          
|Professional fees                               |  |      | 21,229     |      |   | 32,312              |  |                     | (11,083   
|Insurance costs                                 |  |      |           |      |   | 3,754               |  |                     | (3,754    
|Occupancy and equipment costs                   |  |      |           |      |   |                    |  |                     |          
|All other G&A expenses                          |  |      | 691,351    |      |   | 1,607,910           |  |                     | (916,559  
|                                                |  |      |            |      |   |                     |  |                     |           
|TOTAL G&AOff-line segment                      |  | $    | 712,580    |      | $ | 1,643,976           |  | $                   | (931,396  
|                                                |  |      |            |      |   |                     |  |                     |           
|LEC Billed Products and Services                |  |      |            |      |   |                     |  |                     |           
|Compensation costs and related expenses         |  | $    | 308,574    |      | $ |                    |  | $                   | 308,574   
|Insurance costs                                 |  |      | 42,976     |      |   |                    |  |                     | 42,976    
|Occupancy and equipment costs                   |  |      | 27,113     |      |   |                    |  |                     | 27,113    
|All other G&A expenses                          |  |      | 96,273     |      |   |                    |  |                     | 96,273    
|                                                |  |      |            |      |   |                     |  |                     |           
|TOTAL G&ALEC segment                           |  | $    | 474,936    |      | $ |                    |  | $                   | 474,936   
|                                                |  |      |            |      |   |                     |  |                     |           
|Corporate                                       |  |      |            |      |   |                     |  |                     |           
|Compensation costs and related expenses         |  | $    | 1,557,307  |      | $ | 2,361,991           |  | $                   | (804,684  
|Professional fees                               |  |      | 705,012    |      |   | 747,864             |  |                     | (42,852   
|Insurance costs                                 |  |      | 520,560    |      |   | 475,775             |  |                     | 44,785    
|All other G&A expenses                          |  |      | 605,713    |      |   | 659,286             |  |                     | (53,573   
|                                                |  |      |            |      |   |                     |  |                     |           
|TOTAL G&ACorporate                             |  | $    | 3,388,592  |      | $ | 4,244,916           |  | $                   | (856,324  
|                                                |  |      |            |      |   |                     |  |                     |           
|Consolidated Totals                             |  | $    | 13,646,524 |      | $ | 15,251,422          |  | $                   | (1,604,898
|                                                |  |      |            |      |   |                     |  |                     |           

General
and Administrative expenses ("G&A") on a consolidated basis decreased approximately $1.6 million, or 11%, when comparing G&A of approximately $15.3 million from the
year ended

25

---

November 30,
2002 to G&A of approximately $13.6 million incurred during the year ended November 30, 2003. The decrease was attributable to the following: (a) decreased
E-commerce segment expenses of approximately $0.3 million, primarily attributable to increases in the costs of the development, maintenance and modifications to our newly
introduced, and existing, websites, offset by reductions in: (i) compensation costs (primarily from staff reductions coupled with reduced Fiscal 2003 year end bonuses, (ii) professional
fees (primarily from reduced litigation defense demand) and (iii) other E-commerce G&A expenses (primarily reflecting the benefit of general cost reduction efforts undertaken in
Fiscal 2003); (b) decreased Off-line Marketing Services segment expenses of approximately $0.9 million, attributable to the March 6, 2003 sale of our majority owned
subsidiary, Montvale Management, LLC; (c) increased G&A costs associated with the LEC Billed Products segment of approximately $0.5 million, with such segment being inactive in Fiscal
2002; and (d) decreases in the Corporate segment of approximately $0.9 million, primarily attributable to reductions in the number of compensated officers resulting from a Fiscal 2002
officer resignation, coupled with the current year's absence of the $0.3 million related option repurchase compensation charge incurred in the fourth quarter of Fiscal 2002, and a Fiscal 2003
bonus reduction of approximately $420,000.

In
the fiscal year ended November 30, 2002, our subsidiary ThanksMuch.com, was served with a class action lawsuit in the State of California, Los Angles County, for damages
associated with allegedly violating the State's Shipping and Handling laws. The suit was settled during the first six months of the year ended November 30, 2003. The costs regarding the
settlement approximated $30,000, including plaintiffs' legal fees (exclusive of disbursements), with such costs being charged to operations, and included within general and administrative expenses, in
the fiscal year ended November 30, 2003.

Feder,
Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of
actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $733,000 in legal fees
(exclusive of disbursements) from FKIWSBR during the year ended November 30, 2003.

Consolidated Bad Debt Expense, by segment

|Year Ended November 30,                |  | 2003 |         | 2002 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |        
|-------------------------------------- |  | ---- | ------- | ---- | - | ------------------- |  | ------------------- | -------
|E-commerce                             |  | $    | 576,350 |      | $ | 647,875             |  | $                   | (71,525
|Off-line Customer Acquisition Services |  |      |        |      |   |                    |  |                     |       
|LEC Billed Products                    |  |      |        |      |   |                    |  |                     |       
|Corporate                              |  |      |        |      |   |                    |  |                     |       
|                                       |  |      |         |      |   |                     |  |                     |        
|Consolidated Totals                    |  | $    | 576,350 |      | $ | 647,875             |  | $                   | (71,525
|                                       |  |      |         |      |   |                     |  |                     |        

Bad
Debt expense decreased approximately $71,000, or 11%, to $576,000 in Fiscal 2003 from approximately $648,000 in Fiscal 2002.

We
continuously evaluate the potential of the collectibility of trade receivables by reviewing such factors as deterioration in the operating results, financial condition or bankruptcy
filings of our customers. As a result of this review process, we record bad debt provisions to adjust the related receivables' carrying amount to an amount that reflects their probable realizable
value. Provisions for bad debts are also recorded resulting from the review of other factors, including (a) length of time the receivables are past due, (b) historical experience and
(c) other factors obtained during collection efforts. If circumstances related to specific customers change, our estimates for bad debt provisions could be further increased.

26

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During
the year ended November 30, 2003, one of our major customers filed for bankruptcy protection. This resulted in a write-off of approximately $622,000, of which $322,000 was
charged to bad debt expense in Fiscal 2003 and an approximately $300,000 reduction to a previously recorded reserve. The balance of bad debt expense relates to the risk of collection from bad debts as
it relates to the balance of our customer base.

Other Income (Expense)

The components of "Other income (expense)" for the years ended November 30, 2003 and 2002 are set forth below:

Consolidated Other Income (Expense)

|Year Ended November 30,                         |                                                    | 2003 |           | 2002    |   | change
inc(dec)
$$$ |            | change
inc(dec)
%%% |          
|----------------------------------------------- | -------------------------------------------------- | ---- | --------- | ------- | - | ------------------- | ---------- | ------------------- | ---------
|Other income (expense):                         |                                                    |      |           |         |   |                     |            |                     |          
|Interest expense                                |                                                    | $    |          |         | $ | (101,385            | )          | $                   | 101,385  
|Interest income and dividends                   |                                                    |      | 479,934   |         |   | 783,143             |            |                     | (303,209 
|Realized gains on sale of marketable securities |                                                    |      | 19,730    |         |   | 76,607              |            |                     | (56,877  
|Realized gain on sale of subsidiary             |                                                    |      | 1,375,801 |         |   |                    |            |                     | 1,375,801
|Other non-operating income:                     |                                                    |      |           |         |   |                     |            |                     |          
|                                                | Talk.com Arbitration Settlement                    |      |           |        |   |                     | 2,342,123  |                     |          
|                                                | P.M. Thomas Arbitration Settlement                 |      |           |        |   |                     | (2,710,000 | )                   |          
|                                                | Other miscellaneous income(expense)                |      |           | (54,068 | ) |                     | (11,793    | )                   |          
|                                                | Liquidation proceeds on prior year impairment loss |      |           |        |   |                     | 125,000    |                     |          
|Minority interest (income) loss                 |                                                    |      | (137,567  | )       |   | (402,716            | )          |                     | 265,149  
|                                                |                                                    |      |           |         |   |                     |            |                     |          
|Total Consolidated Other Income (Expense)       |                                                    | $    | 1,683,830 |         | $ | 100,979             |            | $                   | 1,582,851
|                                                |                                                    |      |           |         |   |                     |            |                     |          

Consolidated
Other Income (Expense) increased approximately $1.6 million, from approximately $0.1 million in "net income" for the year ended November 30, 2002 to
approximately $1.7 million of net income for the year ended November 30, 2003.

The
primary factors contributing to the net increase, in the order of the table set forth above, are as follows:



27

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PROVISION FOR INCOME TAXES

We provide for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the
tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. A final adjustment is made to our provision for income taxes pursuant to the
computation of our annual tax provision (benefit). Our current year's tax benefit approximates $148,000, coupled with pre tax income of approximately $273,000. This effective rate relationship, when
compared to our historical effective rate of approximately 39% results from several offsetting factors. We recognized tax benefits from the use of approximately $1.4 million in previously
devalued capital loss carryover deferred tax assets. Such prior year devalued capital loss deferred tax assets were utilized in Fiscal 2003 to offset the tax expense on the current year's capital gain
income of approximately $1.4 million. Additionally, we benefited from state tax benefits partially offset by foreign income tax expense. See Note 9 to the Consolidated Financial
Statements for further details of the tax expense(benefit), and deferred tax assets and liabilities. We are subject to examination by taxing authorities in various jurisdictions, and believe that we
have adequately provided for all such tax liabilities. Matters raised upon audit from such jurisdictions may involve substantial amounts and could be material. Management considers it unlikely that
resolution of any such matters would have a material adverse effect upon our consolidated financial statements.

Year Ended November 30, 2002 Compared to Year Ended November 30, 2001

Our net revenues, on a segmental basis, and with the components of the individual segments, for each of the fiscal years ended November 30, 2002 and 2001,
are set forth in the following tables:

Segment DataNet Revenues, by Segment Component

|Year Ended November 30,                     |  | 2002 |            | 2001 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |           
|------------------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | ----------
|E-commerce components                       |  |      |            |      |   |                     |  |                     |           
|GroupLotto and other websites               |  | $    | 12,589,401 |      | $ | 7,082,587           |  | $                   | 5,506,814 
|Net branch commission fees                  |  |      | 904,810    |      |   | 347,416             |  |                     | 557,394   
|Email marketing programs                    |  |      | 20,154,519 |      |   | 16,649,559          |  |                     | 3,504,960 
|Data sales and rentals                      |  |      | 3,383,079  |      |   | 2,389,116           |  |                     | 993,963   
|Sales of jewelry and gifts                  |  |      | 1,332,331  |      |   |                    |  |                     | 1,332,331 
|Internet game development and other         |  |      | 442,979    |      |   | 2,006,547           |  |                     | (1,563,568
|                                            |  |      |            |      |   |                     |  |                     |           
|Total E-commerce                            |  |      | 38,807,119 |      |   | 28,475,225          |  |                     | 10,331,894
|                                            |  |      |            |      |   |                     |  |                     |           
|Off-line Marketing Service components       |  |      |            |      |   |                     |  |                     |           
|Net branch commission fees                  |  |      | 5,166,867  |      |   | 521,123             |  |                     | 4,645,744 
|Other off-line marketing                    |  |      | 68,939     |      |   | 1,693,453           |  |                     | (1,624,514
|                                            |  |      |            |      |   |                     |  |                     |           
|Total Off-line Marketing Services           |  |      | 5,235,806  |      |   | 2,214,576           |  |                     | 3,021,230 
|                                            |  |      |            |      |   |                     |  |                     |           
|LEC Billed Products and Services components |  |      |            |      |   |                     |  |                     |           
|"900" Entertainment Service royalties       |  |      |           |      |   | 486,406             |  |                     | (486,406  
|Enhanced Services, principally voice mail   |  |      |           |      |   | 884,373             |  |                     | (884,373  
|Other LEC Billed Services                   |  |      |           |      |   | 148,830             |  |                     | (148,830  
|                                            |  |      |            |      |   |                     |  |                     |           
|Total LEC Billed Products and Services      |  |      |           |      |   | 1,519,609           |  |                     | (1,519,609
|                                            |  |      |            |      |   |                     |  |                     |           
|TOTAL CONSOLIDATED NET REVENUE              |  | $    | 44,042,925 |      | $ | 32,209,410          |  | $                   | 11,833,515
|                                            |  |      |            |      |   |                     |  |                     |           

28

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Consolidated
Net Revenue increased approximately $11.8 million, or 37%, to approximately $44.0 million for the year ended November 30, 2002 from approximately $32.2 million
in the year ended November 30, 2001. The primary component of the increase was attributable to an approximate $10.3 million increase in our E-commerce segment net revenues,
combined with an increase of approximately $3 million in net revenue from our Off-line Marketing services segment. Such increases were partially offset by a decrease of
approximately $1.5 million in our LEC Billed Product and Services legacy segment. The E-commerce segment revenue increase resulted from our increasing focus on generating revenue
from our current core business, on-line direct marketing. We expect this segment to continue to represent the substantial part of our revenue in future fiscal periods. Nevertheless, we
continue to assess the potential of revenue generation from off-line, conventional direct marketing activities and will implement that strategy if deemed beneficial for our Company.
Currently, we are using our on-line databases to enhance third party off-line databases through the application of overlay technology, whereby databases are appended to one
another, effectively increasing the depth of consumer related information within the appended database.

The
growth in our E-commerce segment was primarily attributable to approximately $20.1 million in revenue generated from the segment's Email marketing program
sub-set. This represented a $3.5 million increase over the prior year's $16.6 million in revenue generated from such segment's sub-set. We believe this
substantial increase of approximately 21% over the prior year was primarily the result of our acquisition of significant volumes of permission-based email records, extension of the quantity and
quality of third party (client) offers being emailed to the databases and greater efficiencies in our email delivery programs. In the prior year's comparable period, specifically the first three
months of the fiscal year ended November 30, 2001, we had been in the early stages of developing and carrying out our online strategy. The revenue from the email marketing program
sub-set represented approximately 46% of our consolidated net revenue for the year ended November 30, 2002, as compared to 52% of our consolidated net revenue for the year ended
November 30, 2001.

During
the year ended November 30, 2002, specifically within the period March 1, 2002 to November 30, 2002, we experienced problems with the delivery of our email
promotional offers. These problems caused reduced revenue and income from the E-Commerce sub-segment. We believe that the significant component of the email delivery problem is
attributable to Internet Service Providers that unilaterally block commercial emails from reaching their consumer subscribers. We have addressed the issue by deploying new reinforced delivery
platforms with increased redundancy and expanded diversification using both internal and external emailing resources. Although we have conceived of a number of programs to address this specific
problem, there can be no assurance that any of these programs will work effectively, or can be timely implemented.

Various
state laws exist, and federal legislation is currently pending, that limit our ability to deliver commercial e-mail messages to consumers. The Federal Trade
Commission is convening a three-day workshop to review commercial e-mail practices. There are presently no federal laws that explicitly regulate sending unsolicited
e-mail. The pending federal bills and existing state laws require that certain "opt-out" procedures be included in e-mails and prohibit "false routing" or
"fictitious address" information. Existing state, and pending federal, laws require functioning return e-mail addresses and that valid
postal addresses be included by the senders of commercial e-mail messages. Some states require an "ADV" label in the subject line, and proscribe false header or misleading subject lines.
Attorneys General and/or consumers are given authority to enforce the state laws. Over half the states have enacted legislation affecting the sending of unsolicited commercial e-mail. If
strict federal legislation is subsequently written into law, with its terms specifically limiting 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
November 2002, we received an inquiry from the Federal Trade Commission questioning whether we needed to comply with the Graham Leach Bliley Act (privacy of consumer
information for

29

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financial
institutions) arising from Atlas Credit Group, one of our Internet subsidiaries. We responded by stating that we need not comply with the Graham Leach Bliley Act because Atlas Credit Group
utilizes advertising from other financial institutions, but is not itself a financial institution as defined under the statute. We have not received any further comments from the Federal Trade
Commission. ThanksMuch.com, LLC, another of our Internet subsidiaries, was served with a class action lawsuit in State Court in the County of Los Angeles, California, for damages associated with
allegedly violating the State's Shipping and Handling laws. This suit was settled in Fiscal 2003. The settlement offers a $5.00 certificate to California consumers on future purchases of ThanksMuch
products and provides a small payment for attorneys' fees.

The
Pennsylvania Attorney General's Office had requested us to enter into an Assurance of Voluntary Compliance Agreement to resolve allegations concerning certain of our sales practices.
The Attorney General alleged that our Fly Free telemarketing program, as well as certain pay-per-call services, did not adequately disclose to the consumer the terms of the
offer being made. The Agreement also provides for a payment to the State in an amount yet to be determined. Discussions with the Pennsylvania Attorney General's Office are on-going.

Any
changes in the Internet operating landscape that materially hinders our ability and/or cost to deliver commercial email messages to the consumer records in our databases, and the
consumer records in the databases of our affiliates, could potentially cause a material impact on net revenue and gross margin and, therefore, our profitability and cash flows could be adversely
affected. Various state laws exist, and federal legislation is currently pending, that limit our ability to deliver commercial email messages to consumers. The Federal Trade Commission is convening a
three-day workshop to review commercial e-mail practices. There are presently no federal laws that explicitly regulate sending unsolicited email. The pending federal bills and
existing state laws require that certain "opt-out" procedures be included in emails and prohibit "false routing" or "fictitious address" information. Existing state, and pending federal,
laws require functioning return e-mail addresses and that valid postal addresses be included by the senders of commercial email messages. Some states require an "ADV" label in the subject
line, and proscribe false header or misleading subject lines. Attorneys General and/or consumers are given authority to enforce the state laws. If strict Federal legislation is subsequently written
into law, with its terms specifically limiting our ability to market our offers, we could potentially realize a material
adverse impact in future fiscal period net revenue, and therefore, profitability and cash flows could be adversely affected.

Revenue
from our E-commerce segment's "GroupLotto and other web sites" sub-set for Fiscal 2002 was $12.6 million, which was an increase in revenues of
$5.5 million, or 78%, to Fiscal 2001 ($7.1 million in revenue). This increase is the result of our shift from low priced "click through" revenue to higher revenue generating
registration, lead generation and on-line customer acquisition based revenue. We generate a significant portion of our site traffic from email marketing. As discussed in the prior
paragraph, any change in the Internet operating landscape (such as the enactment of additional state and Federal legislation that materially hinders our ability and/or cost to deliver commercial email
messages to consumers) could potentially cause a material adverse impact on net revenue and gross margin and, therefore, our profitability and cash flows.

Additional
increases in our consolidated revenues were attributable to new sub-sets added to the E-commerce segment during the year ended November 30, 2002
when compared to the year ended November 30, 2001. The combined revenue resulting from the new sub-sets amounted to approximately $3.1 million and is detailed as follows:
(a) approximately $0.9 million of such increase relates to our majority-owned subsidiary, Montvale Management, LLC, that provides services under a net branch agreement with licensed
mortgage banking and brokerage companies in the acquisition of candidates for new mortgages and the refinancing of existing debt, which subsidiary also conducts the same services off-line
and recorded approximately $5.2 million within our Off-line Marketing Services segment; (b) approximately $1.3 million of such increase relates to the
on-line sales of jewelry and gifts

30

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by
our new subsidiary, ThanksMuch, Inc., which was formed after the acquisition of the assets of a closely held private company on December 14, 2001, all as more fully described in
Note 1 to the financial statements; (c) approximately $0.3 million of such increase relates to the Internet game development revenues generated by our new subsidiary,
InfiKnowledge ULC, which was formed after the acquisition of the assets of a closely held private Canadian company on December 6, 2001, all as more fully described in Note 1 to the
financial statements; and (d) the balance of such increase, or approximately $0.1 million, was attributable to a web marketing, design and development contract executed and completed by
us during the three months ended February 28, 2002.

The
increases in revenues from our E-commerce segment and Off-line Marketing Services segment were partially offset by a decrease of approximately
$1.5 million in revenues from our LEC Billed Products and Services segment. A portion of the decrease, or approximately $0.5 million, resulted from the expiration in the three months
ended February 28, 2001, of certain agreements pursuant to which we had been paid a royalty fee (with virtually no corresponding costs) to refrain from conducting, marketing, advertising or
promoting certain LEC Billed Products and Services. Fiscal 2002 did not include any revenue related to these services, but we do expect such segment to become active again during the first quarter of
Fiscal 2003, resulting from the marketing of our products and services that will be billed to consumers on their phone bills through the LECs. The
balance of the decrease in LEC Billed Product and Service segment revenue, or approximately $1.0 million, resulted from our elimination of billing voice mail services under our contract with
the service bureau Federal Transtel, Inc. ("FTT") in October 2001. FTT has since filed for protection under the United States Bankruptcy Code.

See
"Transactions with Major Customers" and the Securities and Exchange Commission's ("SEC") mandated FR-60 disclosures following the "Liquidity and Capital Resources"
section for a further discussion of the significant customer concentrations, loss of significant customer, critical accounting policies and estimates, and other factors that could affect future
results.

Our
cost of revenues during the years ended November 30, 2002 and 2001, are comprised of (1) direct and indirect marketing costs associated with the acquisition and
retention of consumers for our databases, including direct response email marketing costs, data purchases, promotional costs and premium fulfillment costs, and (2) the related contingent-based
prize indemnification expense, and LEC segment related billing and collection fees, and customer service costs.

31

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Our cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the years ended November 30, 2002 and 2001, are set forth
below:

Consolidated Cost of Sales, by Segment, by Component

|Year Ended November 30,                      |                                        | 2002                       |           | 2001       |            | Change
Inc(Dec)
$$$ |           | Change
Inc(Dec)
%%% |          
|-------------------------------------------- | -------------------------------------- | -------------------------- | --------- | ---------- | ---------- | ------------------- | --------- | ------------------- | ---------
|E-commerce                                   |                                        |                            |           |            |            |                     |           |                     |          
|Advertising, promotion and fulfillment costs |                                        |                            |           |            |            |                     |           |                     |          
|Email marketing and related delivery costs   |                                        | $                          | 5,103,777 |            | $          | 4,046,881           |           | $                   | 1,056,896
|Data purchases and premium costs             |                                        |                            | 5,983,008 |            |            | 3,357,308           |           |                     | 2,625,700
|Promotional, creative and other costs        |                                        |                            | 191,960   |            |            | 115,322             |           |                     | 76,638   
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|                                             | Total E-commerce Advertising           |                            |           | 11,278,745 |            |                     | 7,519,511 |                     |          
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|Service Bureau fees                          |                                        |                            |           |            |            |                     |           |                     |          
|Contingent based prize indemnification costs |                                        |                            | 345,559   |            |            | 381,525             |           |                     | (35,966  
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|                                             | Total E-commerce Cost of Sales         |                            |           | 11,624,304 |            |                     | 7,901,036 |                     |          
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|Off-line Marketing Services                  |                                        |                            |           |            |            |                     |           |                     |          
|Advertising, promotion and fulfillment costs |                                        |                            |           |            |            |                     |           |                     |          
|Telemarketing, direct mail and related costs |                                        |                            | 619,331   |            |            | 1,283,035           |           |                     | (663,704 
|Premium fulfillment costs                    |                                        |                            |          |            |            | (89,009             | )         |                     | 89,009   
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|                                             | Total Off-line Marketing Cost of Sales |                            |           | 619,331    |            |                     | 1,194,026 |                     |          
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|LEC Billed Products and Services             |                                        |                            |           |            |            |                     |           |                     |          
|Service Bureau fees                          |                                        |                            |           |            |            |                     |           |                     |          
|Billing and collection fees                  |                                        |                            |          |            |            | 57,400              |           |                     | (57,400  
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|                                             | Total LEC Billed Cost of Sales         |                            |           |           |            |                     | 57,400    |                     |          
|                                             |                                        |                            |           |            |            |                     |           |                     |          
|                                             |                                        | Consolidated Cost of Sales |           | $          | 12,243,635 |                     | $         | 9,152,462           |          
|                                             |                                        |                            |           |            |            |                     |           |                     |          

Cost
of sales on a consolidated basis increased $3.1 million, or 34%, to approximately $12.2 million for the year ended November 30, 2002, from
approximately $9.2 million in the year ended November 30, 2001.

