<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934

        FOR THE TRANSITION PERIOD FROM                TO

                         COMMISSION FILE NUMBER 0-27046

                                 TRAFFIX, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                            <C>
                  DELAWARE                                      22-3322277
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)

             ONE BLUE HILL PLAZA                                   10965
            PEARL RIVER, NEW YORK                               (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</Table>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (845) 620-1212

<Table>
<Caption>
                                      TITLE OF CLASS   EXCHANGE ON WHICH REGISTERED
                                      --------------   ----------------------------
<S>                                  <C>               <C>
SECURITIES REGISTERED PURSUANT       COMMON STOCK         NASDAQ NATIONAL MARKET
  TO SECTION 12(b) OF THE ACT:       $.001 PAR VALUE
SECURITIES REGISTERED PURSUANT       COMMON STOCK
  TO SECTION 12(g) OF THE ACT:       $.001 PAR VALUE
</Table>

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.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.  [ ]

                            ------------------------

     The number of shares outstanding of the Registrant's common stock is
14,390,722 (as of 2/26/02). The aggregate market value of the voting stock held
by nonaffiliates of the Registrant was approximately $82,764,598 (as of 2/26/02,
based upon a closing price of the Company's Common Stock on the Nasdaq National
Market on such date of $7.45).

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                 TRAFFIX, INC.

                      INDEX TO ANNUAL REPORT ON FORM 10-K
               FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001

                               ITEMS IN FORM 10-K

<Table>
<Caption>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I
  Item 1.   Business....................................................    2
  Item 2.   Properties..................................................    5
  Item 3.   Legal Proceedings...........................................    5
  Item 4.   Submission of Matters to a Vote of Security Holders.........  N/A
PART II
  Item 5.   Market for the Registrant's Common Equity and Related
            Stockholder Matters.........................................    6
  Item 6.   Selected Financial Data.....................................    7
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................    8
  Item 7A.  Quantitative and Qualitative Disclosures About Market
            Risk........................................................  N/A
  Item 8.   Financial Statements and Supplementary Data.................   33
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................  N/A
PART III
  Item 10.  Directors and Executive Officers of the Registrant..........   33
  Item 11.  Executive Compensation......................................   36
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   39
  Item 13.  Certain Relationships and Related Transactions..............   40
PART IV
  Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.........................................................   41
SIGNATURES..............................................................   42
</Table>

                                        1
<PAGE>

                          FORWARD LOOKING INFORMATION
                              MAY PROVE INACCURATE

     This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
Management, as well as assumptions made by and information currently available
to the Company. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company 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. The Company does not intend to update these
forward-looking statements.

ITEM 1.  BUSINESS

  OVERVIEW

     We are a leading on-line database marketing company that acquires customers
and generates sales for our corporate clients. We provide complete end-to-end
marketing solutions for companies seeking to increase sales and customers
through on-line marketing programs. The services we offer range from the
development of a complete creative promotion to be used to market the client's
product to consumers, broadcasting the 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 clients' sales and generating
comprehensive reporting in order for the client to analyze the effectiveness of
the promotion. We use the proprietary on-line media of our websites,
newsletters, interactive games, email marketing and our database of almost 50
million permission-based, profiled records to generate the customers, sales
and/or leads for our clients. 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 client-based revenue, we recently began
generating revenue from our products and services (e.g., costume jewelry and
inexpensive gift items) and 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 Communications, Inc.")
through 1999, we generated the bulk of our revenue from database marketing using
the traditional media of television, postal mail and telemarketing. In 2000, we
repositioned our database marketing business to the on-line media of the Web.
Applying the direct marketing disciplines honed from our years of operating in
the "off-line" media, our management believes it is able to provide
significantly enhanced response-based results in a more cost-efficient and
scaleable manner via on-line marketing. In addition, as a result of our direct
marketing background, we believe we are 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.

  ON-LINE MARKETING

     We own the free on-line lottery, www.grouplotto.com, as well as a number of
other interactive games, sites and services on the Web. These properties are
designed to generate real-time response-based marketing. Consumers are given the
opportunity, while on-line, to purchase, sign-up for, ask to be contacted
regarding, or simply indicate an interest in, hundreds of offers for various
products and services provided by our corporate clients. Specifically through
these interactive Web properties we generate a variety of transactional results
for our corporate clients 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) actual sales of products and services.

                                        2
<PAGE>

     GroupLotto.com.  The GroupLotto website offers consumers the opportunity to
win up to $10 million daily in a free, on-line lottery. The lottery 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 GroupLotto and our marketing
partners. The interactive media on this website includes registration pages,
game banners, and "pop-ups", the purpose of which is to generate web traffic,
leads and sales. Revenue is generated at this website from our corporate clients
who pay for such traffic, leads and sales. We generate our bulk consumer traffic
to this website through email marketing to lists of consumers who have indicated
an interest in our marketing programs by opting in to receive such offers.

     Similar to the GroupLotto website, we generate results for our clients
through several other interactive games and products. For example, we market
through a "scratch and win" game that offers consumers the chance to instantly
find out if they have won any number of prizes. The consumer plays the game by
"scratching" with the mouse certain parts of the entry ticket to uncover the
results. These games can be "pushed" to consumers by delivering them to the
player's email inbox.

     We recently launched www.prizecade.com, a destination website where
consumers have access to parlor, arcade and casino style games. We intend to use
these games to generate revenue from our clients in a similar manner as the
GroupLotto model. We believe these games could also offer other new revenue
opportunities, such as brand marketing.

     Email Marketing.  One of our most important revenue sources is direct
marketing via email. Each program that we market for our clients can be
implemented not only through the interactive games and "pop-ups", but also, and
often primarily, through email marketing. We currently have almost 50 million
profiled, permission-based records which have been acquired under a number of
affinity group based brands.

     Compared to postal marketing and telemarketing, email marketing is
significantly less expensive, offers much faster response times, and, we
believe, provides for a more rich consumer media experience. We now own an email
delivery system which reduces our dependence on third party vendors and further
reduces the expenses associated with delivering our monthly commercial email
messages.

     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 extensive databases, manage a 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 being utilized
cost-efficiently, and to determine whether new and different copy is yielding
better overall results. These are the traditional direct-marketing disciplines
which, we believe, when applied together with our proprietary databases,
delivery systems and reporting systems, distinguish us from our competitors in
the on-line marketing industry.

     Syndication.  After we develop a campaign that works efficiently on our
proprietary 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 a list of 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 these media companies benefit
by receiving an immediately marketable, fully-packaged and tested marketing
program. As a result, we believe we are able to leverage campaigns we have
developed (including our proprietary products and services) so that we can
generate additional revenue with virtually no costs or risks associated with
such business extension.

                                        3
<PAGE>

  PROPRIETARY PRODUCTS AND SERVICES

     A revenue stream which we recently introduced is the on-line marketing of
our own products and services. For example, one of our websites, Thanksmuch.com,
now sells inexpensive costume jewelry and other gift items 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. In addition to the Thanksmuch line of jewelry and gifts,
we are developing and testing other products and services for direct marketing
to consumers. No assurances can be given, however, that these anticipated
sources of revenue will generate any significant income to our operations in
future fiscal periods, if at all.

  SEGMENT REVENUE

     During the fiscal year ended November 30, 2001, we generated revenue from
three segments: E-Commerce, LEC Billed Products and Off-Line Customer
Acquisition. The E-Commerce segment grew the most rapidly during the year and
represents the core of our current business operations. Revenue in this segment
is generated primarily from marketing of third party products and services on
our websites and through e-mail promotions. The Off-Line Customer Acquisition
segment consists of revenue generated by us through off-line direct marketing
channels. Historically, this segment's activities were primarily telemarketing.
The LEC Billed Products segment, which is no longer being actively marketed,
represented telecommunications-related products and services marketed by us
directly to consumers who are billed by local exchange carriers on the
consumer's telephone bill. Segment information is set forth in Note 13 to the
Consolidated Financial Statements referred to in the Financial Statements and
Supplementary Data section hereof and incorporated herein by reference. 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.
These financial and other capabilities permit such companies to implement
extensive advertising and promotional campaigns, both generally and in response
to efforts by additional competitors to enter into new markets and introduce new
services.