On
a segmental level, our E-commerce segment cost of sales increased, on a net basis, approximately $3.7 million, or 47%, to $11.6 million during the year ended
November 30, 2002, when compared to $7.9 million incurred in the prior year. Our continuing strategy of generating revenues primarily from direct marketing campaigns delivered
on-line was the significant factor contributing to this increase. We realized marketing costs for email delivery of approximately $5.1 million in the year ended November 30,
2002, representing an increase of approximately $1.1 million, or 26%, when compared to approximately $4 million in email delivery costs incurred in the year ended November 30,
2001. In December 2001, we acquired the assets of a Canadian-based technology company (InfiKnowledge). We believe that the integration of Infiknowledge's assets, technology and human resources
into our operations and email delivery platform will continue to reduce the unitary costs of our email promotions and serve to preserve and/or improve operating margins.See
the preceding "Net Revenue" section for a further discussion of recent business and legal developments attributable to email marketing.

32

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We
realized costs of approximately $4.5 million for data purchases necessary to build and maintain our marketing databases and approximately $1.5 million for premium costs
related to premium redemption obligations for certain of our marketing program offers. These costs represent an increase of approximately $2.6 million, or 78%, over data purchase and
fulfillment costs of approximately $3.4 million incurred during the year ended November 30, 2001. The costs associated with data purchase increases were due, in combination, to our
(a) increasing the volume of data acquired for our marketing activities and (b) our increased allocation of data purchases for opt-in data.

The
growth in fiscal 2002 premium costs to $1.5 million, when compared to approximately $158,000 incurred in fiscal 2001, resulted from us commencing a new long distance customer
acquisition program for a major long distance company in October 2001. Customer acquisitions under the program were incentivized through the Company's issuance of premiums (fulfillment costs).
The revenues generated from the new marketing agreement accounted for 21.5%, or approximately $9.5 million, of our total revenues in fiscal 2002, thereby having the correlative effect of
increasing our "fulfillment costs" during such period. The fiscal year ended November 30, 2001, did not have a significant customer from which business a fulfillment cost arose.

We
use the services of an agency for the provision of indemnification coverage in the event the GroupLotto site produces a winner in one of its free on-line lottery games.
The costs attributable to the provision of such indemnification coverage decreased in Fiscal 2002 approximately
$36,000, or 9%, when compared with Fiscal 2001. The primary reason for this decrease was due to a slight decrease in the games played at the GroupLotto.com website during the year ended
November 30, 2002 when compared to the year ended November 30, 2001.

Our
Off-line Marketing Services segment's cost of sales decreased approximately $0.6 million, or 48%, to approximately $0.6 million, when compared to
approximately $1.2 million during the year ended November 30, 2001. The Fiscal 2002 Off-line Marketing Service segment's cost of sales result from our
majority-owned-subsidiary, Montvale Management LLC, which was consolidated with our activities effective September 1, 2001. Prior to such consolidation, the subsidiary was primarily inactive.
In the fiscal year ended November 30, 2001, our Off-line Marketing Services primarily consisted of a contingent marketing fee that became payable upon the settlement of related
litigation, in which we were granted an arbitration award, thus triggering the contingency.

The
balance of the decrease in cost of goods sold relates to the LEC Billed Product and Service segment and amounted to a reduction of $57,400. This reduction resulted from our
elimination of billing voice mail services under our contract with the service bureau Federal Transtel, Inc. ("FTT") in October 2001. FTT has since filed for protection under the United
States Bankruptcy Code.

Our
gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the years ended November 30, 2002 and 2001 are set
forth below:

33

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Consolidated Gross Profit, by segment

|Year Ended November 30,          |  | 2002 |            | 2001 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |           
|-------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | ----------
|E-commerce                       |  | $    | 27,182,815 |      | $ | 20,574,189          |  | $                   | 6,608,626 
|Off-line Marketing services      |  |      | 4,616,475  |      |   | 1,020,550           |  |                     | 3,595,925 
|LEC Billed products and services |  |      |           |      |   | 1,462,209           |  |                     | (1,462,209
|                                 |  |      |            |      |   |                     |  |                     |           
|CONSOLIDATED TOTALS              |  | $    | 31,799,290 |      | $ | 23,056,948          |  | $                   | 8,742,342 
|                                 |  |      |            |      |   |                     |  |                     |           

Consolidated Gross Profit Percentages, by segment

|Year Ended November 30,              |  | 2002 |   | 2001 |   | Absolute
percentage
change
inc(dec) |   | Relative
percentage
change
inc(dec) |  
|------------------------------------ |  | ---- | - | ---- | - | ----------------------------------- | - | ----------------------------------- | -
|E-commerce                           |  | 70.0 | % | 72.3 | % | -2.3                                | % | -3.1                                | %
|Off-line Marketing services          |  | 88.2 | % | 46.1 | % | 42.1                                | % | 91.3                                | %
|LEC Billed products and services     |  | 0.0  | % | 96.2 | % | -96.2                               | % | -100.0                              | %
|                                     |  |      |   |      |   |                                     |   |                                     |  
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 72.2 | % | 71.6 | % | 0.6                                 | % | 0.9                                 | %
|                                     |  |      |   |      |   |                                     |   |                                     |  

Consolidated
Gross Profit ("Gross Margin") as a percentage of net revenue was 72.2% during the year ended November 30, 2002, compared to 71.6% in the year ended
November 30, 2001, representing an absolute percentage point increase of 0.6%, or a 0.9% increase on a relative basis. On a segmental basis, our E-commerce segment realized a
decrease in margin in Fiscal 2002 when compared to Fiscal 2001. The 2.3% absolute percentage point decrease resulted from our increased costs associated with data purchases (which are fully expensed
at the time of receipt) and a significant increase in premium fulfillment obligation costs. We anticipate that the immediate expensing policy regarding data purchases could provide a margin
improvement benefit in future fiscal periods through the continued marketing to such acquired data. The costs of premium fulfillment obligations related to our marketing of a program for a long
distance service provider, with such costs approximating $1.5 million in the year ended November 30, 2002. We began marketing this premium fulfillment sensitive program in the fourth
quarter of Fiscal 2001, pursuant to which we incurred approximately $158,000 in accrued premium fulfillment costs. Offsetting the decrease in gross margins, as described above, our gross margin
benefited from the acquisition of the assets of Infiknowledge.com. The Infiknowledge asset acquisition allowed us to develop our own email delivery platform, through which
we were able to decrease our reliance on third party email vendors. By decreasing this third party reliance, we were able to decrease the unitary costs relative to email delivery. Changes in the gross
margins generated from our Off-line Marketing Services segment and LEC Product and Services segment primarily offset each other in terms of percentage changes. See the previous discussions
of net revenues and cost of sales for a more detailed discussion of such segments.

34

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Our
Selling Expenses and General and Administrative Expenses for each of the years ended November 30, 2002 and 2001 are presented, on a segmental basis, and with the components of
the individual segments, in the tables set forth below:

Segment DataSelling Expenses

Consolidated Selling Expenses, by segment, by component

|Year Ended November 30,               |  | 2002 |            | 2001 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |          
|------------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | ---------
|E-commerce                            |  |      |            |      |   |                     |  |                     |          
|Fee share commissions                 |  | $    | 5,711,535  |      | $ | 2,157,921           |  | $                   | 3,553,614
|Other commissions                     |  |      | 1,595,209  |      |   | 356,133             |  |                     | 1,239,076
|Selling salaries and related expenses |  |      | 1,671,661  |      |   | 1,372,934           |  |                     | 298,727  
|Occupancy and equipment costs         |  |      | 22,715     |      |   | 23,118              |  |                     | (403     
|Travel and entertainment              |  |      | 243,789    |      |   | 244,913             |  |                     | (1,124   
|                                      |  |      |            |      |   |                     |  |                     |          
|TOTAL SellingE-commerce segment      |  |      | 9,244,909  |      |   | 4,155,019           |  |                     | 5,089,890
|                                      |  |      |            |      |   |                     |  |                     |          
|Off-line Marketing Services           |  |      |            |      |   |                     |  |                     |          
|Fee share commissions                 |  |      |           |      |   |                    |  |                     |         
|Other commissions                     |  |      |           |      |   |                    |  |                     |         
|Selling salaries and related expenses |  |      | 2,048,015  |      |   | 87,573              |  |                     | 1,960,442
|Occupancy and equipment costs         |  |      | 143,959    |      |   | 191,211             |  |                     | (47,252  
|Travel and entertainment              |  |      | 35,805     |      |   | 3,470               |  |                     | 32,335   
|                                      |  |      |            |      |   |                     |  |                     |          
|TOTAL SellingOff-line segment        |  |      | 2,227,779  |      |   | 282,254             |  |                     | 1,945,525
|                                      |  |      |            |      |   |                     |  |                     |          
|Consolidated Totals                   |  | $    | 11,472,688 |      | $ | 4,437,273           |  | $                   | 7,035,415
|                                      |  |      |            |      |   |                     |  |                     |          

Selling
expenses on a consolidated basis increased approximately $7 million, or 159%, from $4.4 million during the year ended November 30, 2001 to
$11.5 million during the year ended November 30, 2002. The increase was attributable to increases of approximately $5.1 million in the E-commerce segment, and
increases of approximately $1.9 million in the Off-line Marketing Services segment.

The
significant factors contributing to the increase in selling expenses were (a) increased fee share commissions incurred in our E-commerce segment of approximately
$3.6 million; and (b) increased selling-based commissions and compensation costs ($1.2 million and $0.3 million, respectively) arising from the expansion of the
E-commerce segment's sales force and selling activities.

Regarding
the increase in fee share commissions, during the fiscal year ended November 30, 2001, we significantly expanded the practice of marketing promotional offers on behalf
of our marketing clients ("Clients") to third party databases on a fee share commission basis. The fee share commission relationship generally arises after we conclude a contractual arrangement with a
Client pursuant to which we modify or develop the copy, offer form and promotional materials for the Client's product or service. We then test the promotion, and agree to deliver a minimum level of
new customers, and/or targeted leads to the Client. Simultaneously with the execution of these contractual arrangements, we often obtain the rights from the Client to market its promotions to a list
of third parties with whom we have marketing relationships (the "Third Parties"). We enter into contracts with each Third Party with whom we intend to market Client promotions. The terms of these
agreements generally provide that the Third Party has the right to (i) approve the creative materials for each promotion, (ii) approve the timing of each promotion's mailing,
(iii) terminate the contract on short notice, and (iv) reject any promotion for any reason. Each agreement also restricts the Third Party from doing business with the Client other than
through our Company for the period of time covered by the agreement, and sets forth the terms of the Third Party's compensation. Payments are performance-based only and are either fixed fees paid for
each customer or lead generated for the Client, or a revenue share that is a

35

---

percentage
of the revenue generated (after deduction for certain direct costs) by us for marketing that offer to the Third Party database. We utilize unique Universal Resource Locater identifier links
("URLs") when promotions are mailed to the Third Party database. It is the unique URL's that form the tracking mechanism by which the Client reports results to us, and we are able to
account for revenue generated under the fee share arrangement with Third Parties. During the Fiscal year ended November 30, 2002, the Company significantly increased the number of third party
databases and lists under management, which is the primary factor contributing to the increase in the fee share commissions expense category. Additionally, the other commission expense category
increase was attributable to agency commissions paid on the sales to one of our largest customers, which customer is no longer conducting business with us, (see "Transactions with Major
Customers").

Selling
expenses within the Off-line Marketing Services segment for Fiscal 2002 increased approximately $1.9 million, or 689%, when compared to the prior year's
comparable period. This increase is attributable to the activities of our majority owned subsidiary, Montvale Management, LLC. This subsidiary was active for the entire fiscal year ended
November 30, 2002, whereas in Fiscal 2001 such subsidiary was only active for the fourth quarter.

Segment DataGeneral and Administrative Expenses

Consolidated General and Administrative Expenses, by segment, by component

|Year Ended November 30,                         |  | 2002 |            | 2001 |   | Change
Inc(Dec)
$$$ |  | Change
Inc(Dec)
%%% |          
|----------------------------------------------- |  | ---- | ---------- | ---- | - | ------------------- |  | ------------------- | ---------
|E-commerce                                      |  |      |            |      |   |                     |  |                     |          
|Compensation costs and related expenses         |  | $    | 4,668,160  |      | $ | 2,558,010           |  | $                   | 2,110,150
|Professional fees                               |  |      | 1,408,053  |      |   | 853,050             |  |                     | 555,003  
|Insurance costs                                 |  |      | 477,656    |      |   | 532,901             |  |                     | (55,245  
|Occupancy and equipment costs                   |  |      | 347,170    |      |   | 284,148             |  |                     | 63,022   
|Site development, maintenance and Modifications |  |      | 868,755    |      |   | 1,750,638           |  |                     | (881,883 
|All other G&A expenses                          |  |      | 1,592,736  |      |   | 740,883             |  |                     | 851,853  
|                                                |  |      |            |      |   |                     |  |                     |          
|TOTAL G&AE-commerce segment                    |  |      | 9,362,530  |      |   | 6,719,630           |  |                     | 2,642,900
|                                                |  |      |            |      |   |                     |  |                     |          
|Off-line Marketing Services                     |  |      |            |      |   |                     |  |                     |          
|Compensation costs and related expenses         |  |      |           |      |   | 217,327             |  |                     | (217,327 
|Professional fees                               |  |      | 32,312     |      |   | 158,821             |  |                     | (126,509 
|Insurance costs                                 |  |      | 3,754      |      |   | 84,142              |  |                     | (80,388  
|Occupancy and equipment costs                   |  |      |           |      |   | 22,550              |  |                     | (22,550  
|All other G&A expenses                          |  |      | 1,607,910  |      |   | 55,050              |  |                     | 1,552,860
|                                                |  |      |            |      |   |                     |  |                     |          
|TOTAL G&AOff-line segment                      |  |      | 1,643,976  |      |   | 537,890             |  |                     | 1,106,086
|                                                |  |      |            |      |   |                     |  |                     |          
|LEC Billed Products and Services                |  |      |            |      |   |                     |  |                     |          
|Compensation costs and related expenses         |  |      |           |      |   | 146,200             |  |                     | (146,200 
|Insurance costs                                 |  |      |           |      |   | 84,142              |  |                     | (84,142  
|Occupancy and equipment costs                   |  |      |           |      |   | 22,549              |  |                     | (22,549  
|All other G&A expenses                          |  |      |           |      |   | 15,097              |  |                     | (15,097  
|                                                |  |      |            |      |   |                     |  |                     |          
|TOTAL G&ALEC segment                           |  |      |           |      |   | 267,988             |  |                     | (267,988 
|                                                |  |      |            |      |   |                     |  |                     |          
|Corporate and other                             |  |      |            |      |   |                     |  |                     |          
|Compensation costs and related expenses         |  |      | 2,361,991  |      |   | 2,054,173           |  |                     | 307,818  
|Professional fees                               |  |      | 747,864    |      |   | 1,183,800           |  |                     | (435,936 
|Insurance costs                                 |  |      | 475,775    |      |   | 3,474               |  |                     | 472,301  
|All other G&A expenses                          |  |      | 659,286    |      |   | 495,601             |  |                     | 163,685  
|                                                |  |      |            |      |   |                     |  |                     |          
|TOTAL G&ACorporate and other                   |  |      | 4,244,916  |      |   | 3,737,048           |  |                     | 507,868  
|                                                |  |      |            |      |   |                     |  |                     |          
|Consolidated Totals                             |  | $    | 15,251,422 |      | $ | 11,262,556          |  | $                   | 3,988,866
|                                                |  |      |            |      |   |                     |  |                     |          

36

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General and Administrative expenses ("G&A") on a consolidated basis increased approximately $4 million, or 35%, when comparing G&A of $11.3 million for the year ended
November 30, 2001 to G&A of $15.3 million for the year ended November 30, 2002. The net increase was attributable to (a) the E-commerce segment (approximately
$2.6 million, or 66% of total increase), with such increase related to increased compensation costs, professional fees and other G&A, offset by a decline in maintenance costs associated with
our web sites, all required to support the 37% increase in revenues generated by such segment during the year ended November 30, 2002, (b) the Off-line Marketing Services
Segment (approximately $1.1 million, or 27% of total increase), with such increase related to G&A necessary to support the segment's growth in revenues from Montvale Management, LLC (our
majority owned subsidiary) of approximately $0.9 million in Fiscal 2001 to approximately $6.1 million during Fiscal 2002, and (c) other corporate overhead (approximately
approximately $0.5 million, or 13% of total increase) not specifically identified to our operating segments, with such cost increase including (i) directors and officers liability
insurance, (ii) professional fees incurred in the defense of actions arising from legacy operations, and (iii) other non-allocable G&A. These overhead increases were
partially offset by an approximate $0.3 million decrease in overhead attributable to our currently inactive LEC Billed Product and Services segment.

Consolidated Bad Debt Expense, by segment

|Year Ended November 30,          |  | 2002 |         | 2001 |   | Change
Inc(Dec)
$$$ |   | Change
Inc(Dec)
%%% |         
|-------------------------------- |  | ---- | ------- | ---- | - | ------------------- | - | ------------------- | --------
|E-commerce                       |  | $    | 647,875 |      | $ | 301,933             |   | $                   | 345,942 
|Off-line Marketing Services      |  |      |        |      |   |                    |   |                     |        
|LEC Billed Products and Services |  |      |        |      |   | 826,893             |   |                     | (826,893
|Corporate and other              |  |      |        |      |   | (45,000             | ) |                     | 45,000  
|                                 |  |      |         |      |   |                     |   |                     |         
|Consolidated Totals              |  | $    | 647,875 |      | $ | 1,083,826           |   | $                   | (435,951
|                                 |  |      |         |      |   |                     |   |                     |         

Bad
Debt expense decreased approximately $0.4 million, or 40%, to approximately $0.6 million in Fiscal 2002 from approximately $1.1 million in Fiscal 2001.

The
reasons behind our increase in bad debt expense when comparing the fiscal year ended November 30, 1999 with bad debt expense realized in the years ended November 30,
2000 and 2001 is explained as follows. From our inception through the fiscal year ended November 30, 1999, our primary revenue sources were LEC Billed Products and Services and
Off-line Marketing Services. The revenue generated from LEC Billed Products and Services was subject to reserve accruals established for anticipated chargebacks, which were estimated and
recorded at the time the gross revenue was booked, and were included as a contra revenue (as opposed to bad debt expense) when calculating the net revenue presented in our statements of operations.
Our LEC Billed Products and Services did not yield bad debt expense in the classical single line item presentation, based on the fact that the Company dealt with the customer indirectly through a
billing service bureau and local exchange carrier. Any and all items that might otherwise have been treated as bad debt expense, referred to chargebacks in the LEC billing world, were included as a
component of contra revenue. Therefore, the revenues earned by us in conducting the LEC Billed Products and Services activity did not cause us to record specific bad debt expense, and did not
necessitate an allowance for doubtful accounts.

Regarding
our Off-line Marketing Service activities, we had historically billed to and received directly from the major long-distance carriers all such
Off-line Marketing service revenue. Under these arrangements, we acquired long distance customers for such carriers, billed the carriers and received the payment on such invoices,
typically prior to the filing of our quarterly and annual reports that would include such revenue. Therefore, due to our prompt receipt of payment for our invoices through

37

---

our
relationships with such long distance carriers, we were not subject to bad debt expense or the necessity for an allowance for doubtful accounts.

Commencing
in the fiscal year ended November 30, 2000, we repositioned our marketing and related revenue generating efforts and entered the on-line media arena. As
such, we started entering into classical direct trade business relationships with numerous Internet-based companies, many of which were granted credit and failed to perform, causing us to incur bad
debt expense. This entry into the on-line media arena, and the ensuing Internet client business failures, were the circumstances that were primarily responsible for the significant
additions to our allowance for doubtful accounts and corresponding bad debt expense increases. Specifically, at the inception of our entry into the on-line media arena, we believed that it
was probable that we would be able to collect our receivables from our Internet-based clients. Subsequently, due to the inability of many of such clients to survive the collapse of the "dot com"
market, we concluded that the collection of such receivables was no longer probable.

We
continuously evaluate the potential of the collectibility of trade receivables by reviewing such factors as deterioration in the operating results, financial condition or bankruptcy
filings of our customers. As a result of this review process, we record bad debt provisions to adjust the related receivables' carrying amount to an amount that reflects their probable realizable
value. Provisions for bad debts are also recorded resulting from the review of other factors, including (a) length of time the receivables are past due, (b) historical experience and
(c) other factors obtained during collection efforts. If circumstances related to specific customers change, our estimates for bad debt provisions could be further increased.

Other Income (Expense)

The components of "Other income(expense)" for the years ended November 30, 2002 and 2001 are set forth below:

Consolidated Other Income (Expense)

|Year Ended November 30,                         |                                                    | 2002 |          | 2001       |   | Change
Inc(Dec)
$$$ |         | Change
Inc(Dec)
%%% |          
|----------------------------------------------- | -------------------------------------------------- | ---- | -------- | ---------- | - | ------------------- | ------- | ------------------- | ---------
|Other income (expense):                         |                                                    |      |          |            |   |                     |         |                     |          
|Interest expense                                |                                                    | $    | (101,385 | )          | $ | (5,900              | )       | $                   | (95,485  
|Interest income and dividends                   |                                                    |      | 783,143  |            |   | 1,780,546           |         |                     | (997,403 
|Realized gains on sale of marketable securities |                                                    |      | 76,607   |            |   | 387,948             |         |                     | (311,341 
|Permanent impairment charges                    |                                                    |      |         |            |   | (4,690,258          | )       |                     | 4,690,258
|Other non-operating income (expense):           |                                                    |      |          |            |   |                     |         |                     |          
|                                                | Talk.com Arbitration Settlement                    |      |          | 2,342,123  |   |                     |        |                     |          
|                                                | P.M.Thomas Arbitration Settlement                  |      |          | (2,710,000 | ) |                     |        |                     |          
|                                                | Residual loss from terminated Programs             |      |          |           |   |                     | (57,344 | )                   |          
|                                                | Other miscellaneous income(expense)                |      |          | (11,793    | ) |                     | 74,043  |                     |          
|                                                | Liquidation proceeds on prior year impairment loss |      |          | 125,000    |   |                     |        |                     |          
|Minority interest (income) loss                 |                                                    |      | (402,716 | )          |   | (69,629             | )       |                     | (333,087 
|                                                |                                                    |      |          |            |   |                     |         |                     |          
|Total Consolidated Other Income (Expense)       |                                                    | $    | 100,979  |            | $ | (2,580,594          | )       | $                   | 2,681,574
|                                                |                                                    |      |          |            |   |                     |         |                     |          

Consolidated
Other Income(Expense) increased approximately $2.7 million, from approximately $2.6 million in net expense for the year ended November 30, 2001 to
approximately $0.1 million of net income for the year ended November 30, 2002.

38

---

The
primary factors contributing to the net increase, in the order of the table set forth above, are as follows:



Provision for Income Taxes

Our effective income tax rate is a result of the combination of federal income taxes at statutory rates, and state taxes, subject to the effects of valuation
allowances taken against the "realizability" of deferred tax assets. We recorded income tax expense of approximately $1.8 million for the year ended November 30, 2002 on
pre-tax income of approximately $4.5 million. This equates to an effective tax rate of approximately 39.5%. This effective tax rate is similar to our historically recognized tax
rate. In the year ended November 30, 2002, we realized previously devalued deferred tax assets related to capital losses (see Note 9 to the Financial Statements for further details of
our income tax accounts).

We
had recorded income tax expense of approximately $3.3 million for the year ended November 30, 2001 on a pre-tax profit of approximately approximately
$3.7 million. This effective tax rate relationship is the result of our taking a full valuation allowance during the year ended November 30, 2001 against the future tax benefits
attributable to the loss carryovers arising from permanent impairment charges of $4,690,258 incurred during such period. This deferred tax asset valuation allowance had been recorded during the year
ended November 30, 2001, due to the absence of appreciated capital gain property (available for the potential generation of capital gain income) to offset the net capital losses generated by
the impairment charges.

LIQUIDITY AND CAPITAL RESOURCES

As of November 30, 2003, we had aggregate working capital of $38.7 million compared to aggregate working capital of $39.3 million as of
November 30, 2002. We had available cash, cash

39

---

equivalents
and readily available marketable debt securities of $36.7 million as of November 30, 2003 compared to available cash, cash equivalents and readily available marketable debt
securities of $36.3 million as of November 30, 2002. The equity component of our marketable securities was $1.6 million at November 30, 2003 compared to $1.1 million
at November 30, 2002.

Cash
provided by operating activities was $2.1 million for Fiscal 2003, compared to $4.1 million in Fiscal 2002. The primary factor contributing to the decline was a
decrease in net income of $2.0 million when comparing the year ended November 30, 2003 with the year ended November 30, 2002. This decrease in net income is primarily a result of
a decrease in revenues in our E-commerce segment in Fiscal 2003 when compared to Fiscal 2002.

Cash
used for investing activities was $13.8 million for Fiscal 2003, compared to cash provided from investing activities of $6.8 million in Fiscal 2002. The primary use of
cash for investing activities related to the acquisition by our money managers of short-term marketable securities during the year ended November 30, 2003. The funds used to acquire
such securities were held in our cash and cash equivalent accounts as at November 30, 2002. Additionally, during Fiscal 2003 we incurred cash outflows of $1.5 million for capital
expenditures, offset by $1.4 million collected on the sale of a subsidiary.

Cash
used for financing activities was $1.8 million for Fiscal 2003, compared to $2.2 million used for Fiscal 2002. During Fiscal 2003 we declared and paid our first two
quarterly dividends, amounting to $2.0 million and paid $64,000 for the purchase of our common stock, with both being offset by $0.3 million in proceeds from stock options exercised.
During Fiscal 2002, we did not make any dividend payments, we paid $3.6 million for purchases of our common stock, and received $1.2 million in proceeds from stock options exercised.

Our
days-sales-outstanding ("DSO") in accounts receivable at November 30, 2003 was 46 days, compared to 49 days at August 31, 2003, 54 days
at May 31, 2003 and 52 days at February 28, 2003. DSO in accounts receivable at November 30, 2002, was 42 days, compared to 56 days at August 31, 2002,
59 days at May 31, 2002 and 70 days at February 28, 2002. The decrease in the current quarter's DSO compared to Fiscal 2002's fourth quarter relates to the improved
collection cycles on our client billed business, partially offset by longer collection cycles attributable to our recently reinstated LEC Billed Products segment activities.

The
majority of our customers are extended 30-day credit terms. In limited instances credit is extended to ranges approximating 90 days. We continually monitor
customer adherence to such terms and constantly strive to improve the effectiveness of our collection efforts with the goal of achieving a DSO in the 40-day range. Future fiscal periods
might not reflect this goal of a 40-day DSO, and might exceed the 46-day DSO recognized in the quarter ended November 30, 2003. To the extent that our LEC Billed
Products segment would contribute an increased amount of revenue and related account receivable in future fiscal periods, our DSO would increase, pursuant to the extended collection terms realized in
such business activity.

Historically,
our primary cash requirements have been used to fund the cost of advertising and promotion and test marketing new products, services and promotions, with additional funds
having been used in the purchasing of equipment and services in connection with the commencement of new business lines, further development of businesses being test marketed and for the development of
the equipment infrastructure of subsidiaries organized in Fiscal 2002.

In
Fiscal 2000, we executed our on-line direct marketing strategy. Our future plans and business strategy continue to call for our Internet-based E-commerce
segment to be our primary operating focus, with such segment generating the material portion of our revenues for the year ended November 30, 2003. We continue to invest considerable capital
into our E-commerce segment ($1.5 million and $1.9 million in Fiscal 2003 and 2002, respectively). If the E-commerce segment's activities fail to generate
sufficient revenue, we could realize a material adverse impact on our capital

40

---

and
liquidity resources resulting from expenditures necessary to generate such revenue, including, but not limited to, expenditures for (a) marketing campaigns, (b) product development
costs, (c) site development and maintenance and related technology based costs, (d) potential on-line and/or off-line business acquisitions, (e) costs
associated with developing alternative means of email promotion delivery, or (f) other unexpected and/or currently unidentifiable costs.

In
February 2004, we entered into an agreement (the "LOTN Agreement") to acquire all of the assets of LiveOnTheNet.com, a privately held provider of 24/7 live PC technical support
services designed for the home computer user. The purchase price will be $1.18 million, consisting of $944,000 in shares of our common stock and $236,000 in cash (subject to certain
post-closing adjustments). The LOTN Agreement provides that our obligation to consummate the acquisition is subject to several factors, including our performance of due diligence, the
delivery of the consent of the shareholders of LiveOnTheNet.com to the sale, and the delivery of the consents of parties to agreements with LiveOnTheNet.com to the assignment of such agreements to us.
Upon the consummation of the acquisition, our existing marketing agreement with LiveOnTheNet.com will be terminated.

In
March 2003, we sold our 51% majority owned subsidiary, Montvale Management LLC ("Montvale"), to Mortgage Industry Consultants, LLC ("MIC") for $1.6 million, plus our
investment. We had obtained our 51% interest in September 1999 through an initial investment of approximately $50,000. The terms of the agreement included an initial payment of $1 million
(received in March 2003) followed by a note for an additional $600,000 to be paid in 24 monthly installments of $25,000 each. As of February 1, 2004, ten installments were
received and recorded as realized gain on sale of subsidiary. Based on management's assessment of Montvale's future cash flows, after taking into consideration Montvale's increased obligations with
respect to the note obligations due us, we have deemed it prudent to defer recognition of income on the unpaid portion of the note. Recognition will, therefore, take place in future periods under the
cost recovery method.

In
May 2003, we received approximately $299,000, representing our GAAP basis capital account in such majority owned subsidiary as at November 30, 2002, pursuant to the
terms of the sale agreement. We also entered into a two year Media Purchase Agreement whereby we agreed to provide certain media lead generation and related services to the continuing owners of
Montvale for consideration of $40,000 per month over the term of the agreement. As of February 1, 2004, we have collected the requisite seven payments, for a total of $280,000.

In
the fiscal year ended November 30, 1999, the adoption of our Internet business plan and strategy prompted us to terminate the marketing of our legacy products and services,
which were active at that time. Accordingly, this legacy activity has contributed in a significantly decreasing degree to our cash flows and results of operations for the three-year fiscal
period, December 1, 1999 to November 30, 2002, and has not contributed at all to the operations of Fiscal 2003. This should be considered when using our historical results in evaluating
future operations, cash flows and financial position. Nevertheless, we will continue to explore opportunities to offer other Off-line marketing services, and expect to expand our
activities within our LEC Billed Products segment.

Under
currently proposed operating plans and assumptions, management believes that projected cash flows from operations and available cash resources and working capital described above,
will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. Our known identifiable short-term and long-term obligations are described
below in the "Obligations and Commitments" disclosure as required by the Securities and Exchange Commission's Release Nos. 33-8056 and 34-45321 and FR-61, as issued
on January 22, 2002.

Additionally,
as we seek to further extend our reach into the E-commerce and LEC Billed product and service arenas, as well as identifying new and other consumer oriented
products and services in the off-line arena, we may use existing cash reserves, enter into long-term financing arrangements, or

41

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employ
other means to finance such diversification, none of which is specifically identifiable or measurable at this time.

OBLIGATIONS AND COMMITMENTS

We are not aware of any specific factors, outside of those described in the following table, and those "potential factors" described in the "Critical Accounting
Policy and Accounting Estimate Discussion" which follows below, that are reasonably likely to cause a material impact, either positive or negative, on our liquidity trends. Additionally, we do not
have off-balance sheet arrangements, other than those described in the following table, and do not engage in trading activities involving non-exchange traded contracts. A
summary table of future contractual commitments, for future minimum lease payments under non-cancelable operating leases and employment contracts are set forth below:

Operating Leases

Employment agreements

Total Contractual
ObligationsDomestic

Foreign

Domestic

Foreign

Domestic

Foreign2004

$
331,600

$
74,624

$
1,484,500

$
254,375

$
1,816,100

$
328,9992005


322,500


31,093


12,850


277,500


335,350


308,5932006


215,000








300,624


215,000


300,624Thereafter











3,801





3,801$
869,100

$
105,717

$
1,497,350

$
836,300

$
2,366,450

$
942,017


RELATED PARTIES

Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation
services in defense of actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. FKIWSBR legal services are
billed on an arms length transaction basis. We incurred approximately $733,000 in legal fees (exclusive of disbursements) from FKIWSBR during the year ended November 30, 2003.

TRANSACTIONS WITH MAJOR CUSTOMERS

During the fiscal year ended November 30, 2003, we had nine customers in our E-commerce segment which, in combination, accounted for
approximately $10.7 million, or 33% of consolidated net revenues during such period, and approximately $1.6 million, or 40% of consolidated net accounts receivable as of
November 30, 2003. The nine major customers accounted for 9.6%, 6.5%, 4.6%, 3.1%, 2.6%, 2.1%, 2.1%, 1.6% and 0.8% of consolidated net revenue for the year ended November 30, 2003.
Regarding the balance of our customer base, no single customer had net revenues that equaled, or exceeded, 0.8% of consolidated net revenues for the year ended November 30, 2003. During the
year ended November 30, 2003, our business model caused us to move away from significant single, or material multiple, customer reliance, and therefore reduced the risk regarding singular
customer loss. During the fiscal years ended November 30, 2002 and 2001, we had five and six major customers who accounted for 50% and 55% of revenue, respectively.

CRITICAL ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION

In accordance with the Commission's Release Nos. 33-8040 and 34-45149 and FR-60 issued in December 2001, referencing
the Commission's statement "regarding the selection and disclosure by public companies of critical accounting policies and practices", we have set forth below what we believe to be the most pervasive
accounting policies and estimates that could have a material effect on our Company's results of operations and cash flows, if general business conditions or individual customer

42

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financial
circumstances change in an adverse way relative to the policies and estimates used in the attached financial statements or in any "forward looking" statements contained herein.



Continuation of trend relative to decreasing revenues and a stable or increasing overhead environment

The
following charts and subsequent discussion provide the details of a known trend in revenue deterioration, and the potential effects if such trend were to continue.

Our
quarterly net revenues for the prior nine quarterly periods are set forth in the table below:

Quarterly period ended

net revenue

% change
from previous
QuarterNovember 30, 2001

$
14,050,493February 28, 2002


12,370,897

-11.95
%(1)May 31, 2002


10,804,538

-12.66
%(1)August 31, 2002


10,664,246

-1.30
%(1)November 30, 2002


10,203,244

-4.32
%(1)February 28, 2003


9,117,229

-10.64
%(1)May 31, 2003


7,422,604

-18.59%
(1)August 31, 2003


8,503,267

14.56
%November 30, 2003


7,345,752

-13.61
%


Quarterly endedFebruary 28, 2002

$
866,408May 31, 2002

$
1,387,930August 31, 2002

$
1,876,069November 30, 2002

$
1,941,270February 28, 2003

$
2,211,731May 31, 2003

$
161,475


We
have been able to replace a portion of Montvale's revenue through: (a) the expansion of its direct-to-consumer based proprietary products and services;
(b) the expansion of existing client relationships; and (c) the new contact strategies.

Our
quarterly overhead, which is the combination of selling expenses, general and administrative expenses, and bad debt expense, for the prior nine quarterly periods are set forth in the
table below:

Quarterly period ended

Selling
expense

G&A
expense

Bad Debt
expense

Total
OverheadNovember 30, 2001

$
2,783,638

$
3,185,320

$
1,083,826

$
7,052,784February 28, 2002


3,168,568


3,578,591


329,334


7,076,493
(1)May 31, 2002


2,370,775


3,949,851


109,172


6,429,798
(1)August 31, 2002


3,133,682


3,665,681


48,941


6,848,304
(1)November 30, 2002


2,799,663


4,057,299


160,428


7,017,390
(1)February 28, 2003


2,319,559


4,206,037


336,188


6,861,784
(1)May 31, 2003


1,777,890


3,978,704


153,860


5,910,454
(1)August 31, 2003


1,480,191


2,946,741


117,382


4,544,314November 30, 2003


918,284


2,515,042


(31,080
)

3,402,246


43

---

Quarterly endedFebruary 28, 2002

$
638,358May 31, 2002

$
890,686August 31, 2002

$
1,150,917November 30, 2002

$
1,233,823February 28, 2003

$
1,525,615May 31, 2003

$
33,607


Should
the trend of quarterly decreases in net revenue, as recognized to November 30, 2003, continue in future fiscal periods, and the corresponding overhead
environment remain stable, or be subject to increases necessary to generate future fiscal period revenues, our liquidity and our capital resources could be adversely affected.

44

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REVENUE RECOGNITION, VARIABLE COSTS AND BAD DEBTS

We currently earn the most significant portion of our revenue from the E-commerce segment pursuant to marketing agreements with marketing partners and
corporate customers. The provisions of each agreement determine the type and timing of revenue to be recorded. We invoice our customers in accordance with the terms of the underlying agreement.
Revenue is recognized at the time the marketing activity is delivered, or service is provided, net of estimated contractually specified data qualification allowances, when applicable. Such data
qualification allowances may include duplications, invalid addresses, and age restrictions, and are recorded as contra revenue. Our revenues are adjusted in later fiscal periods if actual allowances
vary from amounts previously estimated. Historically, the variance between actual allowances and previously estimated allowances has been immaterial. If events were to occur that would cause actual
allowances (which are recorded as offsets against gross revenue, as contra-revenues, in arriving at reported net revenue) to vary significantly from those originally estimated and reflected in the
financial statements, we could suffer material deterioration in future fiscal period gross margins, and, therefore, our profitability, cash flows and capital resources could be adversely affected.

Certain
revenue related obligations are recorded at the time revenue is recognized. They include costs payable to other on-line, as well as off-line, media
companies for generating registered users and consumer data for us, database fee sharing costs under third party database use agreements, email message delivery costs, contingent based prize
indemnification coverage (i.e., sweepstakes payout indemnification), estimated premium fulfillment costs related to a promotion and all other variable costs directly associated with completing our
obligations relative to the revenue being recognized. Our actual premium fulfillment estimates have varied from that which were accrued at the time of recording the related revenue. This is deemed a
change in management's estimate, and we take the additional cost, or benefit, on the accrual adjustment in the fiscal period that the variance is determinable. The fiscal year ended
November 30, 2003 included a benefit of approximately $629,000 on the adjustment of the premium fulfillment accruals from November 30, 2002.

Should
the Internet operating landscape change resulting in (a) higher costs of acquiring consumer data and registered users for our websites; (b) higher costs of acquiring
data for our marketing partners, compromising such marketing partners' ability to maintain adequate sized databases to allow for continued third party database use agreements; (c) the
InfiKnowledge asset acquisition failing to reduce the cost of our email delivery activities and web development and web hosting service costs, or our being required to depend on third party emailing
service bureaus, at a cost in excess of our anticipated costs, or other currently unknown third party influences on our ability to deliver email messages to the records in our databases, or the
records in our marketing affiliates' databases; (d) our contingent-based prize indemnification premiums for indemnification coverage increasing due to an increase in the number of prize winners
at the sites, or as a result of the insurance industry in general; (e) our accruals for fulfillment obligations arising out of promotions proving to be less than the actual redemptions
processed in subsequent fiscal periods; or (f) unpredictable technology changes or commercial technology applications; then, if any one, or a combination, of the above factors were to
materialize, we could suffer material deterioration in future fiscal period revenue growth and gross margins, and, therefore, our profitability, cash flows and capital resources could be materially
adversely affected.

Revenue
recognition is also subject to provisions based on the probability of collection of the related trade accounts receivable. We continuously evaluate the potential of the
collectibility of trade receivables by reviewing such factors as deterioration in the operating results, financial condition, or bankruptcy filings, of our customers. As a result of this review
process, we record bad debt provisions to adjust the related receivables' carrying amount to an estimated realizable value. Provisions for bad debts are also recorded due to the review of other
factors, including the length of time the receivables are past due, historical experience and other factors obtained during the conduct of collection efforts.

45

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If
circumstances change regarding our specific customers on an individual basis, or if demand for Internet direct marketing softens, our estimates for bad debt provisions could be further increased,
which could adversely affect our operating margins, profitability, cash flows and capital resources.

MAJOR CUSTOMERS AND DISPOSITION OF MAJORITY-OWNED SUBSIDIARY

During the fiscal year ended November 30, 2003, we had nine customers in our E-commerce segment which, in combination, accounted for
approximately $10.7 million, or 33% of consolidated net revenues during such period, and approximately $1.6 million, or 40% of consolidated net accounts receivable as of
November 30, 2003. The nine major customers accounted for 9.6%, 6.5%, 4.6%, 3.1%, 2.6%, 2.1%, 2.1%, 1.6% and 0.8% of consolidated net revenue for the year ended November 30, 2003.
Regarding the balance of our customer base, no single customer had net revenues that equaled, or exceeded, 0.8% of consolidated net revenues for the year ended November 30, 2003. During the
year ended November 30, 2003, our business model caused us to move away from significant single, or material multiple, customer reliance, and therefore has minimized the risk regarding singular
customer loss. During the fiscal years ended November 30, 2002 and 2001, we had five and six major customers who accounted for 50% and 55% of revenue, respectively.

In
March 2003, we sold our interest, in our majority owned subsidiary, Montvale Management LLC, for $1.6 million, plus our investment. Pursuant to the terms of the sale, we
received $1 million in cash at closing on March 7, 2003. Additionally, we received a note from the Purchaser for $600,000, payable in 24 monthly installments of $25,000. We have
also received approximately $299,000, representing our GAAP basis capital account in such majority subsidiary as at November 30, 2002. We also entered into a two year Media Purchase Agreement
whereby we agreed to provide certain media lead generation and related services to the continuing owners of Montvale for consideration of $40,000 per month over the term of the agreement. We estimate
that the cash flow from the Media Purchase Agreement will equal or exceed the cash flows surrendered pursuant to the disposition of the majority owned subsidiary.

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

46

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IMPAIRMENT OF GOODWILL, OTHER INTANGIBLES AND INVESTMENT PORTFOLIOS COULD IMPACT NET INCOME

We carry Goodwill and other Identifiable Intangibles on our balance sheet arising from prior year acquisitions. We are required to review, at least annually, such
Goodwill and other Identifiable Intangibles for any asset impairment. If the review of the Goodwill and Identifiable Intangibles related to the subsidiaries organized to acquire such assets determines
that such assets are impaired, then we will be required to recognize an impairment charge on such Goodwill necessary to reduce the carrying value of the Goodwill to its net realizable value. Should
events occur that would give rise to such impairment charge, we would recognize decreased profitability to the extent of such adjustment. Cash flows would not be directly affected by the impairment
charge, but cash flows would, most likely, be adversely affected as a result of the facts and circumstances that created the impairment charge.

MARKET FLUCTUATION AND DEBT REPAYMENT RISK OF MARKETABLE SECURITIES INVESTMENT PORTFOLIO

We maintain an investment portfolio that is managed by prominent financial institutions. The portfolio includes high-grade corporate commercial paper
and auction rate securities, certificates of deposit, annuities and common stock equities, all of which are held for varying periods of time, pursuant to maturity dates, market conditions and other
factors. The fair value of our investments in
the common stock of publicly traded companies as of November 30, 2003 amounted to approximately $1.5 million. These investments are subject to market price volatility, in addition to the
potential for business failure at the company level. Moreover, due to the economic climate as realized in the United States, and abroad, and difficulties that may be faced by some of the companies in
which we have investments, our investment portfolio could be further impaired by the failure of such companies to fulfill their responsibility of adhering to the repayment of principal upon maturity.
Additionally, interest income, and corresponding cash flows could be negatively impacted by continued Federal Reserve Bank interest rate reductions.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 19 amends
and clarifies financial accounting and reporting of derivative instruments hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 149 amends SFAS No. 133 for decisions made:



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and further requires that an issuer clarify as a liability (or an
asset in some circumstances) financial instruments that fall within its scope because the financial instrument embodies an obligation of the issuer. Many of these instruments were previously
classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial position and results of operations.