  INSURANCE

     As an operating entity, we may be subject to substantial liability as a
result of our day-to-day operations. Accordingly, we maintain a general
liability insurance policy that is subject to a per occurrence limit of
$1,000,000 with a $2,000,000 aggregate limit and an umbrella policy covering an
additional $10,000,000 of liability. In addition, the Company has errors and
omissions insurance with a limit of $5,000,000. The Company also maintains
Directors and Officers liability insurance policies providing aggregate coverage
of $12,500,000 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.

  GOVERNMENT REGULATION

     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 would offer refunds to consumers submitting written complaints within
a 90 day window. The Agreement also provides for a payment to the State in an
amount yet to be determined. We proposed certain modifications to the proposed
Agreement. No response has been received to date from the Pennsylvania Attorney
General's Office.

                                        4
<PAGE>

  EMPLOYEES

     We had 47 full-time employees, including five executive officers, and two
part-time employees, at November 30, 2001. Information regarding our executive
officers is set forth in Part III of this report. We believe that our relations
with our employees are satisfactory. None of our employees are represented by a
union.

  TRANSACTIONS WITH MAJOR CUSTOMERS

     Transactions with major customers and related economic dependence
information is set forth 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.

  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, and our telephone number is (845)
620-1212.

ITEM 2.  PROPERTIES

     The Company leases approximately 15,000 square feet of space at One Blue
Hill Plaza, Pearl River, New York, all of which is currently used for the
Company's 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.

ITEM 3.  LEGAL PROCEEDINGS

  Philip Michael Thomas

     In an arbitration before the American Arbitration Association in New York
entitled Philip 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. (No. 131400004900), the
claimants allege that they are owed an aggregate of $8,573,339, with interest of
$3,576,264, arising from agreements among the parties pursuant to which the
respondents were permitted to use Mr. Thomas' name and likeness in connection
with certain programs and membership clubs and pursuant to which he was to make
certain infomercials. The claimants allege that they were not paid the
appropriate percentage of revenues allegedly due them and have asserted claims
for fraud and deceit, constructive fraud, civil conspiracy, breach of
constructive trust, quantum meruit/unjust enrichment, and unauthorized
publication of Mr. Thomas' name and likeness. Hearings on the arbitration have
been held during the last week of February 2002 and are scheduled to continue
through March 1, 2002. A decision by the arbitrator is expeted to be issued
within the next 3 months. The Company believes that there is no merit to the
claims and has been and intends to continue to vigorously defend against them.

  Nancy Garen

     On or about October 16, 2001, Nancy Garen, author of "Tarot Made Easy",
commenced an action against a series of defendants, including the Company, in
the United States District Court for the Central District of California,
entitled Nancy Garen v. Steven L. Feder, Peter L. Stolz, Thomas H. Lindsey,
Galactic Telcom, Inc., Access Resource Services, Inc., Psychic Readers Network,
Inc. d/b/a Miss Cleo, Oshun 5 Communications, Inc., Circle of Light, Inc.,
Central Talk Management, Inc., Traffix, Inc., Wekare Readers & Interpreters,
Inc., West Corporation, and Does 1 through 10 (EDCV 01-790 (VAP-SGLx)).
Plaintiff alleges that defendants are liable for a copyright infringement,
contributory copyright infringement, vicarious copyright infringement, unfair
competition, contributory federal unfair competition and state statutory and
common law unfair competition, and further requests a constructive trust, a
temporary restraining order, and

                                        5
<PAGE>

damages from alleged infringement of a copyright or, alternatively, statutory
damages for each act of infringement in "an amount provided by law in excess of
$250,000,000", all as the same may have arisen from the defendants' marketing of
tarot card reading and other psychic services. As yet, no answer has been filed
in this action. The Company does not believe that there is any merit to Ms.
Garen's claims as they relate to the Company, and intends vigorously to defend
against them.