47

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In
July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which addresses the
recognition, measurement and reporting of costs associated with exit or disposal activities. SFAS No. 146 requires the recognition of a liability for a disposal activity, including those
related to employee termination benefits and obligations under operating leases and order contracts, and that the liability be recognized when incurred and not necessarily on the date of an entity's
commitment to an exit plan. SFAS No. 146 also establishes that the
initial measurement of a liability be based on fair value. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We
have not had any exit or disposal activities since the adoption of the standard.

In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21 (EITF No. 00-21), Multiple-Deliverable Revenue
Arrangements. EITF No. 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both that are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are separate
units of accounting. The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus is applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB
No. 20, Accounting Changes. We are assessing the impact of EITF No. 00-21 and believe that the adoption will not have a material impact on our financial position and results
of operations.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 18 requires disclosure of the pro
forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim
disclosure requirements are effective for interim periods beginning after December 15, 2002. We have applied the disclosure provisions of SFAS No. 148.

In
January 2003, the FASB issued FIN No. 146, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Fin No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions for Fin No. 46
must be applied for the first interim or annual period ending after December 15, 2003. We believe that the adoption of this standard will have no material impact on our financial position and
results of operations.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Financial Statements referred to in the accompanying Index, setting forth the consolidated financial statements of Traffix, Inc.
and subsidiaries, together with the report of PricewaterhouseCoopers LLP dated February 4, 2004.

48

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PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the directors and executive officers of our Company, their respective names and ages, positions with our Company, principal occupations and
business experiences during at least the past five years and the dates of the commencement of each individual's term as a director and/or officer.

|Name                   |  | Age |  | Position                                         
|---------------------- |  | --- |  | -------------------------------------------------
|Jeffrey L. Schwartz    |  | 55  |  | Chairman of the Board and Chief Executive Officer
|Andrew Stollman        |  | 38  |  | President, Secretary and Director                
|Joshua B. Gillon, Esq. |  | 41  |  | Executive Vice President and General Counsel     
|Daniel Harvey          |  | 45  |  | Chief Financial Officer                          
|Richard Wentworth      |  | 54  |  | Chief Operating Officer                          
|Murray L. Skala        |  | 57  |  | Director                                         
|Edwin A. Levy          |  | 66  |  | Director                                         
|Lawrence Burstein      |  | 61  |  | Director                                         
|Mark Gutterman         |  | 48  |  | Director                                         

Directors

Jeffrey L. Schwartz has been our Chairman and Chief Executive Officer since January 1995, Secretary/Treasurer from September 1993 to
December 1994 and a director since our inception in 1993. From January 1979 until May 1998, Mr. Schwartz was also Co-President and a director of Jami Marketing
Services, Inc., a list brokerage and list management consulting firm, Jami Data Services, Inc., a database management consulting firm, and Jami Direct, Inc., a direct mail graphic
and creative design firm (collectively, the "Jami Companies"). The Jami Companies were sold by the principals thereof in May 1998.

Andrew
Stollman has been our President since November 21, 2002, Chief Operating Officer from January 1, 2001 to November 21, 2002, and Secretary and a director
Company since January 1995. From February 2000 until January 2001, Mr. Stollman was also our Executive Vice President and from January 1995 until
February 2000, he was Senior Vice President. Mr. Stollman was ourPresident from September 1993 to December 1994.

Murray
L. Skala has been a director since October 1995. Mr. Skala has been a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine, LLP
since 1976. Mr. Skala is also a director of JAKKS Pacific, Inc., a publicly-held company in the business of developing, marketing and distributing children's toys.

Edwin
A. Levy has been a director since November 1995. Mr. Levy has been the Chairman of the Board of Levy, Harkins & Co., Inc., an investment advisor, since
1979, and is also a director of Coastcast Corp., a publicly-held company in the business of manufacturing golf club heads; Forward Industries, Inc., a publicly-held company in the business
of designing, manufacturing and distributing custom carrying case solutions; and World Point Terminals, Inc., a publicly-held company in the business of providing bulk liquid storage services.

Lawrence
Burstein has been a director since April 1999. Since March 1996, Mr. Burstein has been Chairman of the Board and a principal shareholder of Unity Venture
Capital Associates, Ltd., a private venture capital firm. For approximately ten years prior thereto, Mr. Burstein was the President, a director and principal stockholder of Trinity
Capital Corporation, a private investment banking concern. Trinity ceased operations upon the formation of Unity Venture in 1996. Mr. Burstein is a director of

49

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several
companies, being, respectively, THQ, Inc., engaged in the development and marketing of games for Sony, Nintendo and Sega game systems; CAS Medical Systems, Inc., engaged in the
manufacture and marketing of blood pressure monitors and other disposable products, principally for the neonatal market; Medical Nutrition USA Inc., engaged in the manufacturing
and distribution of nutritional supplements; and I.D. Systems Inc., engaged in the design, development and production of a wireless monitoring and tracking system which uses radio frequency
technology.

Mark
Gutterman was appointed a director in November 2003. He had previously served as a director from December 1995 to April 1999. Mr. Gutterman has been the Chief Financial Officer of
Starpoint Solutions LLC, a company providing IT staffing and solutions, since 1999, prior to which he was a partner in the accounting firm of Feldman, Gutterman, Meinberg & Co. Mr. Gutterman is a
Certified Public Accountant.

All
directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Directors receive no cash compensation for serving on the
Board of Directors other than reimbursement of reasonable expenses incurred in attending meetings. Directors who are not our employees are compensated for their services and attendance at meetings
through the grant of options pursuant to our Stock Option Plan.

Executive Officers

Officers are elected annually by the Board of Directors and serve at the direction of the Board of Directors. Two of our executive officers, Jeffrey L. Schwartz
and Andrew Stollman, are also directors of our Company. Information with regard to such persons is set forth above under the heading "Directors."

The
remaining executive officers are Joshua B. Gillon, Esq., Executive Vice President and General Counsel, Mr. Daniel Harvey, Chief Financial Officer, and Mr. Richard
Wentworth, Chief Operating Officer.

Mr. Gillon,
age 41, was appointed Chief Investment Officer and General Counsel in April 2000. In April 2001, Mr. Gillon's title was changed to Executive Vice
PresidentCorporate Affairs and General Counsel. In November 2002, Mr. Gillon's title was changed to Executive Vice President and General Counsel. From April 1999
through March 2000, Mr. Gillon served as the Project Director for Total Energy, Inc., a home heating oil industry consolidation. From February 1996 to March 1999, he
was a partner at the law firm of Schneck, Weltman & Hashmall, LLP, specializing in mergers, acquisitions and securities law. From 1990 to 1996, he was an associate with the law firm of Kronish
Lieb Weiner & Hellman, LLP and from 1988 to 1990, he was an associate with the law firm of Seward & Kissel, LLP.

Mr. Harvey,
age 45, has been our Chief Financial Officer since January 1997. He joined us in September 1996. From November 1991 to August 1996, he was
a Senior Manager with the accounting firm of Feldman, Gutterman, Meinberg & Co. Mr. Harvey is a Certified Public Accountant.

Mr. Wentworth,
age 54, has been our Chief Operating Officer since November 21, 2002. He initially joined us in 1998, and had served as our Vice President of Data Operations
since January 2000. From November 1994 to 1999, Mr. Wentworth was the President and Chief Operating Officer of TIAC, a prominent New England based regional Internet Service
Provider.

We
have obtained "key man" life insurance in the amount of $1,000,000 on each of the lives of Jeffrey L. Schwartz and Andrew Stollman.

The Committees

The Board of Directors has an Audit Committee, a Compensation Committee and a Stock Option Committee. The Board of Directors does not have a Nominating Committee,
and the usual functions of such a committee are performed by the entire Board of Directors.

50

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Audit Committee.The functions of the Audit Committee are to recommend to the Board of Directors the engagement of the
independent accountants, review the audit plan and results of the audit engagement, review the independence of the auditors and review the adequacy of our system of
internal accounting controls. Messrs. Gutterman, Burstein and Levy are the current members of the Audit Committee and are each "independent" (as that term is defined in NASD
Rule 4200(a)(14)), and are each able to read and understand fundamental financial statements. Mr. Gutterman is the Chairman of the Audit Committee and possesses the financial expertise
required under Rule 401(h) of Regulation SK of the Act and NASD Rule 4350(d)(2). He is further "independent", as that term is defined under Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act. We will, in the future, continue to have (i) an Audit Committee of at least three members comprised solely of independent directors, each of whom will be able to read
and understand fundamental financial statements (or will become able to do so within a reasonable period of time after his or her appointment); and (ii) at least one member of the Audit
Committee that will possess the financial expertise required under NASD Rule 4350(d)(2). Our Board has adopted a written charter for the Audit Committee and the Audit Committee reviews and
reassesses the adequacy of that charter on an annual basis.

Compensation Committee.The function of the Compensation Committee is to make recommendations to the Board with respect to
compensation of management employees. In addition, the Compensation Committee administers plans and programs, with the exception of our stock option plans, relating to employee benefits, incentives
and compensation. The current members of the Compensation Committee are Messrs. Gutterman and Burstein.

Stock Option Committee.The Stock Option Committee determines the persons to whom options should be granted under our stock
option plans and the number of options to be granted to each person. The current members of the Stock Option Committee are Messrs. Levy and Burstein.

Attendance at Meetings

From December 1, 2002 through November 30, 2003, the Board of Directors, Stock Option Committee, Audit Committee and Compensation Committee each met
or acted without a meeting pursuant to unanimous written consent eight times, two times, two times and one time, respectively.

Section 16(a) Beneficial Ownership Reporting Compliance

To the best of our knowledge, during the fiscal year ended November 30, 2003, (i) Michael Miller untimely filed four reports on Form 4, reporting a
total of six transactions; (ii) Josuha B. Gillon and Daniel Harvey each untimely filed one report on Form 4, each reporting one transaction; (iii) Mark Gutterman untimely filed
one report on Form 3; and (iv) Richard Wentworth failed to file one report on Form 4 reporting one transaction and untimely filed a Form 5 in connection with such transaction. These
individuals were executive officers, directors and/or beneficial owners of more than 10% of our Common Stock during the fiscal year ended November 30, 2003. To the best of our knowledge, all
other Forms 3, 4 and 5 required to be filed during the fiscal year ended November 30, 2003 were done so on a timely basis.

Code of Ethics

We have adopted a Code of Ethics that applies to each of our employees, including our principal executive officer and principal accounting officer, as well as the
members of our Board of Directors. We have filed a copy of such Code as an exhibit to this annual report.

Item 11. EXECUTIVE COMPENSATION

The following table sets forth the executive compensation paid during the three fiscal years ended November 30, 2003, 2002 and 2001 for (i) our
Chief Executive Officer; (ii) our four most highly compensated executive officers (other than the Chief Executive Officer) whose cash compensation for

51

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the
fiscal year ended November 30, 2003 exceeded $100,000; and (iii) up to two additional individuals for whom disclosure would have been provided under the above clause (ii) but
for the fact that the individuals were not serving as executive officers at the end of the last completed fiscal year (the "Named Officers").

|                                                                    |  |                |  |     |                         |  |     |                        |  | Long Term Compensation
|------------------------------------------------------------------- |  | -------------- |  | --- | ----------------------- |  | --- | ---------------------- |  | ----------------------
|
|
|
|
|
|Jeffrey L. Schwartz
Chairman and Chief Executive Officer            |  | 2003
2002
2001 |  | $$$ | 550,000
500,000
444,000 |  | $$$ | 50,000
185,707
200,000 |  | 0
0
0                 
|Andrew Stollman
President and Secretary                             |  | 2003
2002
2001 |  | $$$ | 495,000
450,000
401,000 |  | $$$ | 50,000
185,707
200,000 |  | 0
0
0                 
|Joshua B. Gillon, Esq.
Executive Vice President and General Counsel |  | 2003
2002
2001 |  | $$$ | 250,000
244,244
225,000 |  | $$$ | 20,000
50,000
50,000   |  | 0
0
0                 
|Daniel Harvey
Chief Financial Officer                               |  | 2003
2002
2001 |  | $$$ | 200,000
196,706
184,000 |  | $$$ | 20,000
40,000
40,000   |  | 0
0
0                 
|Richard Wentworth
Chief Operating Officer (1)                       |  | 2003
2002
2001 |  | $$$ | 200,000
165,000
177,280 |  | $$$ | 50,000
25,000
0        |  | 0
0
0                 
|Gary Salmirs
Executive Vice PresidentMarketing And Sales(2)        |  | 2003
2002
2001 |  | $$$ | 237,500
240,000
240,000 |  | $$$ | 0
100,000
117,345      |  | 0
0
0                 

---

52

---

The following table sets forth certain information regarding the granting of options to the Named Officers during the fiscal year ended
November 30, 2003.

Option Grants in Last Fiscal Year

|                 |  |        |        |      |   |   |      |  |            | Potential
Realizable
Value at Assumed
Annual
Rates of Stock
Price Appreciation
for Option
Term(2) |  
|---------------- |  | ------ | ------ | ---- | - | - | ---- |  | ---------- | ------------------------------------------------------------------------------------------------- | -
|
|
|
|
|Joshua B. Gillon |  | 50,000 | (3)    | 7.80 | % | $ | 2.87 |  | 12/10/2007 |                                                                                                   | $
|Daniel Harvey    |  | 40,000 | (3)    | 6.25 | % | $ | 2.87 |  | 12/10/2007 |                                                                                                   |  
|Gary Salmirs     |  | 50,000 | (3)(4) | 7.80 | % | $ | 3.05 |  | (4         | )                                                                                                 |  

---

The
following table sets forth certain information regarding options exercised and exercisable during the fiscal year ended November 30, 2003 and the value of the
options held as of November 30, 2003 by the Named Officers.

Aggregated Option Exercises In Last Fiscal Year  and Fiscal Year-End Option Value

|(a)                 |  | (b)    |  | (c) |        | (d) |         | (e) |       
|------------------- |  | ------ |  | --- | ------ | --- | ------- | --- | ------
|
|
|Jeffrey L. Schwartz |  | 0      |  |     | 0      |     | 363,750 |     | 0     
|Andrew Stollman     |  | 0      |  |     | 0      |     | 348,750 |     | 0     
|Joshua B. Gillon    |  | 0      |  |     | 0      |     | 258,333 |     | 66,667
|Daniel Harvey       |  | 5,566  |  | $   | 15,825 |     | 73,433  |     | 26,666
|Richard Wentworth   |  | 1,000  |  | $   | 2,030  |     | 92,334  |     | 16,666
|Gary Salmirs(2)     |  | 58,050 |  | $   | 64,558 |     | (2      | )   | (2    

---

53

---



Board Compensation

As a result of our policy to compensate non-employee directors for their services, our 1996 Stock Option Plan, as amended and restated (the "Plan"),
provides for an automatic one-time grant to all non-employee directors of options to purchase 25,000 shares of Common Stock and for additional automatic quarterly grants of
options to purchase 6,250 shares of Common Stock. The exercise prices for all of such non-employee director options are the market value of the Common Stock on their date of grant.

Employment Agreements

We have entered into employment agreements, effective December 1, 2001, with each of Jeffrey L. Schwartz and Andrew Stollman, which expire on
November 30, 2004. Pursuant to such agreements, (i) Mr. Schwartz is employed as Chairman and Chief Executive Officer and Mr. Stollman is employed as Chief Operating
Officer; (ii) Messrs. Schwartz and Stollman were paid $550,000 and $495,000 per annum, respectively, for the fiscal year ended November 30, 2003, and in each subsequent
12 month period will be paid at a rate to be determined by our Board of Directors, but that is at least ten percent (10%) more than the annual rate in the immediately preceding year;
(iii) Messrs. Schwartz and Stollman will each receive bonuses upon our Company's achievement of certain pre-tax income milestones, as well as discretionary bonuses subject
to approval of our Board of Directors; (iv) Messrs. Schwartz and Stollman were each issued 10 year options to acquire 105,000 shares of our Common Stock at an exercise price of
$5.70 per share; (v) Messrs. Schwartz and Stollman each agreed not to compete or engage in a business competitive with our business during the term of the agreement and for a period of
one year thereafter; (vi) if an employee's employment is terminated other than as a result of a "For Cause Event" (as defined in the agreements), such employee shall be entitled to receive
additional compensation and other consideration, all as more fully described in the agreements; and (vii) if an employee's employment is terminated as a result of a "Change in Control" (as
defined in the agreements), such employee shall be entitled to receive a one-time payment in an amount equal to 2.99 times his "base amount" determined in accordance with the applicable
provisions of the Internal Revenue Code.

The
foregoing is only a summary of the material terms of our employment agreements with the Named Officers. For a complete description, copies of such agreements are annexed hereto in
their entirety as exhibits or are otherwise incorporated herein by reference.

Compensation Committee Interlock and Insider Participation

The Compensation Committee of our Board of Directors from December 1, 2002 through November 30, 2003 consisted of Murray L. Skala and Lawrence
Burstein. See "Certain Relationships and Related Transactions." Mark Gutterman replaced Mr. Skala on such Committee in December 2003.

54

---

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of February 17, 2004, based upon information obtained from the persons named below, regarding beneficial
ownership of our Common Stock by (i) each person who is known by us to own beneficially more than 5% of the outstanding shares of our Common Stock, (ii) each director of our Company,
(iii) each of the Named Officers, and (iv) all executive officers and directors of our Company as a group.

|Name and Address of
Beneficial Owner(1)                     |  | Number of Shares
Beneficially Owned(2) |      | Percent
of Class(2) |  
|----------------------------------------------------------- |  | -------------------------------------- | ---- | ------------------- | -
|Jeffrey L. Schwartz                                         |  | 2,461,615                              | (3)  | 18.45               | %
|Jack Silver
660 Madison Avenue
New York, NY 10021           |  | 1,423,950                              | (4)  | 10.90               | %
|Michael G. Miller
5 Sky Drive
New City, NY 10956            |  | 1,397,723                              |      | 10.77               | %
|Andrew Stollman                                             |  | 1,195,982                              | (5)  | 8.98                | %
|Joshua B. Gillon, Esq.                                      |  | 275,001                                | (6)  | 2.08                | %
|Edwin A. Levy
570 Lexington Avenue
New York, NY 10022       |  | 225,100                                | (7)  | 1.71                | %
|Murray L. Skala
750 Lexington Avenue
New York, NY 10022     |  | 174,000                                | (8)  | 1.32                | %
|Lawrence Burstein
245 Fifth Avenue
New York, NY 10016       |  | 143,750                                | (9)  | 1.10                | %
|Richard Wentworth                                           |  | 92,334                                 | (10) | *                   |  
|Daniel Harvey                                               |  | 86,766                                 | (11) | *                   |  
|Mark Gutterman
115 Broadway
2nd Floor
New York, NY 10006    |  | 31,250                                 | (12) | *                   |  
|Gary Salmirs
7 Myrtle Avenue
Demarest, NJ 07627             |  | 0                                      |      | 0                   |  
|All executive officers and directors as a group (9 persons) |  | 4,685,798                              | (13) | 31.90               | %

---

55

---



Equity Compensation Plan Information

The table below sets forth the following information as of the fiscal year ended November 30, 2003 for (i) all compensation plans previously
approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any:



|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 |                                                                                                                                                
|Equity compensation plans not approved by security holders |  | 0                                                                                               |  | $                                                                               | 0.00 |                                                                                                                                                
|Total                                                      |  | 2,783,677                                                                                       |  | $                                                                               | 4.40 |                                                                                                                                                

56

---

Equity
compensation plans approved by our stockholders include the 1995 Employee Stock Option Plan and the Fourth Amended and Restated 1996 Employee Stock Option Plan.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On December 14, 2001, each of Jeffrey L. Schwartz and Andrew Stollman, executive officers of our Company, entered into a Purchase Agreement with a group of
investment funds unaffiliated with us, pursuant to which Messrs. Schwartz and Stollman each sold 200,000 shares of Common Stock (400,000 shares in the aggregate), at a price of $5.75 per share
(for proceeds of $1,150,000 to each of Messrs. Schwartz and Stollman). Such individuals also agreed, that for a period of six (6) months after such sale, they would not (with certain
limited exceptions, as enumerated in the Purchase Agreements), without the consent of the investment funds, sell, assign, pledge, transfer or otherwise dispose of any securities of our Company. In
such Purchase Agreements, we provided several covenants, including (i) the obligation to register such 400,000 shares with the Commission on Form S-3; (ii) use all
reasonable best efforts to cause such registration statement to be declared effective within 120 days after filing; and (iii) cause such registration statement to remain continuously
effective until December 13, 2003. Such registration statement was declared effective by the Commission on January 31, 2002. We agreed to indemnify the investment funds (limited to the
amount of the proceeds received by Messrs. Schwartz and Stollman) in the event we breach of any of the covenants we made in the Purchase Agreements.

Murray
L. Skala, a director of our Company, is a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, our attorneys ("Feder Kaszovitz"). We
incurred fees (exclusive of disbursements) of approximately $733,000 during the fiscal year ended November 30, 2003. Feder Kaszovitz continues to provide services to us during our current
fiscal year. Its fees are based primarily on hourly rates. We believe that our relationship with such firm is on terms no less favorable to us than could have been obtained from unaffiliated third
parties.

Item 14. CONTROLS AND PROCEDURES

Our
Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14(c) and 15-d-14(c)) as of a date within 90 days of the filing date of this Annual Report (the "Evaluation Date") have concluded that as of
the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to us
and them by others within those entities, particularly during the period in which this Annual Report was being prepared.

There
were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date,
nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.

57

---

ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following are the fees billed us by PricewaterhouseCoopers LLP for services rendered thereby during the fiscal years ended November 30, 2002 and 2003:

Fiscal Year Ended
November 30,2003

2002Audit Fees

$
212,880

$
199,530Audit Related Fees


29,500


9,275Tax Fees


28,725


19,410All Other Fees


0


0


Audit Feesconsist of the aggregate fees billed for professional services rendered for the audit of our annual financial
statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by the auditors in connection with our statutory and
regulatory filings or engagements.

Audit Related Feesconsist of the aggregate fees billed for professional services rendered for assurance and related services that were
reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees. Included in such Audit Related Fees were fees incurred in
connection with the auditors' review of financial information included in our filed registration statements.

Tax Feesconsist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included
in such Tax Fees were fees incurred for tax planning services and state and local tax advice.

All Other Feesconsist of the aggregate fees billed for products and services provided by the auditors and not otherwise included in Audit
Fees, Audit Related Fees or Tax Fees.

Our
Audit Committee has considered whether the provisions of the non-audit services described above is compatible with maintaining our auditor's independence and determined that such
services are appropriate.

Before
our auditors are engaged to provide us audit or non-audit services, such engagement is approved by the Audit Committee of our Board of Directors.

PART IV

Item 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)Financial Statements and Financial Statement Schedules.



All
other financial statement schedules have been omitted since either (i) the schedule or condition requiring a schedule is not applicable or (ii) the information required
by such schedule is contained in the Consolidated Financial Statements and Notes thereto or in Management's Discussion and Analysis of Financial Condition and Results of Operation.

58

---

(b)Reports on Form 8-K.We did not file any
Current Reports on Form 8-K during the quarter ended November 30, 2003.

(c)Exhibits.

|Exhibit
Number |  |                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------
|3.1.1          |  | Articles of Incorporation of the Company, as amended.(1)                                   
|3.1.2          |  | Amendment to the Articles of Incorporation of the Company.(2)                              
|3.2            |  | Bylaws of the Company.(3)                                                                  
|10.1           |  | Fourth Amended and Restated 1996 Stock Option Plan.(4)                                     
|10.2           |  | Lease of the Company's offices at One Blue Hill Plaza, Pearl River, New York.(5)           
|10.3.1         |  | December 1, 2001 Employment Agreement by and between the Company and Jeffrey L. Schwartz(6)
|10.3.2         |  | December 1, 2001 Employment Agreement by and between the Company and Andrew Stollman(6)    
|14.1*          |  | Code of Ethics                                                                             
|21*            |  | 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                                                

---

59

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

|Dated: March 1, 2004 |  | Traffix, Inc.
|-------------------- |  | -------------
|                     |  |              
|                     |  | By:          

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|Signature                                 |  | Title                                                                |  | Date         
|----------------------------------------- |  | -------------------------------------------------------------------- |  | -------------
|                                          |  |                                                                      |  |              
|/s/JEFFREY L. SCHWARTZJeffrey L. Schwartz |  | Chairman and Chief Executive Officer (Principal Executive Officer)   |  | March 1, 2004
|/s/DANIEL HARVEYDaniel Harvey             |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 1, 2004
|/s/ANDREW STOLLMANAndrew Stollman         |  | President, Secretary and Director                                    |  | March 1, 2004
|/s/MURRAY L. SKALAMurray L. Skala         |  | Director                                                             |  | March 1, 2004
|/s/EDWIN A. LEVYEdwin A. Levy             |  | Director                                                             |  | March 1, 2004
|/s/LAWRENCE BURSTEINLawrence Burstein     |  | Director                                                             |  | March 1, 2004
|/s/MARK GUTTERMANMark Gutterman           |  | Director                                                             |  | March 1, 2004

60

---

Exhibits.

|Exhibit Number |  |                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------
|3.1.1          |  | Articles of Incorporation of the Company, as amended.(1)                                   
|3.1.2          |  | Amendment to the Articles of Incorporation of the Company.(2)                              
|3.2            |  | Bylaws of the Company.(3)                                                                  
|10.1           |  | Fourth Amended and Restated 1996 Stock Option Plan.(4)                                     
|10.2           |  | Lease of the Company's offices at One Blue Hill Plaza, Pearl River, New York.(5)           
|10.3.1         |  | December 1, 2001 Employment Agreement by and between the Company and Jeffrey L. Schwartz(6)
|10.3.3         |  | December 1, 2001 Employment Agreement by and between the Company and Andrew Stollman(6)    
|14.1*          |  | Code of Ethics                                                                             
|21*            |  | 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                                                

---

61

---

Traffix, Inc. and Subsidiaries        Index to Consolidated Financial Statements and Financial Statement Schedule

|                                                                                                     |  | Page      
|---------------------------------------------------------------------------------------------------- |  | ----------
|Report of Independent Auditors                                                                       |  | F-2       
|Consolidated Balance Sheets as of November 30, 2003 and 2002                                         |  | F-3       
|Consolidated Statements of Operations for the years ended November 30, 2003, 2002 and 2001           |  | F-4       
|Consolidated Statements of Shareholders' Equity for the years ended November 30, 2003, 2002 and 2001 |  | F-5       
|Consolidated Statements of Cash Flows for the years ended November 30, 2003, 2002 and 2001           |  | F-6 - F-7 
|Notes to Consolidated Financial Statements                                                           |  | F-8 - F-38
|Schedule IIValuation and Qualifying Accounts and Reserves                                           |  | S-1       

---



Report of Independent Auditors

To the Board of Directors and Shareholders of
Traffix, Inc.:

In
our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Traffix, Inc. and its
Subsidiaries (the "Company") at November 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 2003 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Florham
Park, New Jersey
February 4, 2004

F-2

---



TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        As of November 30, 2003 and 2002

|                                                                                                                         |                                                                                                                            | 2003                                       |            | 2002       |           
|------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ---------- | ----------
|Assets                                                                                                                   |                                                                                                                            |                                            |            |            |           
|Current assets:                                                                                                          |                                                                                                                            |                                            |            |            |           
|                                                                                                                         | Cash and cash equivalents                                                                                                  |                                            | $          | 9,939,657  |           
|                                                                                                                         | Marketable securities                                                                                                      |                                            |            | 28,272,520 |           
|                                                                                                                         | Accounts receivable, trade, net of allowance for doubtful accounts of $872,605 and $326,127 in 2003 and 2002, respectively |                                            |            | 4,076,947  |           
|                                                                                                                         | Deferred income taxes                                                                                                      |                                            |            | 1,295,983  |           
|                                                                                                                         | Due from related parties                                                                                                   |                                            |            |           |           
|                                                                                                                         | Prepaid income taxes                                                                                                       |                                            |            |           |           
|                                                                                                                         | Prepaid expenses and other current assets                                                                                  |                                            |            | 1,065,580  |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total current assets                       |            |            | 44,650,687
|Property and equipment, at cost, net of accumulated depreciation                                                         |                                                                                                                            |                                            | 2,799,405  |            |           
|Goodwill                                                                                                                 |                                                                                                                            |                                            | 1,071,525  |            |           
|Other intangibles, net                                                                                                   |                                                                                                                            |                                            | 1,157,176  |            |           
|Deferred income taxes                                                                                                    |                                                                                                                            |                                            | 271,744    |            |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total assets                               |            | $          | 49,950,537
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|Liabilities                                                                                                              |                                                                                                                            |                                            |            |            |           
|Current liabilities:                                                                                                     |                                                                                                                            |                                            |            |            |           
|                                                                                                                         | Accounts payable                                                                                                           |                                            | $          | 2,337,445  |           
|                                                                                                                         | Accrued expenses                                                                                                           |                                            |            | 2,974,967  |           
|                                                                                                                         | Reserve for customer chargebacks                                                                                           |                                            |            | 406,352    |           
|                                                                                                                         | Due to related parties                                                                                                     |                                            |            | 351,335    |           
|                                                                                                                         | Income taxes payable                                                                                                       |                                            |            | 333,705    |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total current liabilities                  |            |            | 6,403,804 
|Deferred income taxes                                                                                                    |                                                                                                                            |                                            | 207,820    |            |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total liabilities                          |            |            | 6,611,624 
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|Commitments and contingencies (Note 12)                                                                                  |                                                                                                                            |                                            |            |            |           
|Minority interest                                                                                                        |                                                                                                                            |                                            |           |            |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|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 12,882,992 shares and 14,216,729 shares, respectively |                                                                                                                            |                                            | 12,882     |            |           
|Common stock issuable$.001 par value; 39,174 and 78,347 shares, respectively                                            |                                                                                                                            |                                            | 242,879    |            |           
|Additional paid-in capital                                                                                               |                                                                                                                            |                                            | 37,916,110 |            |           
|Retained earnings                                                                                                        |                                                                                                                            |                                            | 4,319,356  |            |           
|Accumulated other comprehensive income                                                                                   |                                                                                                                            |                                            | 847,686    |            |           
|Common stock held in treasury, at cost, -0- and 1,509,428 shares in 2003 and 2002, respectively                          |                                                                                                                            |                                            |           |            |           
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total shareholders' equity                 |            |            | 43,338,913
|                                                                                                                         |                                                                                                                            |                                            |            |            |           
|                                                                                                                         |                                                                                                                            | Total liabilities and shareholders' equity |            | $          | 49,950,537
|                                                                                                                         |                                                                                                                            |                                            |            |            |           

See
acompanying notes to consolidated financial statements

F-3

---



TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF INCOME        For the years ended November 30, 2003, 2002 and 2001

|                                     |                                                  | 2003                                     |            | 2002       |            | 2001       |           
|------------------------------------ | ------------------------------------------------ | ---------------------------------------- | ---------- | ---------- | ---------- | ---------- | ----------
|Net revenue                          |                                                  | $                                        | 32,388,852 |            | $          | 44,042,925 |           
|Cost of sales                        |                                                  |                                          | 13,080,555 |            |            | 12,243,635 |           
|                                     |                                                  |                                          |            |            |            |            |           
|                                     |                                                  | Gross profit                             |            |            | 19,308,297 |            |           
|Selling expenses                     |                                                  |                                          | 6,495,924  |            |            | 11,472,688 |           
|General and administrative expenses  |                                                  |                                          | 13,646,524 |            |            | 15,251,422 |           
|Bad debt expense                     |                                                  |                                          | 576,350    |            |            | 647,875    |           
|                                     |                                                  |                                          |            |            |            |            |           
|                                     |                                                  | (Loss) income from operations            |            |            | (1,410,501 | )          |           
|Other income (expense):              |                                                  |                                          |            |            |            |            |           
|                                     | Interest expense                                 |                                          |            |           |            |            | (101,385  
|                                     | Interest income and dividends                    |                                          |            | 479,934    |            |            | 783,143   
|                                     | Realized gains on marketable securities          |                                          |            | 19,730     |            |            | 76,607    
|                                     | Realized gain on sale of subsidiary              |                                          |            | 1,375,801  |            |            |          
|                                     | Permanent impairment charges                     |                                          |            |           |            |            |          
|                                     | Other non-operating income (expense)             |                                          |            | (54,068    | )          |            | (254,670  
|                                     | Minority interest in (income) loss of subsidiary |                                          |            | (137,567   | )          |            | (402,716  
|                                     |                                                  |                                          |            |            |            |            |           
|                                     |                                                  | Income before provision for income taxes |            |            | 273,329    |            |           
|(Benefit) provision for income taxes |                                                  |                                          | (147,571   | )          |            | 1,786,894  |           
|                                     |                                                  |                                          |            |            |            |            |           
|                                     |                                                  | Net income                               |            | $          | 420,900    |            | $         
|                                     |                                                  |                                          |            |            |            |            |           
|Basic earnings per share (Note 3):   |                                                  |                                          |            |            |            |            |           
|                                     | Net income                                       |                                          | $          | 0.03       |            | $          | 0.21      
|                                     |                                                  |                                          |            |            |            |            |           
|                                     | Weighted average shares outstanding              |                                          |            | 12,776,295 |            |            | 13,350,794
|                                     |                                                  |                                          |            |            |            |            |           
|Diluted earnings per share (Note 3): |                                                  |                                          |            |            |            |            |           
|                                     | Net income                                       |                                          | $          | 0.03       |            | $          | 0.19      
|                                     |                                                  |                                          |            |            |            |            |           
|                                     | Weighted average shares outstanding              |                                          |            | 13,085,297 |            |            | 14,247,450
|                                     |                                                  |                                          |            |            |            |            |           
|                                     | Cash dividends per common share                  |                                          | $          | 0.16       |            | $          | 0.00      
|                                     |                                                  |                                          |            |            |            |            |           

See
accompanying notes to consolidated financial statements

F-4

---

TRAFFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2003, 2002 and 2001

|                                                                         |                             | Common Stock |   |   |        |   |   |          |   | Treasury Stock |            | Accumulated
Other
Comprehensive
(Loss) Income |   |            |  
|------------------------------------------------------------------------ | --------------------------- | ------------ | - | - | ------ | - | - | -------- | - | -------------- | ---------- | --------------------------------------------- | - | ---------- | -
|
|
|Balance, November 30, 2000                                               |                             | 15,681,116   |   |   | 15,680 |   |   |          |   |                | 39,208,992 |                                               |   | 8,691,438  |  
|Net income for the year                                                  |                             |              |   |   |        |   |   |          |   |                |            |                                               |   | 417,499    |  
|Realized losses on available-for-sale securities                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         | Comprehensive income (loss) |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Stock option exercises                                                   |                             | 273,132      |   |   | 273    |   |   |          |   |                | 480,633    |                                               |   |            |  
|Tax benefit from exercise of stock options                               |                             |              |   |   |        |   |   |          |   |                | 240,265    |                                               |   |            |  
|Compensation expense related to options                                  |                             |              |   |   |        |   |   |          |   |                | 116,218    |                                               |   |            |  
|Common stock issued in connection with acquisition of miniority interest |                             | 336,243      |   |   | 336    |   |   |          |   |                | 1,445,509  |                                               |   |            |  
|Purchase of common stock, held in treasury, at cost                      |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Purchase and retirement of common stock                                  |                             | (2,000,000   | ) |   | (2,000 | ) |   |          |   |                | (95,833    | )                                             |   | (5,902,167 | )
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Balance, November 30, 2001                                               |                             | 14,290,491   |   |   | 14,289 |   |   |         |   |                | 41,395,784 |                                               |   | 3,206,770  |  
|Net income for the year                                                  |                             |              |   |   |        |   |   |          |   |                |            |                                               |   | 2,741,390  |  
|Unrealized losses on available-for-sale securities                       |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Foreign Currency Translation adjustment                                  |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         | Comprehensive income (loss) |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Stock option exercises                                                   |                             | 554,270      |   |   | 554    |   |   |          |   |                | 1,224,143  |                                               |   |            |  
|Tax benefit from exercise of stock options                               |                             |              |   |   |        |   |   |          |   |                | 171,909    |                                               |   |            |  
|Common stock issued in connection connection with acquisition            |                             | 39,174       |   |   | 39     |   |   |          |   |                | 242,840    |                                               |   |            |  
|Net proceeds on non-management trading disgorgement                      |                             |              |   |   |        |   |   |          |   |                | 114,402    |                                               |   |            |  
|Common stock issuable in connection with acquisition                     |                             |              |   |   |        |   |   | 485,758  |   |                |            |                                               |   |            |  
|Purchase of common stock, held in treasury, at cost                      |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Purchase and retirement of common stock                                  |                             | (667,206     | ) |   | (667   | ) |   |          |   |                | (1,457,012 | )                                             |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Balance, November 30, 2002                                               |                             | 14,216,729   |   |   | 14,215 |   |   | 485,758  |   |                | 41,692,066 |                                               |   | 5,948,160  |  
|Net income for the year                                                  |                             |              |   |   |        |   |   |          |   |                |            |                                               |   | 420,900    |  
|Unrealized gains on available-for-sale securities                        |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Foreign Currency Translation adjustment                                  |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         | Comprehensive income        |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Dividends declared                                                       |                             |              |   |   |        |   |   |          |   |                |            |                                               |   | (2,049,704 | )
|Stock option exercises                                                   |                             | 159,704      |   |   | 161    |   |   |          |   |                | 343,379    |                                               |   |            |  
|Tax benefit from exercise of stock options                               |                             |              |   |   |        |   |   |          |   |                | 87,230     |                                               |   |            |  
|Common stock issued in connection with acquisition                       |                             | 39,174       |   |   | 39     |   |   | (242,879 | ) |                | 242,840    |                                               |   |            |  
|Purchase of common stock, held in treasury, at cost                      |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Retirement of treasury stock                                             |                             | (1,532,615   | ) |   | (1,533 | ) |   |          |   |                | (4,449,405 | )                                             |   |            |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  
|Balance, November 30, 2003                                               |                             | 12,882,992   |   | $ | 12,882 |   | $ | 242,879  |   | $              | 37,916,110 |                                               | $ | 4,319,356  |  
|                                                                         |                             |              |   |   |        |   |   |          |   |                |            |                                               |   |            |  

See accompanying notes to consolidated financial statements

F-5

---



TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the years ended November 30, 2003, 2002 and 2001

|                                      |                                                                                   | 2003                                                      |                                                     | 2002         |            | 2001        |             
|------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ------------ | ---------- | ----------- | ------------
|Cash flows from operating activities: |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Net income                                                                        |                                                           | $                                                   | 420,900      |            | $           | 2,741,390   
|                                      | Adjustments to reconcile net income to net cash provided by operating activities: |                                                           |                                                     |              |            |             |             
|                                      |                                                                                   | Depreciation and amortization                             |                                                     |              | 1,436,582  |             |             
|                                      |                                                                                   | Reserve for customer chargebacks                          |                                                     |              | 406,352    |             |             
|                                      |                                                                                   | Provision for uncollectible accounts                      |                                                     |              | 576,350    |             |             
|                                      |                                                                                   | Deferred income taxes                                     |                                                     |              | 124,981    |             |             
|                                      |                                                                                   | Compensation expense related to stock options             |                                                     |              |           |             |             
|                                      |                                                                                   | Net gains on sale of marketable securities                |                                                     |              | (19,730    | )           |             
|                                      |                                                                                   | Gain on sale of subsidiary                                |                                                     |              | (1,375,801 | )           |             
|                                      |                                                                                   | Permanent impairment charges                              |                                                     |              |           |             |             
|                                      |                                                                                   | Amortized discounts and premiums on marketable securities |                                                     |              |           |             |             
|                                      |                                                                                   | Minority interest                                         |                                                     |              | (307,017   | )           |             
|                                      |                                                                                   | Changes in assets and liabilities of business:            |                                                     |              |            |             |             
|                                      |                                                                                   |                                                           | Accounts receivable                                 |              |            | 396,921     |             
|                                      |                                                                                   |                                                           | Due from related parties                            |              |            |            |             
|                                      |                                                                                   |                                                           | Prepaid expenses and other current assets           |              |            | 72,782      |             
|                                      |                                                                                   |                                                           | Accounts payable                                    |              |            | 139,987     |             
|                                      |                                                                                   |                                                           | Income taxes payable                                |              |            | 1,616,742   |             
|                                      |                                                                                   |                                                           | Due to related parties                              |              |            | 55,576      |             
|                                      |                                                                                   |                                                           | Other, principally accrued expenses                 |              |            | (1,482,677  | )           
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      |                                                                                   |                                                           | Net cash provided by operating activities           |              |            | 2,061,948   |             
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|Cash flows from investing activities: |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Purchases of securities                                                           |                                                           |                                                     | (309,681,692 | )          |             | (177,342,682
|                                      | Proceeds from sales of securities                                                 |                                                           |                                                     | 296,016,630  |            |             | 186,861,999 
|                                      | Proceeds from sale of a subsidiary                                                |                                                           |                                                     | 1,375,801    |            |             |            
|                                      | Capital expenditures                                                              |                                                           |                                                     | (1,534,214   | )          |             | (1,873,743  
|                                      | Distributions to minority interest                                                |                                                           |                                                     |             |            |             | (255,350    
|                                      | Payments for asset acquisitions, net of cash received                             |                                                           |                                                     |             |            |             | (545,500    
|                                      | Purchases of long-term investments                                                |                                                           |                                                     |             |            |             |            
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      |                                                                                   |                                                           | Net cash (used in) provided by investing activities |              |            | (13,823,475 | )           
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|Cash flows from financing activities: |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Dividends paid                                                                    |                                                           |                                                     | (2,049,704   | )          |             |            
|                                      | Purchases of common stock                                                         |                                                           |                                                     | (63,691      | )          |             | (3,568,212  
|                                      | Proceeds from stock options exercised                                             |                                                           |                                                     | 343,540      |            |             | 1,224,697   
|                                      | Proceedsnet on settled non-management Section 16-b action                        |                                                           |                                                     |             |            |             | 114,402     
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      |                                                                                   |                                                           | Net cash used in financing activities               |              |            | (1,769,855  | )           
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Effect of exchange rate changes on cash and cash equivalents                      |                                                           |                                                     | 334,698      |            |             | 1,171       
|                                      | Net (decrease) increase in cash and cash equivalents                              |                                                           |                                                     | (13,196,684  | )          |             | 8,678,286   
|                                      | Cash and cash equivalents, beginning of year                                      |                                                           |                                                     | 23,136,341   |            |             | 14,458,055  
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Cash and cash equivalents, end of year                                            |                                                           | $                                                   | 9,939,657    |            | $           | 23,136,341  
|                                      |                                                                                   |                                                           |                                                     |              |            |             |             
|Supplemental disclosures:             |                                                                                   |                                                           |                                                     |              |            |             |             
|                                      | Cash paid during the year for:                                                    |                                                           |                                                     |              |            |             |             
|                                      |                                                                                   | Interest                                                  |                                                     | $            |           |             | $           
|                                      |                                                                                   | Income tax (refunds) net of payments                      |                                                     | $            | (1,931,173 | )           | $           

F-6

---

Noncash investing activities:



Details of Acquisition (Notes 1 and 4)

Infiknowledge

ThanksMuch

CombinedFair value of assets acquired

$
1,379,975

$
559,924

$
1,939,899Liabilities assumed


(388,838
)

(124,924
)

(513,762
)Stock issued


(485,758
)




(485,758
)Stock issuable


(242,879
)




(242,879
)Cash paid


262,500


435,000


697,500Less: cash acquired


(77,767
)

(74,233
)

(152,000
)Net cash paid for acquisitionsFiscal 2002

$
184,733

$
360,767

$
545,500


See
accompanying notes to consolidated financial statements

F-7

---



Traffix, Inc. and SubsidiariesNotes to Consolidated Financial Statements

1.     Significant Accounting Policies



Traffix, Inc. and its consolidated subsidiaries (collectively, "Traffix" or the "Company") provide consumer targeted direct marketing and customer
acquisition services for businesses. The Company utilizes its proprietary and affiliate on-line databases to generate its revenue from direct marketing activities delivered by the
Internet. The Company's on-line databases grow through on-line marketing and data acquisition programs. The Company's direct marketing activities have historically been divided
into three principle operating segments: a) E-commerce, b) Off-line Marketing Services, and c) LEC Billed Products and Services, with
(c) reactivated during the fiscal year ended November 30, 2003.

The
Company's main focus and business strategy is to create compelling content as marketing vehicles that generate revenue for its corporate advertisers and marketing affiliates who seek
access to the Company's databases, and the databases of its affiliates under management.

Our
expansion in, and dependence on, our on-line direct marketing efforts, coupled with the potential for state and/or federal legislation limiting on-line
marketing's consumer contact capability and the potential for seasonality within the E-commerce marketplace, 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.



It is the Company's policy to prepare its financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in
the United States of America.

The
consolidated financial statements of the Company include the accounts of its wholly-owned and majority-owned subsidiaries. Any losses allocated to minority interests are limited to
contributed minority interest capital. All significant intercompany accounts and transactions have been eliminated in consolidation.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company's
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company's most significant estimates relate to the accruals for
fulfillment redemptions, reserves for uncollectible receivables, reserves for data qualification allowances, recoverability of long-lived assets, and the realizability of deferred tax
assets. Additionally, the Company has potential exposure resulting from pending and/or threatened litigation for which the Company currently assesses no risk and does not provide for loss until such
time as potential amounts are considered probable and can be reasonably estimated.