  Mavies Wingler

     On or about May 9, 2001, Mavies Wingler commenced an action against Group
Lotto, Inc. ("GLI"), a wholly owned subsidiary of the Company 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 entitled Wingler v. GroupLotto, Inc. , Docket Number 2:01 -- CV -- 518.
The action is in the initial stages of discovery. The Company does not believe
that there is any merit to Ms. Wingler's claim, and intends vigorously to defend
against it. GLI has a contract of indemnification with SCA Promotions, Inc. to
be indemnified for prizes paid out to qualified winners.

                                    PART II

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

  Market Information.

     Since September 12, 2000, the date upon which the Company changed its name
from Quintel Communications, Inc. to Traffix, Inc., the Company's Common Stock
has traded on the Nasdaq National Market System 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.

<Table>
<Caption>
                                                                HIGH        LOW
                                                              --------    --------
<S>                                                           <C>         <C>
Fiscal Year Ended November 30, 2001
  First Quarter.............................................  $ 2.9688    $      1.375
  Second Quarter............................................    3.67             1.9375
  Third Quarter.............................................    4.45             3.06
  Fourth Quarter............................................    6.20             3.74

Fiscal Year Ended November 30, 2000
  First Quarter.............................................  $12.00      $      4.1875
  Second Quarter............................................    8.9375           2.00
  Third Quarter.............................................    4.5625           2.2812
  Fourth Quarter............................................    6.25             2.00
</Table>

  Security Holders.

     To the best knowledge of the Company, at February 26, 2002, there were 54
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name."

  Dividends.

     The Company has not paid during the two most recently completed fiscal
years, and has no current plans to pay, dividends on its Common Stock. The
Company currently intends to retain all earnings for use in its business.

                                        6
<PAGE>

  Recent Sales of Unregistered Securities.

     On December 6, 2001 (the "Closing Date"), the Company 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 the Company's common
stock, or 117,522 shares, as valued as of the close of trading on November 30,
2001 (the date the Agreement to acquire such assets was executed). In accordance
with such Agreement, 39,174 shares were issued on the Closing Date and 39,174
shares are to be issued on each of the first and second anniversaries of the
Closing Date.

     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 a transaction by an issuer not involving any public offering.

ITEM 6.  SELECTED FINANCIAL DATA

     The following table presents selected historical financial data of the
Company for each of the years in the five year period ended November 30, 2001.
The financial data set forth should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company.

STATEMENT OF OPERATIONS DATA

<Table>
<Caption>
                                                                 YEAR ENDED NOVEMBER 30,
                                          ---------------------------------------------------------------------
                                             2001          2000          1999           1998           1997
                                          -----------   -----------   -----------   ------------   ------------
<S>                                       <C>           <C>           <C>           <C>            <C>
Net revenue.............................  $32,209,410   $26,611,863   $42,839,840   $ 94,690,251   $191,374,936
Costs of sales..........................    9,152,462     9,057,027    26,952,097     80,037,115    149,821,363
Gross profit............................   23,056,948    17,554,836    15,887,743     14,653,136     41,553,573
Selling, general and administrative
  expenses..............................   16,783,655    12,080,543    10,881,156     34,049,435     18,880,769
                                          -----------   -----------   -----------   ------------   ------------
Income (loss) from operations...........    6,273,293     5,474,293     5,006,587    (19,396,299)    22,672,804
Interest expense........................       (5,900)     (286,655)      (70,701)      (186,218)       (80,763)
Other income (expense), net.............   (2,574,694)    3,430,986     1,446,494      2,212,435      1,841,356
                                          -----------   -----------   -----------   ------------   ------------
Income (loss) before provision for
  income taxes (benefit)................    3,692,699     8,618,624     6,382,380    (17,370,082)    24,433,397
Provision for income taxes (benefit)....    3,275,200     3,471,754     2,458,520       (417,464)    10,069,616
                                          -----------   -----------   -----------   ------------   ------------
Net income (loss).......................  $   417,499   $ 5,146,870   $ 3,923,860   $(16,952,618)  $ 14,363,781
                                          ===========   ===========   ===========   ============   ============
Basic net income (loss) per share.......  $      0.03   $      0.35   $      0.26   $      (1.00)  $       0.77
                                          ===========   ===========   ===========   ============   ============
Diluted net income (loss) per share.....  $      0.03   $      0.33   $      0.26   $      (1.00)  $       0.76
                                          ===========   ===========   ===========   ============   ============
Common Shares outstanding
  Basic.................................   14,794,159    14,792,734    15,119,610     17,034,531     18,560,064
  Diluted...............................   15,396,619    15,494,663    15,241,662     17,034,531     18,878,790
</Table>