The Company currently earns the most significant portion of revenue from its E-commerce segment pursuant to marketing agreements with marketing
partners and corporate customers (collectively, "Corporate Customers"). The provisions of each agreement determine the type and timing of revenue to be recorded. The Company generates its
E-commerce revenue from the following nine

F-8

---

basic
categories: (1) delivery of consumer traffic to the websites and inbound telemarketing call centers of its Corporate Customers (e.g., click-thrus from the game banners on the Company's
websites), (2) delivery of consumer data to Corporate Customers with respect to the consumers who have registered for Corporate Customers' products or services (e.g., a consumer who registered
via the registration page of one of the Company's websites to receive on-line promotions from Corporate Customers), (3) delivery of pre-qualified consumer data to
Corporate Customers as a result of consumers' responses to targeted questions and surveys (e.g., receiving free gifts for your children), (4) delivery of a sale or completed application for a
Corporate Customer's product or service (e.g., a consumer who responds to a Traffix email promotion on behalf of a Corporate Customer by completing an on-line application for a credit card
or subscribing for a cellular phone service), (5) generating revenue from any of the foregoing categories by placing Corporate Customers' offers on the media of third parties with whom the
Company has a marketing relationship on a revenue share basis, (6) sales of inexpensive gift items directly to consumers, (7) rentals and sales of copies of specific segments of the
Company's databases to Corporate Customers for their proprietary marketing and database enhancements, (8) sales of memberships to the Company's online dating service, iMatchUp.com, and
(9) customer acquisition services, both on-line and off-line, under a net branch agreement with a qualified mortgage banking establishment. Regarding the Company's net
branch agreement revenues, see Note 1 for a discussion of the disposition of the Company's majority owned subsidiary that generated such revenue.

During
the fiscal year ended November 30, 2003, the Company introduced two additional revenue sources to its product and service suite. Such revenue sources include a proprietary
on-line dating service (referenced above as item (8)) and proprietary ISP, Email and Voice Over Internet LD service offers (included in the LEC Billed Product and Service segment). The
combination of the two newly introduced revenue sources accounted for approximately 17% of the Company's revenue for the fiscal year ended November 30, 2003.

The
Company invoices its customers in accordance with the terms of their respective underlying agreement. Revenue is recognized at the time the marketing activity is delivered, or
service is provided (normally, either daily or weekly), net of estimated contractually specified data qualification allowances, when applicable. Such data qualification allowances may include
duplications, invalid addresses, age restrictions and other allowances. Historically, the variance between actual allowances and previously estimated allowances has been immaterial. The Company
records all related obligations associated with the related net revenue at its point of recognition.

Membership
revenue on the Company's online dating service is billed to members in one-month, three-month and annual terms. The monthly memberships are recognized as revenue
in the month billed (which is the same month as the services are provided). Three month and annual memberships are deferred and recognized over the subscription term.

Revenues
from the Company's off-line customer acquisition services historically consisted of residential long distance customer acquisition programs, and were recorded upon
the achievement of certain events particular to the corresponding program's fulfillment liability. For example, subsequent to the delivery of the initial sales record to the respective long distance
carrier, the Company may have been required to provide to the customer certain products and services (fulfillment liability), such as cellular phones and/or other premiums. These costs were estimated
and accrued, based upon historical fulfillment costs, as a component of marketing expense and included in the cost of sales at the time the associated revenues were recognized. Historically, the
Company has recognized variances between the actual fulfillment experience, when comparing such experience to previously estimated fulfillment accruals. This variance is attributable to significant
variations in consumers' redemption behavior as

F-9

---

accumulated
on a premium-by-premium basis. The variance in said estimates continue to be reflected in current operations when facts and circumstances allow for their
measurement.

The
Company's current business, as conducted in its E-commerce segment, also may require the provision of a premium; premiums are also referred to as fulfillment costs
elsewhere. These E-commerce segment premiums are estimated and accrued, based upon historical and current experience. Such E-commerce premium costs are classified as a
component of marketing expense and are included in the cost of sales at the time the associated revenues are recognized. Any variance in the initial accrual, as compared to the actual experience, is
included in the financial statements for the period that the variance is determinable. The fiscal year ended November 30, 2003 included a reduction to fulfillment expense of approximately
$629,000 relating to the estimated fulfillment expense adjustment resulting from the termination of the fulfillment liability associated with a former major customer.

Revenue
from the Company's LEC Billed Product and Service segment, which resumed activity during the fiscal year ended November 30, 2003, consists of Local Exchange Carrier
("LEC") billed Internet based products. Such products include an Internet Service Provider ("ISP") product, an email service product and a Voice Over Internet Protocol product. The revenue from such
services is recognized net of an estimated provision for refunds, credits and adjustments subsequently granted to customers ("customer chargebacks"). Customer chargebacks are reflected as a
contra-revenue account within the Company's statement of operations. Since the provision for customer chargebacks is established prior to the periods in which chargebacks are actually expended, the
Company's revenues are adjusted in later periods if the Company's incurred chargebacks vary from the amounts previously estimated.

Revenues
from the Company's off-line marketing services segment during the fiscal year ended November 30, 2003 included the revenue earned by Montvale Management, LLC,
the Company's majority-owned subsidiary. The Company sold its interest in such subsidiary to the other member thereof on March 7, 2003 (see Note 1). Such revenues represented
approximately $2.4 million, or 7%, respectively, of the Company's consolidated net revenues for the fiscal year ended November 30, 2003, compared to $3.9 million, or 11%, of the
Company's consolidated net revenues for the fiscal year ended November 30, 2002. Such revenue resulted from Montvale's commission earned for the provision of net branch services to a mortgage
banking institution. Under such arrangement Montvale managed the branch offices and loan origination business of a single third party licensed mortgage banker. Approximately 15% of Montvale's revenues
were derived from on-line sources, with such portion then being included in the Company's E-commerce segment. Montvale recognizes its commission upon the closing of the loan,
with a provision for mortgage refinance rescissions applicable to mortgage refinances consummated within the last 3 business days of the quarter (as all refinancings are subject to a federally
mandated 3-day right of rescission). Actual experience regarding rescissions indicates that the historical variance between rescission provisions and the actual rescissions have been
immaterial.



The Company provides for the estimated costs to fulfill customer premium obligations arising from certain of its customer acquisition services upon the
recognition of the related revenue. Such reserves are determined based upon actual experience, estimates as to new premium offers resulting from actual experience and managements' historical industry
experience. Such estimates are trued up against actual results, with the variance being charged to operations at that time.

F-10

---





The Company charges all research and development costs to site development and maintenance expense, and to miscellaneous general and administrative expense as
incurred.



The Company accounts for the costs of internal use software in accordance with Statement of Position 98-01, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Accordingly, costs other than reengineering costs are expensed or capitalized depending on whether they are incurred in the preliminary project stage,
application development stage or the post-implementation/operation stage. As of November 30, 2003 and 2002, the Company had $135,000 and $173,000 respectively, in unamortized
capitalized internal use software costs. Amortization of these costs was $38,000, $17,000 and $-0- during fiscal 2003, 2002 and 2001, respectively.



Basic earnings per common share is based on the weighted-average number of common shares outstanding during each reporting period. Diluted earnings per common
share is based on the weighted-average number of common shares and the effect of dilutive common shares (stock options) outstanding during each reporting period.



Financial instruments that potentially subject the Company to concentration of credit risk have historically consisted of cash and cash equivalents, marketable
securities and accounts receivable. Currently the Company invests the majority of its excess cash in high-grade commercial paper, with maturities ranging from one month to three years with
certain investments. Substantially all of the Company's cash and cash equivalents, and short-term investments, are held by four major U.S. financial institutions. Consistent with the
above, the Company maintains Board of Director established guidelines requiring diversification yielding safety and liquidity.

Cash
and cash equivalent balances are principally held at four financial institutions and may, at times, exceed insurable amounts. The Company believes it mitigates its risks by
investing in or through major financial institutions. Recoverability is dependent upon the performance of the institutions.



All short-term investments with an original maturity of less than one month are considered to be cash equivalents.



The Company's marketable securities have historically consisted of corporate commercial paper, auction rate securities and equity securities, all of which are
held for varying and indefinite periods of time, pursuant to maturity dates, market conditions and other factors. It is the Company's intent to maintain a liquid portfolio to take advantage of
investment opportunities; therefore, all marketable securities are considered to be available-for-sale and are classified as current assets. Accordingly, such securities are
stated at fair value, with unrealized gains and losses, net of the estimated tax effects when applicable, being included in other comprehensive income (loss) as a separate component of

F-11

---

shareholders'
equity, until realized. Actual sales of securities resulting in realized gains and losses on marketable securities are included in the statement of operations, as a component of "Other
income (expense)" and are derived using the specific identification method for determining the cost of securities.



The Company's foreign subsidiary uses its local currency as its functional currency; correspondingly assets and liabilities are translated at exchange rates in
effect at the balance sheet date, with the resulting translation adjustments being recorded directly to other comprehensive income (loss), as a separate component of shareholders' equity; and income
and expenses are translated using average exchange rate for the periods presented.



Accounts receivable consist of trade accounts receivable from the Company's Corporate Customer base, with extension of credit varying between 30 to
90 days, with the majority at 30 days. Additionally, accounts receivable from Local Exchange Carriers (LEC Segment) and credit card companies (on-line dating service) are due
to the Company. The Company's customer base is comprised of domestic entities with diverse demographics. The allowance for doubtful accounts is based on management's evaluation of the collectibility
of receivables after giving consideration to current delinquency data, historical loss experience and general economic conditions, both at the Company level and sector/industry level. The Company's
accounts receivable balances are continually reviewed by management, and when situations dictate, provisions for losses are recorded. Additional allowances might be required if the original estimates
for loss prove to be inadequate. See "Estimates" included above.



The Company's accounts receivable, as described above, is reported net of an allowance for contractually specified data qualification allowances. Such data
qualification allowances are reflected as a reduction to accounts receivable, and as a contra revenue account in arriving at the Company's reported net revenue. Contractually specified data
qualifications allowances are determined pursuant to the terms of the Company's marketing agreements with its corporate customers. These allowances include reductions to the gross amount of records
shipped to, accepted by, and invoiced to the Company's corporate customers. The allowance relates to data that fails to meet: (1) minimum age restrictions, (2) country residence
restrictions, (3) pre-existing relationships of such data with the respective corporate customers, (4) duplications of names within the same file transfer and
(5) other data qualifications specific to the terms of the underlying marketing offer. The Company's methodology in determining the allowance for data qualifications is based on the Company's
historical experience regarding data qualifications with existing corporate clients, and the application of such experience to similar products in the case of new corporate clients whose marketing
agreements call for data qualification allowances.



Historically, the significant portion of the Company's revenue was dependent on a limited number of major customers. During Fiscal 2003, pursuant to a change in
our business model, no individual customer relationship equaled, or exceeded the 10% of current year's revenue threshold for major customers. During the year ended November 30, 2002, the
Company reported five major customers, which in combination, accounted for approximately $22 million, or 50% of Fiscal 2002 consolidated

F-12

---

revenue.
During the year ended November 30, 2001, the Company reported six major customers, which in combination, accounted for approximately $18 million, or 55% of Fiscal 2001
consolidated revenue.



Property and equipment are stated at cost and are depreciated using the straight-line method over a three to five year useful life depending on the
nature of the asset. Leasehold improvements are amortized over the life of the improvement or the term of the lease, whichever is shorter. Expenditures for maintenance and repairs are expensed as
incurred while renewals and betterments are capitalized.

Upon
retirement or disposal, the asset cost and related accumulated depreciation and amortization are eliminated from the respective accounts and the resulting gain or loss, if any, is
included in the results of operations for the period.



Goodwill and other identifiable intangibles represent the excess of purchase price over the fair value of minority interest in GroupLotto, Inc. a wholly
owned subsidiary. The aggregate amount of such cost was $1,445,845, which will be amortized on a straight-line basis over five years. Amortization expense was approximately $599,000,
$533,000 and $108,000 in the fiscal years ended November 30, 2003, 2002 and 2001, respectively.



If events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company estimates:
(a) the future cash flows expected to result from the use of such asset over its remaining useful life and (b) the potential cash flows realizable from its possible disposition. If the
sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the long-lived asset, an impairment loss is measured as a difference
between carrying amount and the future discounted cash flows (See Notes 1, 4, 5 and 6).



Deferred tax assets and liabilities are based on the expected future tax consequences of events that have been included in the financial statements or tax
returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation allowances are provided against deferred tax assets, which are not likely to be realized (see Note 9).



The Company's advertising and marketing costs, incurred in the advertising and marketing of the products, services and promotional offers of its marketing
clients, are comprised of (1) costs associated with the transmission of email marketing messages, both from internal sources and external third party vendors, (2) costs associated with
on-line customer acquisition data, (3) costs associated with the fulfillment obligations relating to premiums offered in conjunction with the Company's promotions, and
(4) email program promotional and creative development costs. Such costs are charged to operations (1) at the time of the email transmission, (2) upon receipt of the qualified
customer acquisition data, (3) at the time the premium obligation related revenue is recorded, and (4) at the time the

F-13

---

promotional
and creative services are provided, respectively, and are included as a component of cost of sales.

Total
advertising and marketing expenses by segment for fiscal 2003, 2002 and 2001 were as follows:

Consolidated Advertising and Marketing Costs
Year ended November 30,2003

2002

2001E-commerce

$
11,327,208

$
11,278,745

$
7,519,511Off-line Marketing Services


261,786


619,331


1,194,026Consolidated totals

$
11,588,994

$
11,898,076

$
8,713,537




The Company presents foreign currency translation adjustments and unrealized gains and losses on its marketable securities as a component of "Comprehensive income
(loss)" and are presented below:

Year Ended November 30,2003

2002

2001Net income

$
420,900

$
2,741,390

$
417,499Other comprehensive income (loss), net of tax:Foreign currency translation adjustment


476,311


1,171


Unrealized gain (loss) from available-for-sale securities, net of income taxes of, $-0- for 2003, $-0-for 2002 and $-0- for 2001


338,319


(40,692
)

614,561Less: reclassification adjustment for lossesRealized in net income








4,188,957Add: reclassification adjustment for gainsRealized in net income








(345,291
)Comprehensive income

$
1,235,530

$
2,701,869

$
4,875,726




Pursuant to Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, the
Company will continue to use the intrinsic value method of accounting for its employee and director stock-based compensation awards. Accordingly, the Company has not recognized compensation expense
for its noncompensatory employee and director stock option awards. As recommended by SFAS No. 123, the fair values of options were estimated using the Black-Scholes option-pricing model. Option
vesting periods have historically been three years, except for grants to non-employee members of the Board of directors, which fully vest at the time of grant. The Company's adjusted net
income and adjusted earnings per share had it elected

F-14

---

to
adopt the fair value approach of SFAS No. 123, which charges earnings for the estimated fair value of stock options, would have been as follows:

|                                                                                                                  |  | Three Years Ended
November 30, |         
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --------
|
|Net income, as reported                                                                                           |  | $                              | 420,900 
|Total stock-based compensation expense incurred in as reported net income, net of related tax effects             |  |                                | 0       
|Less: Total stock-based compensation expense determined under fair value based method, net of related tax effects |  |                                | (889,759
|                                                                                                                  |  |                                |         
|Pro forma Net income(loss), as adjusted                                                                           |  | $                              | (468,859
|Basic net income(loss) per share:                                                                                 |  |                                |         
|As reported                                                                                                       |  | $                              | 0.03    
|Pro forma                                                                                                         |  | $                              | (0.04   
|Diluted net income(loss) per share:                                                                               |  |                                |         
|As reported                                                                                                       |  | $                              | 0.03    
|Pro forma                                                                                                         |  | $                              | (0.04   

The
pro forma amounts shown above are not necessarily representative of the impact on net income in future periods.



Segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating
decision maker(s) in deciding how to allocate resources and in assessing performance. Disclosure is also required about products and services, geographic areas and major customers. The Company's three
principle operating segments are: a) E-commerce, b) Off-line Marketing Services, and c) LEC Billed Products and Services, with the related segment
disclosure information presented in Note 14.



In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 19 amends
and clarifies financial accounting and reporting of derivative instruments hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 149 amends SFAS No. 133 for decisions made:



In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity

F-15

---

and
further requires that an issuer clarify as a liability (or an asset in some circumstances) financial instruments that fall within its scope because the financial instrument embodies an obligation
of the issuer. Many of these instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial position and results of
operations.

In
July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which addresses the
recognition, measurement and
reporting of costs associated with exit or disposal activities. SFAS No. 146 requires the recognition of a liability for a disposal activity, including those related to employee termination
benefits and obligations under operating leases and order contracts, and that the liability be recognized when incurred and not necessarily on the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that the initial measurement of a liability be based on fair value. The provisions of SFAS No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. We have not had any exit or disposal activities since the adoption of the standard.

In
November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21 (EITF No. 00-21), Multiple-Deliverable Revenue
Arrangements. EITF No. 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The
consensus mandates how to identify whether goods or services or both that are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are separate
units of accounting. The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of
individual items accounted for separately. The final consensus is applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB
No. 20, Accounting Changes. We are assessing the impact of EITF No. 00-21 and believe that the adoption will not have a material impact on our financial position and results
of operations.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 18 requires disclosure of the pro
forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The interim
disclosure requirements are effective for interim periods beginning after December 15, 2002. We have applied the disclosure provisions of SFAS No. 148.

In
January 2003, the FASB issued FIN No. 146, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Fin No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions for Fin No. 46
must be applied for the first interim or annual period ending after December 15, 2003. We

F-16

---

believe
that the adoption of this standard will have no material impact on our financial position and results of operations.



Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.



In March 2003, the Company sold its majority owned subsidiary, Montvale Management LLC ("Montvale") to Mortgage Industry Consultants, LLC ("MIC") for
$1.6 million, plus its investment. Traffix had obtained its 51% interest in September of 1999 through an initial investment of approximately $50,000. Pursuant to the terms of the sale, we
received $1 million in cash at closing on March 7, 2003. Additionally, we received a note from the Purchaser for $600,000, payable in 24 monthly installments of $25,000. As of
February 1, 2004, ten installments were received under the note. The Company has also received approximately $299,000, representing its GAAP basis capital account in such majority owned
subsidiary as at November 30, 2002.

Based
on management's assessment of Montvale's future cash flows, after taking into consideration Montvale's increased obligations with respect to the note obligations due the Company,
the Company has deemed it prudent to defer recognition of income on the unpaid portion of the note. Recognition will take place in future periods under the cost recovery method.

The
Company also entered into a two-year Media Purchase Agreement whereby it agreed to provide certain media lead generation and related services to the continuing owners of
Montvale for consideration of $40,000 per month over the term of the agreement. As of February 1, 2004, seven installments were received under the Media Purchase Agreement.

In
December 2001, the Company acquired 100% of the assets of the following two entities for a total cost of $1,676,682. The components of the asset purchase prices are set forth
following the descriptions of the assets acquired:



F-17

---







The total purchase price for these two acquisition was: (a) cash of $897,500, of which $697,500 was paid simultaneous with the respective asset acquisition
closings in December 2001 and $200,000 of which was payable to the sellers of Infiknowledge on December 6, 2002 and which is included as a component of the Company's accrued expenses as
at November 30, 2002; and (b) 117,521 shares of the Company's common stock, valued at $6.20 per share (the average closing prices of the Company's stock for the period December fourth to
December tenth of 2001), which accounted for the additional consideration in the InfiKnowledge asset acquisition. Of the total share consideration, 39,174 of such shares were issued at the closing of
the InfiKnowledge acquisition and 78,347 shares remained issuable, with 39,174 shares issued on December 6, 2002 and 39,173 shares issued on December 6, 2003. The issuable shares were
considered as outstanding common shares in the computation of both basic and diluted weighted shares outstanding for the period December 6, 2001 to November 30, 2003. Goodwill and other
intangible assets recognized in the transactions amounted to $1,499,512, of which approximately 90%, or $1.3 million, is expected to be deductible for income tax purposes. The goodwill and
other intangibles were assigned to the E-commerce segment.

2.     Related Party Transactions

The Company incurred approximately $733,000, $798,000 and $745,000, respectively, during fiscal 2003, 2002 and 2001, in legal fees to a firm having a member who
is also a director of the Company. The fees charged by such firm were at rates comparable to rates obtainable from other firms for similar services.

During
the year ended November 30, 2002, the Company consummated certain transactions with Eric Aroesty, a former principal stockholder, executive officer and director of our
Company (the "Closing"), the specifics of the transactions are included below:



F-18

---



The
Company included the above Items (i), (ii) and (iii), in its Consolidated Statement of Shareholders' Equity for the year ended November 30, 2002, with items
(i) and (iii) being included under the line item "Purchase and retirement of common stock", and item (ii) was included under the line item "Stock
option exercises" (the balance of such line item consisted of other routine employee stock option exercises).

Furthermore,
FASB Interpretation No. (FIN) 44, paragraph 14(a), provides, in part, that if an option is exercised (the "Exercise"), and within six months after the Exercise the
company repurchases the shares acquired upon such Exercise (the "Repurchase"), the portion of the consideration paid by the company in the Repurchase that exceeds the exercise price paid upon the
Exercise (the "Excess Amount") shall be deemed by the company to be compensation. In accordance with FIN 44, the Company included the $281,657 Excess Amount received by Mr. Aroesty in the line
item "General and Administrative Expenses" under its Consolidated Statement of Operations for the year ended November 30, 2002, and further explains the same in the footnote of Note 14.

3.     Marketable Securities

The carrying amount of the Company's marketable securities is shown in the table below:

|                               |                            | November 30,
|------------------------------ | -------------------------- | ------------
|
|
|Available-for-sale securities: |                            |             
|                               | Equity securities          |             
|                               | Certificates of deposit    |             
|                               | Annuity                    |             
|                               | Corporate commercial paper |             
|                               |                            |             
|                               |                            | Total       
|                               |                            |             

Marketable
securities shown in the above table are carried at historical cost, as at November 30, 2003 and 2002, respectively, and stated at fair value; the cost basis of
marketable securities with scheduled maturities within one year were $24,990,000 and $13,150,000 for fiscal 2003 and fiscal 2002, respectively.

Proceeds,
realized/unrealized gains and realized/unrealized losses from sales of securities classified as available-for-sale for fiscal year 2003, 2002 and 2001
consisted of the following:

|                                     |  | 2003 |             | 2002 |   | 2001        |  
|------------------------------------ |  | ---- | ----------- | ---- | - | ----------- | -
|Proceeds from sales of securities    |  | $    | 296,016,630 |      | $ | 186,861,999 |  
|Gross realized gains                 |  |      | 21,478      |      |   | 103,729     |  
|Gross realized losses                |  |      | (1,748      | )    |   | (27,122     | )
|Comprehensive income gains(losses):  |  |      |             |      |   |             |  
|Gross unrealized gains               |  |      | 411,528     |      |   | 198,908     |  
|Gross unrealized losses              |  |      | (73,209     | )    |   | (239,600    | )
|                                     |  |      |             |      |   |             |  
|Total gross unrealized gains(losses) |  |      | 338,319     |      |   | (40,692     | )
|                                     |  |      |             |      |   |             |  

During
the year ended November 30, 2001, specifically within the three months ended February 28, 2001, the Company recognized losses through an impairment charge of
$4,190,207 on its available-for

F-19

---

sale
marketable securities. The underlying securities and related recognized losses (after the historical carrying values of such securities were reduced to their respective closing prices on
February 28, 2001) were as follows:

Company

Loss AmountMy Points, Inc. (Nasdaq: MYPT)

$
2,553,778SkyMall, Inc. (Nasdaq: SKYM)

$
1,386,429Predict It, Inc. (Nasdaq: PRIT.OB)

$
250,000Total Loss Amount

$
4,190,207


The
Company held all of such securities for periods in excess of six months. The Company had continually evaluated the carrying value of such investments. On April 1, 2001, the
Company determined that, based upon the precipitous decline in the share values of each of the above companies, as well as the overall market conditions at that time, it was probable that the decline
was other than temporary in
accordance with Financial Accounting Statement (FAS) 115, paragraph 16. As a result, the Company adjusted the "cost basis" of these securities during the year ended November 30,
2001(specifically as effective February 28, 2001), to the closing prices of the respective securities on such date and realized the corresponding impairment loss. This loss was included in the
Company's "other income (expense), Permanent impairment charges", for the year ended November 30, 2001.

The
My Points, Inc. impairment charge/loss of $2,553,778 was calculated as being the difference between the Company's $2,681,778 basis in its My Points, Inc. shares (or
117,023 shares at $22.9167 per share) and the $128,000 market value of such shares at February 28, 2001, based upon a closing price of $1.09380 per share.

The
SkyMall, Inc. impairment charge/loss of $1,386,429 was calculated as being the difference between the Company's $1,740,000 basis in its SkyMall, Inc. securities (or
188,571 shares at $5.250 per share and 214,286 warrants at $3.50 per warrant) and the $353,571 market value of such shares and warrants at February 28, 2001, based upon a closing price for the
shares of $1.8750 per share and $-0- per warrant, due to the absence of a trading market therefor.

The
Predict It, Inc. impairment charge/loss of $250,000 was calculated as being the difference between the Company's $250,000 basis in its Predict It, Inc. securities (or
250,000 shares at $0.10 per share and 500,000 warrants at $0.45 per warrant) and the $-0-market value of such shares and warrants at February 28, 2001, due to the absence of a
trading market therefor.

F-20

---

4.     Goodwill and identifiable intangible assets

The gross carrying value and accumulated amortization of goodwill and other intangibles are as follows:

|                                        |  | As of November 30, 2003 |           | As of November 30, 2002
|--------------------------------------- |  | ----------------------- | --------- | -----------------------
|
|Amortizable intangible assets:          |  |                         |           |                        
|GroupLotto identifiable intangibles:    |  |                         |           |                        
|GroupLotto Site Brand Recognition       |  | $                       | 722,922   |                        
|GroupLotto Database                     |  |                         | 433,754   |                        
|Intellectual Property Assets            |  |                         | 289,169   |                        
|Marketing Right License Fee             |  |                         | 300,000   |                        
|Infiknowledge identifiable intangibles: |  |                         |           |                        
|Internet Game Suite                     |  |                         | 231,543   |                        
|Intellectual Property Assets            |  |                         | 173,657   |                        
|Market Position Acquired                |  |                         | 201,525   |                        
|Thanksmuch identifiable intangibles:    |  |                         |           |                        
|Profiled customer data                  |  |                         | 50,000    |                        
|Restrictive Covenants                   |  |                         | 10,000    |                        
|                                        |  |                         |           |                        
|Total amortizable intangible assets     |  | $                       | 2,412,570 |                        
|                                        |  |                         |           |                        
|Unamortized intangible assets:          |  |                         |           |                        
|GoodwillInfiknowledge                  |  | $                       | 781,789   |                        
|GoodwillThanksmuch                     |  |                         | 289,736   |                        
|                                        |  |                         |           |                        
|Total Goodwill                          |  | $                       | 1,071,525 |                        
|                                        |  |                         |           |                        

The
Infiknowledge identifiable intangibles and unamortizable goodwill gross carrying amount changes as a result of the effects of foreign currency exchange translation.

The
amortizable intangibles listed above are deemed to have a finite life of five years, or less, from the date of acquisition; the straight-line method of amortization has
been applied to such assets in calculating their respective amortization. The Internet and E-commerce industries, within which the Company conducts the majority of its business and has
extensive experience, are dynamic and constantly evolving business arenas. Based on the its experience in these industries, the Company evaluated the nature of each of the components of the
identifiable intangible assets and determined that a five-year useful life, with corresponding straight-line amortization, was the most accurate available means of estimating
such assets' finite lives. In future fiscal periods, if facts or circumstances arise that indicate the five-year useful life assigned to such assets was, in fact, inaccurate, the Company
will make the appropriate adjustments at that time.

F-21

---



The Infiknowledge acquisition indentifiable intangibles related amortization expense has been recorded for the period December 6, 2001 (date of
acquisition) to November 30, 2003.

The
ThanksMuch acquisition indentifiable intangibles related amortization expense has been recorded for the period December 14, 2001 (date of acquisition) to November 30,
2003.

The
GroupLotto acquisition indentifiable intangibles related amortization expense has been recorded for the July 23, 2001 (date of acquisition) to November 30, 2003.

The
future intangible amortization expense for the next five fiscal years is estimated to be as follows:

|                                                |                                            | 2004 |         | 2005    |   | 2006    |         | 2007 |         | 2008   
|----------------------------------------------- | ------------------------------------------ | ---- | ------- | ------- | - | ------- | ------- | ---- | ------- | -------
|GroupLotto Identifable intangible amortization: |                                            |      |         |         |   |         |         |      |         |        
|GroupLotto Site Brand Recognition               |                                            | $    | 144,595 |         | $ | 144,595 |         | $    | 92,092  |        
|GroupLotto Database                             |                                            |      | 86,757  |         |   | 86,757  |         |      | 55,257  |        
|Intellectual Property Assets                    |                                            |      | 57,838  |         |   | 57,838  |         |      | 36,837  |        
|Marketing Right License Fee                     |                                            |      |        |         |   |        |         |      |        |        
|                                                |                                            |      |         |         |   |         |         |      |         |        
|                                                | Total Group's amortization                 |      | $       | 289,189 |   | $       | 289,190 |      | $       | 184,186
|                                                |                                            |      |         |         |   |         |         |      |         |        
|Infiknowledge Identifable intangibles:          |                                            |      |         |         |   |         |         |      |         |        
|Cost allocated                                  |                                            |      |         |         |   |         |         |      |         |        
|Internet Game Suite                             |                                            | $    | 46,242  |         | $ | 46,242  |         | $    | 46,242  |        
|Intellectual Property Assets                    |                                            |      | 34,682  |         |   | 34,682  |         |      | 34,682  |        
|Market Position Acquired                        |                                            |      | 40,248  |         |   | 40,248  |         |      | 40,248  |        
|                                                |                                            |      |         |         |   |         |         |      |         |        
|                                                | Total Group's amortization                 |      | $       | 121,172 |   | $       | 121,172 |      | $       | 121,172
|                                                |                                            |      |         |         |   |         |         |      |         |        
|ThanksMuch Identifable intangibles:             |                                            |      |         |         |   |         |         |      |         |        
|Profiled customer data                          |                                            | $    | 16,667  |         | $ | 5,124   |         |      |         |        
|Restrictive Covenants                           |                                            |      | 2,000   |         |   | 2,000   |         |      | 1,693   |        
|                                                |                                            |      |         |         |   |         |         |      |         |        
|                                                | Total Group's amortization                 |      | $       | 18,667  |   | $       | 7,124   |      | $       | 1,693  
|                                                |                                            |      |         |         |   |         |         |      |         |        
|Summary                                         |                                            |      |         |         |   |         |         |      |         |        
|GroupLotto Identifable intangibles:             |                                            | $    | 289,189 |         | $ | 289,190 |         | $    | 184,186 |        
|Infiknowledge Identifable intangibles:          |                                            |      | 121,172 |         |   | 121,172 |         |      | 121,172 |        
|ThanksMuch Identifable intangibles:             |                                            |      | 18,667  |         |   | 7,124   |         |      | 1,693   |        
|                                                |                                            |      |         |         |   |         |         |      |         |        
|                                                | Total identifiable intangible amortization |      | $       | 429,028 |   | $       | 417,486 |      | $       | 307,051
|                                                |                                            |      |         |         |   |         |         |      |         |        

For
all of the above referenced acquisition based intangibles, there are no contingencies for cash and/or shares, other than those described in Note 1 to the financial statements.

F-22

---

5.     Property and Equipment

Property and equipment for the years ended November 30, 2003 and 2002 consists of the following:

2003

2002Furniture and fixtures

$
397,512

$
375,323Computers and equipment


4,123,996


3,379,468Land and Building


640,997


Leasehold improvements


224,038


97,5385,386,543


3,852,329Less: accumulated depreciation and amortization


2,587,138


1,683,173$
2,799,405

$
2,169,156


Depreciation
and amortization expense on property, equipment and leasehold improvements for the years ended November 30, 2003, 2002 and 2001 was approximately $904,000, $656,000
and $281,000, respectively.

6.     Marketable securities and Long-term investments, at cost, and prior year acquisitions

The Company's Long-term investments, at cost, include investment interests of less than 20% in private companies without a readily determinable market
value. If circumstances exist that indicate the carrying value of such investments is less than their recoverable value, the Company assesses the need to record an impairment loss. Key criteria that
the Company considers in its evaluation of potential impairment events include, but are not limited to: the underlying investment's failure to meet its operating projections; failure of the investment
to raise additional capital or acquire debt financing; failure to obtain and/or maintain key employees or acquire, or maintain, a specific market share; and the failure of the investments to achieve
initial short-term goals as defined in their business plans.



In Fiscal 2001, we acquired the minority interest in GroupLotto, Inc., a majority owned subsidiary prior to such acquisition, for consideration of
$1,445,845. The consideration consisted of 336,243 shares of Traffix, Inc. common stock issued on July 20, 2001, at a market value of $4.30 per share. The transaction was accounted for
under the purchase method, and, accordingly, the results of operations of the acquired minority interest are included in our consolidated results of operations from the date of acquisition.

During
the fiscal year ended November 30, 2000, the Company had invested approximately $500,000 in a private company, and carried the investment under the cost method. After
review of such investment, and the investment's continued failure to achieve significant goals set forth in its business and financing plans, such investment fell within the Company's impairment
evaluation criteria. According to the above analysis, the Company's impairment loss for the prior fiscal year's first quarter ended February 28, 2001 amounted to $500,051, and is included as a
component of other income (expense) "Permanent impairment charges" for the year ended November 30, 2001. During the prior fiscal year's second quarter ended May 31, 2001, this entity
effectively wound down operations and ceased doing business.

F-23

---

During
the prior fiscal year ended November 30, 2001, the Company recognized a loss on the MyPoints.com, Inc. shares (through a permanent impairment charge) of $2,553,778.
This permanent impairment was the result of the Company's evaluation of its marketable securities, in terms of measuring risk at the individual company level coupled with risk at the market level. As
a result of this analysis, the Company determined that the decline in the related security was "other than temporary" and, in response to such determination, recorded the aforementioned impairment
charge. On June 4, 2001, an affiliate of UAL Corp. (NYSE:UAL) announced that it intended to acquire all of the common stock of MyPoints.com, Inc. in a cash tender offer of $2.60 a share.
The Company tendered all of its MyPoints.com, Inc. shares during the third quarter of the fiscal year ended November 30, 2001 and recorded an approximate $224,000 gain at that time.

7.     Accrued expenses

Accrued expenses are comprised of the following at:

November 30,2003

2002Accrued payroll and bonuses

$
398,004

$
983,909Advances from customers


739,007


729,202Accrued fee share liabilities


504,944


805,632Accrued fulfillment/premium liabilities





628,083Accrued payables related to asset acquisition





200,000Other


1,333,012


1,110,818Total accrued liabilities

$
2,974,967

$
4,457,644


8.     Other Income(expense)

Other Income(expense) consisted of the following for the fiscal years ended November 30:

Year Ended November 30,2003

2002

2001Other income (expense):Interest expense

$


$
(101,385
)
$
(5,900
)Interest income and dividends


479,934


783,143


1,780,546Realized gains on sale of marketable securities


19,730


76,607


387,948Permanent impairment charges








(4,690,258
)Realized gain on sale of subsidiary


1,375,801





Other non-operating income:Talk.com Arbitration Settlement





2,342,123


P.M. Thomas Arbitration Settlement





(2,710,000
)

Residual loss from terminated programs








(57,344
)Other miscellaneous income(expense)


(54,068
)

(11,793
)

74,043Liquidation proceeds on prior year impairment loss





125,000


Minority interest (income) loss


(137,567
)

(402,716
)

(69,629
)Total Consolidated Other Income (Expense)

$
1,683,830

$
100,979

$
(2,580,594
)


F-24

---

Talk.com Arbitration Settlement

On November 12, 2001, the American Arbitration Association ("AAA") rendered an award (the "Award") to the Company in response to its claim against Talk.com
("Talk"). The Award was rendered in three components: (1) $3,155,355 plus interest of $260,316.78 for a total of $3,415,671; (2) $1,800,000 plus interest of $141,750 for a total of
$1,941,750; and (3) $774,441 plus interest of $62,440 for a total of $836,881. Immediately after the Award was communicated to the parties, Talk management negotiated a settlement with the
Company regarding terms of payment. Initially, the Company sought payment in full immediately and Talk sought a payment plan over time. The parties agreed on an immediate payment of
$3.7 million (which was received by the Company on November 19, 2001), and a subsequent payment of $2,494,303 with interest thereon at the rate of 9%, which was due on April 1,
2002. Such payment was received on April 1, 2002 in the amount of $2,543,916.40, which included interest of approximately $49,600.

The
description of the three financial components of the Award did not specifically set forth the reasons for each component. Nevertheless, based on the claims made by the Company in the
action before the AAA, the Company had sought approximately: (1) $3,155,355 for payment of an outstanding invoice for services rendered to Talk; (2) $1.8 million for a liquidated
damages claim as set forth in the Agreement between the parties, and (3) $775,000 for approximate revenue that would have been earned by the Company if Talk had given it the 30 days'
termination notice required to terminate the contract.

The
principal amounts of the above components (1) and (3) were recognized as revenue by the Company because component (1) represented amounts actually billed for
services rendered, and component (3) represented a minimal amount of revenue that should have been earned for services partially rendered during the "required 30 days notice to terminate
the contract" period. The Company treated the above component (2), the liquidated damages portion, and all interest thereon, as other miscellaneous income during the year ended November 30,
2002, upon receipt of the second installment in April of 2002.

In
the fourth quarter of fiscal 2001, the Company had recognized $3.7 million in revenue which represented the collected portion of the $3,929,795 in principal awarded in
components (1) and (3). The Company recognized the revenue balance of $229,795 during the year ended November 30, 2002, specifically during its quarter ended May 31 of such year.
The balance of the April 2002 payment, which was deemed to include the liquidated damages and the interest income on the entire award, which amounted to $2,342,123, and was reported as a
component of the Company's "Other income(expense)", included in the line item "Other non-operating income expense" during the year ended November 30, 2002.



During the fiscal year ended November 30, 2002, specifically on June 3, 2002, the American Arbitration Association ("AAA") rendered an award in the
sum of approximately $2.3 million (inclusive of interest) in favor of the Claimants, in the arbitration entitledPhilip Michael Thomas, PMT Productions Inc., Kaye
Porter Management, RMI Entertainment, Inc., Millennium Telemedia, Inc., Claimants v. New Lauderdale, LLC d/b/a Calling Card Co., Psychic Readers Network, Inc. d/b/a PRN
Telecommunications, and Quintel Entertainment, Inc., Respondents (No. 131400004900)("Action"). The award
consisted of approximately $1.48 million in damages, plus interest at nine percent (9%) from January 1, 1996 and January 1, 1997, or approximately $785,000. The award also denied
Claimants' punitive damages and all other claims asserted in the arbitration.

F-25

---



Subsequent to the arbitration, in order to avoid the uncertainties and the possibility of further awards in the Action, the Company agreed to settle the claims in
the Action for approximately $435,000 and to pay the arbitration award in exchange for full releases from the claimants. As such, in September 2002, during the fiscal year ended
November 30, 2002, the combined total of $2.7 million was disbursed to the claimants.

The
Company had accrued and recorded the total settlement as a non-operating expense during the year ended November 30, 2002, describe in the table above as "P.M.
Thomas Arbitration Settlement".

9.     Income Taxes

The provision (credit) for income taxes consists of the following:

Year ended November 30,2003

2002

2001Current tax provision (benefit):U.S federal taxes

$
(112,336
)
$
75,262

$
3,444,673Foreign taxes


(32,173
)

330,401


U.S. state tax


(130,237
)

286,173


(1,154,105
)(274,746
)

691,836


2,290,568Deferred tax provision (benefit):U.S federal taxes


33,425


870,370


1,112,875Foreign taxes


86,226


(49,626
)

U.S. state tax


7,524


274,314


(128,243
)127,175


1,095,058


984,632Total (benefit) provision for income taxes

$
(147,571
)
$
1,786,894

$
3,275,200The domestic and foreign components of income before taxes are as follows:Domestic

$
(228,846
)
$
3,909,873

$
3,692,699Foreign


502,175


618,411


Income before taxes

$
273,329

$
4,528,284

$
3,692,699


F-26

---

The
following is a reconciliation of the income tax expense computed using the statutory federal income tax rate to the actual income tax expense and its effective income tax rate:

Year ended November 30,2003

2002

2001Income tax expense computed at U.S. federal statutory rate

$
92,932

$
1,539,617

$
1,217,170State income taxes, net of federal income tax benefit


(80,991
)

369,921


649,857Foreign tax statutory rate excess over U.S statutory rate


35,675


56,276


Tax settlements





(220,472
)

Capital losses generating no tax benefit








1,456,390Change in valuation allowance


(485,527
)

(66,647
)

(133,237
)Nondeductible items


125,103


108,199


85,020Foreign Tax Credits reclassified to expense


276,030





U.S. federal tax benefit from Foreign Tax Credit reclassification to expense


(112,336
)




Other differences, net


1,543





Effective income tax (benefit) expense

$
(147,571
)
$
1,786,894

$
3,275,200


The
fiscal 2002 reconciling item described as "tax settlements" relates to the settlement of tax liabilities for the 1996 through 1999 tax years, which were settled during the fiscal
year ended November 30, 2002 at amounts less than previously recorded.

F-27

---

The
components of net deferred tax assets are as follows:

November 30,2003

2002Deferred tax assets:Current:Accrued expenses and reserves not currently deductible

$
1,292,737

$
1,238,953Realized capital losses on marketable securities and long term investments


1,112,653


1,598,180Valuation allowance on realized capital losses


(1,112,653
)

(1,598,180
)Fixed Assets and Intangibles


3,246


9,838Foreign Income Tax Credit carryforward





276,030Total current assets


1,295,983


1,524,821Non-current:Fixed assets and intangibles


103,005


49,626Net operating loss carryforwards


168,739


Total noncurrent assets


271,744


49,626Total assets


1,567,727


1,574,447Deferred tax liabilities:State net operating losses


1,384,849


1,384,849Valuation allowance


(1,322,442
)

(1,322,442
)Fixed assets and intangibles


(202,859
)

(151,966
)Other


(67,368
)

Total noncurrent liabilities


(207,820
)

(89,559
)Net deferred tax assets

$
1,359,907

$
1,484,888


At
November 30, 2003 and 2002, valuation allowances of $1,322,442 were established, primarily for state tax net operating losses, which can not be carried back by statute, and
have reduced the deferred tax assets to an amount which the Company believes is more likely than not to be realized.

During
the years ended November 30, 2003 and 2002, the Company recognized $485,527 and $43,244, respectively, in tax savings related to net capital gains, which were not taxed,
based on the realization of the tax benefit of the prior year's capital loss valuation allowance. At November 30, 2003 and 2002, the capital loss deferred tax assets and related valuation
allowances were reduced for the respective current year's tax benefits realized. At November 30, 2003 the balance of the tax deferred asset relating to prior year's capital losses amounted to
$1,112,653, with a corresponding full valuation allowance of $1,112,653. Such capital losses expire on November 30, 2006.

The
Company has approximately $53 million of state net operating losses expiring through 2015.

10.   Regulatory Issues and Other Risk Considerations

Government Regulation

Federal legislation was signed into law, effective January 1, 2004, pre-empting all existing and pending state e-mail marketing
legislation. The CAN-SPAM Act of 2003 requires that certain "opt-out"

F-28

---

procedures,
including, but not limited to, a functioning return e-mail address (and a time limit of ten (10) days to comply with all opt-out requests sent by consumers),
be included in commercial e-mail marketing. The CAN-SPAM Act prohibits the sending of e-mail containing false, deceptive or misleading subject lines, routing
information, headers and / or return address information. The CAN-SPAM Act does not permit consumers to file suit against e-mail marketers for violation of such Act. 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. The Federal Trade Commission ("FTC") is empowered by the
CAN-SPAM Act to enact regulations, within the next four (4) to twenty-four (24) months, that would implement certain provisions of the CAN-SPAM Act
such as standardized subject line labeling, a "bounty" system to compensate consumers for being the first to report a spammer and a potential "do-not-spam registry." If the
regulations promulgated by the FTC specifically 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.

On
September 26, 2003, we were served with a Civil Investigative Demand by the Missouri Attorney General's Office requesting certain documents and inquiring into our Company's
merchandising practices in connection with games of chance available for entry at grouplotto.com. We have responded to the document and information requests and expect to hear back from the Missouri
Attorney General's Office shortly.

To
date, the Company has not been subject to any enforcement actions by any regulatory authority.

11.   Commitments and Contingencies



The Company is obligated under a noncancelable real property operating lease agreements that expire through in fiscal 2006. Future minimum rents consist of the
following at November 30, 2003:

2004

$
406,2242005


353,5932006


215,000Thereafter


$
974,817


Certain
leases contain escalation clauses with respect to real estate taxes and related operating costs. The accompanying financial statements reflect rent expense on a
straight-line basis over the term of the lease as required by accounting principles generally accepted in the United States of America. Rent expense for all leases was $456,000, $571,000
and $352,000 for fiscal 2003, 2002 and 2001, respectively.