BALANCE SHEET DATA:

<Table>
<Caption>
                                                                 YEAR ENDED NOVEMBER 30,
                                           --------------------------------------------------------------------
                                              2001          2000          1999          1998           1997
                                           -----------   -----------   -----------   -----------   ------------
<S>                                        <C>           <C>           <C>           <C>           <C>
Working capital..........................  $40,057,164   $40,178,773   $36,789,213   $34,138,388   $ 43,674,688
Total assets.............................   52,742,584    52,198,843    57,277,279    64,413,144    115,998,776
Total liabilities........................   10,329,878    10,870,283    17,391,001    27,731,000     52,292,478
Stockholders' equity.....................   42,412,706    41,328,560    39,886,278    36,682,144     63,706,297
</Table>

                                        7
<PAGE>

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 the Company that are based on the current
beliefs and expectations of Management, as well as assumptions made by and
information currently available to the Company. 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 the Company are intended to identify forward-looking statements.
Such statements reflect the current views of the 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 acquires customers
and generates sales for our corporate clients. We provide complete end-to-end
marketing solutions for companies seeking to increase sales and customers
through on-line marketing programs. The services we offer range from the
development of a complete creative promotion to be used to market the client's
product to consumers, broadcasting the 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 clients' sales and generating
comprehensive reporting in order for the client to analyze the effectiveness of
the promotion. We use the proprietary on-line media of our websites,
newsletters, interactive games, email marketing and our database of almost 50
million permission-based, profiled records to generate the customers, sales
and/or leads for our clients. 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 client-based revenue, pursuant to an asset
acquisition completed in fiscal 2002 (see Note 14 in the Consolidated Financial
Statements that appear elsewhere in this report) we began generating revenue
from our products and services (e.g., costume jewelry and inexpensive gift
items) and from the sales and rentals (for use both on-line and off-line) from
profiled data base information generated by such acquisition.

  BACKGROUND

     From our inception in 1993 (under the name "Quintel Communications, Inc.")
through 1999, we generated the bulk of our revenue from database marketing using
the traditional media of television, postal mail and telemarketing. In 2000, we
repositioned our database marketing business to the on-line media of the Web.
Applying the direct marketing disciplines honed from our years of operating in
the "off-line" media, our management believes it is able to provide
significantly enhanced response-based results in a more cost-efficient and
scaleable manner via on-line marketing. In addition, as a result of our direct
marketing background, we believe we are 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.

  ON-LINE MARKETING

     We own the free on-line lottery, www.grouplotto.com, as well as a number of
other interactive games, sites and services on the Web. These properties are
designed to generate real-time response-based marketing. Consumers are given the
opportunity, while on-line, to purchase, sign-up for, ask to be contacted
regarding, or simply indicate an interest in, hundreds of offers for various
products and services provided by our corporate clients. Specifically through
these interactive Web properties we generate a variety of transactional results
for our corporate clients ranging from (a) Web traffic, (b) inbound
telemarketing calls, (c) outbound telemarketing leads, (d)
demographically/psychographically profiled lists of consumers, (e)
highly-targeted

                                        8
<PAGE>

customized response-based leads, (f) completed applications for products, and
(g) actual sales of products and services.

     GroupLotto.com.  The GroupLotto website offers consumers the opportunity to
win up to $10 million daily in a free, on-line lottery. The lottery 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 GroupLotto and our marketing
partners. The interactive media on this website includes registration pages,
game banners, and "pop-ups", the purpose of which is to generate web traffic,
leads and sales. Revenue is generated at this website from our corporate clients
who pay for such traffic, leads and sales. We generate our bulk consumer traffic
to this website through email marketing to lists of consumers who have indicated
an interest in our marketing programs by opting in to receive such offers.

     Similar to the GroupLotto website, we generate results for our clients
through several other interactive games and products. For example, we market
through a "scratch and win" game that offers consumers the chance to instantly
find out if they have won any number of prizes. The consumer plays the game by
"scratching" with the mouse certain parts of the entry ticket to uncover the
results. These games can be "pushed" to consumers by delivering them to the
player's email inbox.

     We recently launched www.prizecade.com, a destination website where
consumers have access to parlor, arcade and casino style games. We intend to use
these games to generate revenue from our clients in a similar manner as the
GroupLotto model. We believe these games could also offer other new revenue
opportunities, such as brand marketing.

     Email Marketing.  One of our most important revenue sources is direct
marketing via email. Each program that we market for our clients can be
implemented not only through the interactive games and "pop-ups", but also, and
often primarily, through email marketing. We currently have almost 50 million
profiled, permission-based records which have been acquired under a number of
affinity group based brands.

     Compared to postal marketing and telemarketing, email marketing is
significantly less expensive, offers much faster response times, and, we
believe, provides for a more rich consumer media experience. We now own an email
delivery system which reduces our dependence on third party vendors and further
reduces the expenses associated with delivering our monthly commercial email
messages.

     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 extensive databases, manage a 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 being utilized
cost-efficiently, and to determine whether new and different copy is yielding
better overall results. These are the traditional direct-marketing disciplines
which, we believe, when applied together with our proprietary databases,
delivery systems and reporting systems, distinguish us from our competitors in
the on-line marketing industry.

     Syndication.  After we develop a campaign that works efficiently on our
proprietary 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 a list of 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 these media companies benefit
by receiving an immediately marketable, fully-packaged and tested marketing
program. As a result, we believe we are able to leverage campaigns we have
developed (including our proprietary products and services) so that we can
generate additional revenue with virtually no costs or risks associated with
such business extension.

                                        9
<PAGE>

PROPRIETARY PRODUCTS AND SERVICES

     A revenue stream that has been introduced in Fiscal 2002, relates to the
on-line marketing of our own products and services. For example, one of our
websites, Thanksmuch.com, now sells inexpensive costume jewelry and other gift
items 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. In addition to the Thanksmuch line
of jewelry and gifts, we are developing and testing other products and services
for direct marketing to consumers. No assurances can be given, however, that
these anticipated sources of revenue will generate any significant income to our
operations in future fiscal periods, if at all.

     A summary of the Company's net revenue and earnings from operations as
contributed by our principal business segments is found in Note 13 to the
Consolidated Financial Statements, which is incorporated herein by reference. A
discussion of factors potentially affecting our operations is set forth below.

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 with the current
period presentation.

SEGMENT INFORMATION

     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.

     During the fiscal years ended November 30, 2001 and 2000 we generated
revenue from three segments: E-Commerce, Off-line Customer Acquisition and LEC
Billed Products. The E-Commerce segment realized significant growth during the
year fiscal years ended November 30, 2001 and 2000, and 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 e-mail promotions. The Off-Line Customer Acquisition segment
consists of revenue generated by us through off-line direct marketing channels.
Historically, this segment's activities were primarily telemarketing. The LEC
Billed Products segment represents telecommunications-related products and
services marketed by us directly to consumers who are billed by local exchange
carriers on the consumer's telephone bill. Segment information is set forth in
Note 13 to the Consolidated Financial Statements referred to in the Financial
Statements and Supplementary Data section hereof and incorporated herein by
reference.

     The Company evaluates performance based on many factors, with the primary
criteria being each segment's (a) gross profit and (b) EBITDA, which is net
income excluding (i) special charges, (ii) interest expense, (iii) interest and
dividend income, (iv) realized net (losses) gains on marketable securities, (v)
permanent impairment charges, (vi) gains on nonmonetary cost basis exchanges,
(vii) other nonoperating income (loss), (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.