The Company has entered into employment agreements, effective December 1, 2001, with certain executive officers of the Company. Such agreements expire on
November 30, 2004. Pursuant to the agreements said officers are entitled to an annual increase of at least ten percent (10%) more than the annual rate in the immediately preceding year; said
officers will each receive bonuses upon the Company's achievement of certain pre-tax income milestones, as well as discretionary bonuses subject to approval of the Company's Board of
Directors; said officers were each issued options to acquire

F-29

---

105,000
shares of the Company's Common Stock; said officers agreed not to compete or engage in a business competitive with the business of the Company during the term of the agreement and for a period
of one year thereafter; if an officer/employee's employment is terminated other than as a result of a "For Cause Event" (as defined in the agreements), he shall be entitled to receive additional
compensation and other consideration, all as more fully described in the agreements; and, if an employee's employment is terminated as a result of a "Change in Control" (as defined in the agreements),
he shall be entitled to receive a one-time payment in an amount equal to 2.99 times his "base amount" determined in accordance with the applicable provisions of the Internal Revenue Code.



Mavies WinglerOn or about May 9, 2001, Mavies Wingler commenced an action against Group Lotto, Inc. ("GLI"),
one of our wholly owned subsidiaries, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims to have picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States District Court, Southern District of West Virginia, and is entitledWingler v.
Grouplotto, Inc., Docket Number 2:01CV518. At the end of 2002, Ms. Wingler's attorney withdrew, and she is now representing herself. We
and GLI have a contract of indemnification with SCA Promotions, Inc. to be indemnified for prizes paid out to qualified winners. GLI winners are required to produce the Group Lotto Entry
Notification form ("GLEN") within a specified period of time after matching a drawing's winning numbers in order to qualify for receipt of the appropriate prize winnings. We do not believe that there
is any merit to Ms. Wingler's claim and intend to vigorously continue our defense thereof. Earlier this year, we filed a motion for summary judgment dismissing the complaint.

In
September 2003, the Magistrate Judge assigned by the Court to review and recommend on the motion, issued a report recommending that the complaint be dismissed.
Ms. Wingler has objected to the report. The Court is to rule on the report and the objection.

PlasmanetOn November 21, 2002, Plasmanet, Inc., one of our competitors, commenced an action alleging patent
infringement and misappropriation of trade secrets.Plasmanet, Inc. v. Apax Partners, Inc., et al.,Case No. 02 Civ 9290
(S.D.N.Y.). Plasmanet operates a website, FreeLotto.com, which is similar to one operated by GLI. Plasmanet alleged that on September 24, 2002 it obtained a patent for a "Free Remote Lottery
System" and that we infringed this patent. In addition, Plasmanet asserted that trade secrets were contained in a private placement memorandum and that we misappropriated these trade secrets after we
were allegedly shown such private placement memorandum by an agent of Plasmanet's investment banker. The complaint sought injunctive relief and unspecified money damages. We asserted counterclaims,
inter alia, to declare Plasmanet's patent invalid. In December 2003, the complaint was dismissed with prejudice with respect to Plasmanet's patent infringement claim and our counterclaims, and
without prejudice with respect to the misappropriation of trade secrets claim. Such misappropriation claim has been reasserted by Plasmanet in New York State court (Sup. Ct. N.Y. Co.,
January 27, 2004, Index No. 60021-04). We believe there is no merit to the reasserted claim and intend vigorously to defend against it.

Qwest CommunicationsQwest Communications, Inc. has notified us of an indemnification claim relating to a class action
filed against Qwest in Minnesota,Bindner v. LCI International Telecom Corp. et al., District Court of Minnesota, County of Sibley, Case No.
C0-00-242. In that action, plaintiffs claim that in late 1999 into mid-2000, they were misled when they were solicited to change their long distance carrier to
Qwest. They assert that they were not told that they would have to stay at certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We

F-30

---

introduced
the promotion ("Fly Free America") to Qwest, and had been retained by Qwest to operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement
terminating our contract and settling the amount due us (the "May 2000 Agreement"). The May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any
loss it may sustain by reason of this class action. We maintain that we have no liability in the matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false
advertising claims. The court has certified the class and Qwest is defending the action.

In
November 2002, we commenced an arbitration against Qwest to recover certain amounts due us pursuant to the May 2000 Agreement. In December 2002, Qwest filed
counterclaims in the arbitration relating to the Fly Free America program. Qwest asserts that we must indemnify Qwest for, among other things, fines and penalties amounting to approximately
$1.5 million which Qwest claims it paid in connection with a number of consent decrees it entered into with various state attorneys general, an unspecified amount of attorneys' fees, and any
and all expenses, penalties or other amounts Qwest becomes liable for in connection with the class action. Qwest also seeks reimbursement of approximately $3.1 million it paid us pursuant to
the May 2000 Agreement. A panel of arbitrators was
appointed in December 2003 and a preliminary conference was held in January 2004. After the conference, a schedule was established for substantive motions and for hearings in
June 2004. The arbitrators also provided for exchanges of information in the arbitration subject to Qwest's right to seek to prevent such exchanges. Qwest has moved to prevent exchanges of
information and we have opposed that motion. The motion is still in the briefing process and will be submitted to the arbitrators. We believe that there is no merit to Qwest's counterclaims and intend
vigorously to defend against them, as well as to pursue our claim.

Columbia House/RydelIn or about August 2002, Columbia House, one of our clients, notified us of an indemnification
claim relating to a class action filed against Columbia House, among others, in Illinois,Rydel v. Comtrad Industries, Inc. et al.,
Circuit Court of Cook County, Illinois, No. 02 CH 13269. In that action, plaintiff claims to have received unsolicited commercial e-mail from, among others, Columbia House, in
violation of Illinois law. Columbia House advised us that it believes that the email in question was not approved by Columbia House when it was sent, and asserted a claim for indemnification against
us pursuant to our contract. We and Columbia House agreed to defer resolution of the indemnification claim (and reserved each of our respective rights). Columbia House is defending against the class
action. Its motion to dismiss the complaint has been denied.

In
or about January 2003, we were named as a defendant in theRydelclass action. In an additional count in the complaint, the
plaintiff asserted that we violated the Illinois Consumer Fraud and Deceptive Business Practices Act by providing to a co-defendant a list of consumers who had consented to receive
commercial e-mails when, the complaint alleges, they had not. The complaint sought injunctive relief and unspecified damages. Our motion to dismiss the complaint was granted in
June 2003, and the plaintiff has filed an appeal. We believe that there is no merit to the claim, and, in the event the dismissal of the claim is reversed on appeal, we intend to vigorously
defend against it.

Missouri Civil Investigative DemandOn September 26, 2003, we were served with a Civil Investigative Demand by the
Missouri Attorney General's Office requesting certain documents and inquiring into our Company's merchandising practices in connection with games of chance available for entry at grouplotto.com. We
have responded to the document and information requests and await a response from the Missouri Attorney General's Office.

F-31

---

We
are unable to determine the ultimate outcomes of any of the foregoing claims or demands, and, accordingly, no provision for loss has been recorded in the financial statements included
in this Report.

12.   Earnings Per Share

The following table sets forth the reconciliation of the weighted average shares used for basic and diluted earnings per share:

Year Ended November 30,2003

2002

2001Denominator:Denominator for basic earnings per
shareweighted average shares

12,776,295

13,350,794

14,794,159Effect of dilutive securities:Stock options

309,002

896,656

602,460Denominator for diluted earnings per
shareadjusted weighted average shares

13,085,297

14,247,450

15,396,619


Options
to purchase 1,238,082, 919,291 and 661,250 shares of common stock that were outstanding at November 30, 2003, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share because their effect would be anti-dilutive. The vesting period of the options range from immediate vesting, to three-year, pro rata vesting, in
accordance with the terms authorized by the option compensation committee.

F-32

---



13.   Stock Option Plan and Warrants

During fiscal 1995, the Company implemented the 1995 Stock Option Plan (the "Stock Option Plan") effective as of October 1995. The Stock Option Plan
provides for the grant of options to purchase up to 750,000 shares of the Company's common stock either as incentive stock options ("Incentive Stock Options") within the meaning of Section 422
of the United States Internal Revenue Code or as options that are not intended to meet the requirements of such section ("Nonstatutory Stock Options"). Options to purchase shares may be granted under
the Stock Option Plan to persons who, in the case of Incentive Stock Options, are employees (including officers) of the Company or, in the case of Nonstatutory Stock Options, are employees (including
officers), consultants or nonemployee directors of the Company. The Stock Option Plan has been amended, most recently in August 2002 to provide for the granting of options to purchase
additional shares of the Company's common stock. After these amendments, there were a total of 5,350,000 grants made available to purchase the Company's common stock under the Stock Option Plans.

The
exercise price of options granted under the Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant or, in the case of Incentive Stock
Options granted to a holder of 10% or more of the Company's Common Stock, at least 110% of the fair market value of such shares on the date of grant. The maximum exercise period for which Incentive
Stock Options may be granted is ten years from the date of grant (five years in the case of an individual owning more than 10% of the Company's common stock).

In
addition, the Company's Stock Option Plan provides for certain automatic grants of options to the Company's nonemployee directors in consideration for their services performed as
directors of the Company and for attendance at meetings. It provides for a one-time automatic grant of an option to purchase 25,000 shares of common stock at market value to those
directors who were serving on the Board of Directors at the inception of the Stock Option Plan and also to those persons who become nonemployee directors of the Company in the future, upon their
appointment or election as directors of the Company. In addition, the amended Stock Option Plan provides for quarterly grants to each nonemployee director of the Company of options to purchase 6,250
shares of the Company's common stock at the market value on the date of each grant. The Company granted 125,000, 106,250 and 187,500 options to the nonemployee directors during fiscal 2003, 2002 and
2001, respectively.

A
summary of the Company's stock options is as follows:

|                                                               |  | 2003 |           | 2002 |   | 2001
|-------------------------------------------------------------- |  | ---- | --------- | ---- | - | ----
|
|Options outstanding, beginning of year                         |  |      | 2,773,085 |      | $ | 4.52
|Granted                                                        |  |      | 640,000   |      |   | 3.72
|Exercised                                                      |  |      | (159,704  | )    |   | 2.15
|Cancelled or lapsed                                            |  |      | (609,741  | )    |   | 3.74
|                                                               |  |      |           |      |   |     
|Options outstanding, end of year                               |  |      | 2,643,640 |      | $ | 4.60
|                                                               |  |      |           |      |   |     
|Options exercisable, end of year                               |  |      | 2,092,503 |      |   |     
|                                                               |  |      |           |      |   |     
|Options available for grant, end of year                       |  |      | 1,251,886 |      |   |     
|                                                               |  |      |           |      |   |     
|Weighted average fair value of options granted during the year |  | $    | 3.72      |      |   |     
|                                                               |  |      |           |      |   |     

F-33

---

The
weighted average fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following weighted average
assumptions used for all grants of: volatility of 65.2% in 2003, 71.5% in 2002 and 80.0% in 2001; risk-free interest rate ranging from 2.16% to 2.85% in 2003, 2.64% to 4.38% in 2002 and
3.94% to 5.31% in 2001; and expected lives of approximately 4.0 to 4.8 years.

The
following table summarizes information about stock options outstanding at November 30, 2003:

|Range of Exercise Price |  | Outstanding |  | Weighted
Average
Remaining
Contractual
Life |  | Weighted
Average
Exercisable
Price |       | Shares
Exercisable |           | Weighted
Average
Exercisable
Price
|----------------------- |  | ----------- |  | ------------------------------------------- |  | ---------------------------------- | ----- | ------------------ | --------- | ----------------------------------
|$  1.50-$  2.06         |  | 214,144     |  | 6.2                                         |  | $                                  | 1.76  |                    | 214,144   |                                   
|$  2.31-$  3.35         |  | 668,998     |  | 8.1                                         |  |                                    | 2.82  |                    | 539,002   |                                   
|$  3.60-$  5.03         |  | 778,748     |  | 8.1                                         |  |                                    | 4.37  |                    | 546,428   |                                   
|$  5.69-$  7.74         |  | 913,000     |  | 7.4                                         |  |                                    | 6.27  |                    | 724,179   |                                   
|$  9.00-$11.31          |  | 56,250      |  | 4.3                                         |  |                                    | 10.07 |                    | 56,250    |                                   
|$15.56-$15.56           |  | 12,500      |  | 3.6                                         |  |                                    | 15.56 |                    | 12,500    |                                   
|                        |  |             |  |                                             |  |                                    |       |                    |           |                                   
|$  1.50-$15.56          |  | 2,643,640   |  | 7.6                                         |  | $                                  | 4.60  |                    | 2,092,503 |                                   
|                        |  |             |  |                                             |  |                                    |       |                    |           |                                   

During
fiscal 2003, 2002 and 2001, options for shares of the Company's common stock were exercised by certain employees and directors. A tax benefit of $87,230, $171,909 and $240,265 in
fiscal 2003, 2002 and 2001, respectively, were recorded as an increase to additional paid-in capital and a reduction of income taxes currently payable.

During
fiscal 2001, the vesting period of an employees stock option was accelerated, such acceleration yielded an approximate $116,000 noncash charge to operations.

14.   Segment Information

The Company's segments operate principally in the United States with a presence in Canada; the Canadian presence contributed an immaterial amount to consolidated
net revenues and consolidated net income. The accounting policies of the Company's segments are the same as those detailed in Note 1.

The
Company's reportable operating segments are aligned into three fundamental areas: (1) Internet Commerce billed directly to the Company's marketing partners and corporate
customers, as well as consumers (E-commerce), (2) Off-line Marketing Services billed directly to the Company's
off-line corporate customers, including long distance carriers, wireless carriers, financial institutions and other service providing businesses
(Off-line Marketing Services) and (3) Products and Services billed to consumers by Local Exchange Carriers
(LEC Billed products and services-inactive in fiscal 2002). The balance of the Company's operations, individually immaterial and in the aggregate are
included as part of Corporate and other. This business segment delineation is consistent with the Company's management and financial reporting structure based on products and services. The Company
evaluates performance based on many factors, with the primary criteria being each segment's (a) gross profit and (b) net income excluding (i) special charges, (ii) interest
expense, (iii) interest and dividend income, (iv) net gains (losses) on the sale of marketable securities, (v) permanent impairment charges to long-lived assets,
(vi) gains on nonmonetary cost basis exchanges, (vii) other nonoperating income,

F-34

---

(viii) minority
interest income (loss), (ix) depreciation, (x) amortization and (xi) income taxes. The Company shares a common workforce and office headquarters, which
precludes an allocation of all overhead components. Overhead items that are specifically identifiable to a particular segment are applied to such segment and all other overhead costs are included in
Corporate and other. The following tables set forth the Company's financial results, by management performance criteria, by operating segment. All revenues are from nonintersegment sources; therefore
no intersegment elimination applies.

Corporate
assets of approximately $14.6 million at November 30, 2003, consist principally of cash, cash equivalents and marketable securities.



Net Revenue
Year Ended November 30,2003

2002

2001For the periods:E-commerce

$
28,799,557

$
38,807,119

$
28,475,225Off-line Marketing Services


2,017,225


5,235,806


2,214,576LEC Billed Products and Services


1,572,070





1,519,609Consolidated totals

$
32,388,852

$
44,042,925

$
32,209,410




Gross Profit
Year Ended November 30,2003

2002

2001For the periods:E-commerce

$
16,945,847

$
27,182,815

$
20,574,189Off-line Marketing Services


1,755,439


4,616,475


1,020,550LEC Billed Products and Services


607,011





1,462,209Consolidated totals

$
19,308,297

$
31,799,290

$
23,056,948




EBITDA
Year Ended November 30,2003

2002

2001For the periods:E-commerce

$
2,822,141

$
8,826,506

$
9,554,829Off-line Marketing Services


203,094


743,040


200,406LEC Billed Products and Services


132,075





367,328Consolidated totals

$
3,157,310

$
9,569,546

$
10,122,563


---

F-35

---





Depreciation and Amortization
Year Ended November 30,2003

2002

2001For the periods:E-commerce

$
1,172,343

$
876,976

$
157,222Off-line Marketing Services


6,877


20,349


LEC Billed Products and Services








Corporate


257,362


275,798


232,182Consolidated totals

$
1,436,582

$
1,173,123

$
389,404




Year Ended November 30,2003

2002

2001Adjusted EBITDAby segmentE-commerce

$
2,822,141

$
8,826,506

$
9,554,829Off-line Marketing Services


203,094


743,040


200,406LEC Billed Products and Services


132,075





367,328Total Adjusted EBIDTA

$
3,157,310

$
9,569,546

$
10,122,563Items effecting Adjusted EBITDA in arriving at consolidated income before taxesCorporate

($
3,131,230
)
($
3,969,118
)
($
3,459,866
)Depreciation and amortization (expense)


(1,436,582
)

(1,173,123
)

(389,404
)Interest (expense)





(101,385
)

(5,900
)Interest income and dividends


479,934


783,143


1,780,546Realized gains on marketable securities


19,730


76,607


387,948Realized gain on sale of subsidiary


1,375,801





Permanent impairment charges








(4,690,258
)Other non-operating income(expense)


(54,068
)

(254,670
)

16,699Minority interest in income of subsidiary


(137,567
)

(402,716
)

(69,629
)Total items effecting Adjusted EBITDA

$
2,883,982

$
(5,041,262
)
$
(6,429,864
)Consolidated income before taxes

$
273,328

$
4,528,284

$
3,692,699


F-36

---



Long-Lived Assets
at November 30,2003

2002

2001E-commerce

$
4,575,576

$
4,200,376

$
1,868,627Off-line Marketing services





32,038


LEC Billed products and services








Corporate


452,530


556,449


499,482Consolidated totals

$
5,028,106

$
4,788,863

$
2,368,109




Total Assets
at November 30,2003

2002

2001E-commerce

$
34,295,090

$
29,101,906

$
23,087,920Off-line Marketing services





910,617


1,057,530LEC Billed products and services


1,073,170


317,541


1,321,192Corporate


14,582,277


20,860,929


27,275,942Consolidated totals

$
49,950,537

$
51,190,993

$
52,742,584


15.   Subsequent Events

In February 2004, the Company entered into an agreement (the "LOTN Agreement") to acquire all of the assets of LiveOnTheNet.com, a privately held provider
of 24/7 live PC technical support services designed for the home computer user. The purchase price will be $1.18 million, consisting of $944,000 in shares of the Company's common stock and
$236,000 in cash (subject to certain post-closing adjustments). The LOTN Agreement provides that the Company's obligation to consummate the acquisition is subject to several factors,
including its performance of due diligence, the delivery of the consent of the shareholders of LiveOnTheNet.com to the sale, and the delivery of the consents of parties to agreements with
LiveOnTheNet.com to the assignment of such agreements to the Company. Upon the consummation of the acquisition, the Company's existing marketing agreement with LiveOnTheNet.com will be terminated.

F-37

---

16.   Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited quarterly results of operations for fiscal 2003 and 2002:

Quarter endedNovember 30,

August 31,

May 31,

February 28,2003:Net revenues

$
7,345,752

$
8,503,267

$
7,422,604

$
9,117,229Gross profit


4,128,837


4,844,904


3,463,257


6,871,299Income (loss) before income taxes


1,080,849


484,234


(1,322,242
)

30,488Net income (loss)


879,867


662,084


(1,552,539
)

431,488Basic income (loss) per share

$
0.07

$
0.05

$
(0.12
)
$
0.03Diluted income (loss) per share

$
0.07

$
0.05

$
(0.12
)
$
0.032002:Net revenues

$
10,203,244

$
10,664,246

$
10,804,538

$
12,370,897Gross profit


7,939,584


7,446,086


7,421,334


8,992,286Income before income taxes


882,199


177,615


1,182,583


2,285,887Net income


516,550


108,380


713,043


1,403,417Basic income per share

$
0.04

$
0.01

$
0.05

$
0.10Diluted income per share

$
0.04

$
0.01

$
0.05

$
0.10


During
the fourth quarter of fiscal 2003, the Company adjusted certain accrued expenses related to year-end bonus accruals, current year fulfillment accruals, and a
settlement with a vendor for a reduced amount; the total of such adjustments effectively reduced fourth quarter costs and
expenses by approximately $200,000, correspondingly improving fourth quarter income before income taxes by the same amount.

During
the fourth quarter of fiscal 2002, the Company adjusted certain accrued expenses related to fulfillment accruals, such adjustment effectively reduced cost of sales by
approximately $500,000 in such quarter.

F-38

---



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVES

|Col. A                       |                                   | Col. B |   | Col. C    |  | Col. D |   | Col. E
|---------------------------- | --------------------------------- | ------ | - | --------- |  | ------ | - | ------
|
|
|Year ended November 30, 2003 |                                   |        |   |           |  |        |   |       
|                             | Reserve for customer chargebacks  |        | $ |          |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Reserve for fulfillment costs     |        | $ | 628,083   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for doubtful accounts   |        | $ | 326,127   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for data qualifications |        | $ | 359,820   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|Year ended November 30, 2002 |                                   |        |   |           |  |        |   |       
|                             | Reserve for customer chargebacks  |        | $ | 1,478     |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Reserve for fulfillment costs     |        | $ | 763,443   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for doubtful accounts   |        | $ | 383,676   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for data qualifications |        | $ | 1,250,984 |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|Year ended November 30, 2001 |                                   |        |   |           |  |        |   |       
|                             | Reserve for customer chargebacks  |        | $ | 1,225,040 |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Reserve for fulfillment costs     |        | $ | 746,415   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for doubtful accounts   |        | $ | 795,024   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       
|                             | Allowance for data qualifications |        | $ | 795,021   |  | $      |  |       
|                             |                                   |        |   |           |  |        |   |       

---

S-1

---

Payments made to fulfillment vendors

$
181,820Prior year accrual reversals reducing current year's costs:1Q03

$
524,0342Q03

$
95,1863Q03

$
10,0004Q03

$
-0-Fiscal 2003 4th qtr. Accrual reversals

$
48,268

$
859,308


Payments made to fulfillment vendors

$
1,050,937Prior year accrual reversals reducing costs

$
-0-Fiscal 2002 4th qtr. accrual reversals

$
499,505

$
1,550,442


Reserves written off with corresponding receivablesFTT bankruptcy

$
1,384,483Reserves written off because of immaterial chargeback activityWest

$
60,535Chargebacks refunded to customers

$
353,513

$
1,798,531


Payments made to fulfillment vendors

$
10,317Prior year accrual exceeded actual redemptions

$
130,883

$
141,200


S-2

---

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