                                        10
<PAGE>

RESULTS OF OPERATIONS

     The Company's net revenues, on a segmental basis, and with the components
of the individual segments, for each of the fiscal years ended November 30,
2001, 2000 and 1999 are set forth in the following tables:

               SEGMENT DATA -- NET REVENUES, BY SEGMENT COMPONENT

<Table>
<Caption>
YEAR ENDED NOVEMBER 30,                            2001          2000          1999
-----------------------                         -----------   -----------   -----------
<S>                                             <C>           <C>           <C>
E-COMMERCE COMPONENTS
Long distance customer acquisitions...........  $ 3,992,147   $ 4,913,703   $        --
GroupLotto and other websites.................    7,082,587     4,825,781            --
Net branch commission fees....................      347,416            --            --
Email.........................................   14,663,959       758,702         7,634
Data sales and rentals........................    2,389,116            --            --
                                                -----------   -----------   -----------
TOTAL E-COMMERCE..............................  $28,475,225   $10,498,186   $     7,634
                                                -----------   -----------   -----------
OFF-LINE CUSTOMER ACQUISITION SERVICE
  COMPONENTS
Long distance customer acquisitions...........  $ 1,693,453   $ 4,565,435   $21,593,504
Long distance usage commissions...............           --     4,387,149     9,093,505
Net branch commission fees....................      521,123
Other customer acquisition services...........           --         6,190            --
                                                -----------   -----------   -----------
TOTAL OFF-LINE CUSTOMER ACQUISITION
  SERVICES....................................  $ 2,214,576   $ 8,958,774   $30,687,009
                                                -----------   -----------   -----------
LEC BILLED PRODUCTS AND SERVICE COMPONENTS
"900" Entertainment Service royalties.........  $   486,406   $ 3,393,428   $ 2,769,169
Club 900 Products.............................      148,830        85,417     1,693,373
Enhanced Services, principally voice mail.....      884,373     3,590,463     7,513,080
Telephone number list revenue.................           --        65,523
                                                -----------   -----------   -----------
TOTAL LEC BILLED PRODUCTS AND SERVICES........  $ 1,519,609   $ 7,134,831   $11,975,622
                                                -----------   -----------   -----------
CORPORATE AND OTHER COMPONENTS
Miscellaneous products and other..............  $        --   $    20,072   $   169,575
                                                -----------   -----------   -----------
          CONSOLIDATED NET REVENUES...........  $32,209,410   $26,611,863   $42,839,840
                                                ===========   ===========   ===========
</Table>

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

<Table>
<Caption>
                                                              YEAR ENDED NOVEMBER 30,
                                                              ------------------------
                                                               2001     2000     1999
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Net Revenue.................................................  100.0%   100.0%   100.0%
Cost of Sales...............................................   28.4%    34.0%    62.9%
Gross Profit................................................   71.6%    66.0%    37.1%
Selling, general and administrative expenses................   48.7%    43.4%    25.4%
Bad debt expense............................................    3.4%     1.9%     0.0%
  Interest Expense..........................................    0.0%     1.1%     0.2%
  Other Income (expense)....................................   (7.8)%   12.9%     3.4%
Net Income..................................................    1.3%    19.3%     9.2%
</Table>

     The following is a discussion of the financial condition and results of
operations of the Company for the years ended November 30, 2001, 2000, and 1999,
respectively. This discussion may contain forward looking-

                                        11
<PAGE>

statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. This discussion should be
read in conjunction with the consolidated financial statements of the Company,
the notes thereto and other financial information included elsewhere in the
report.

YEAR ENDED NOVEMBER 30, 2001 COMPARED TO YEAR ENDED NOVEMBER 30, 2000

     The Company's net revenues, on a segmental basis, and with the components
of the individual segments, for the fiscal years ended November 30, 2001 and
2000, are set forth in the following tables:

               SEGMENT DATA -- NET REVENUES, BY SEGMENT COMPONENT

<Table>
<Caption>
                                                                                CHANGE-INC(DEC)   CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30,                                2001          2000             $$$               %%%
-----------------------                             -----------   -----------   ---------------   ---------------
<S>                                                 <C>           <C>           <C>               <C>
E-COMMERCE COMPONENTS
Long distance customer acquisitions...............  $ 3,992,147   $ 4,913,703     $  (921,556)           (19)%
GroupLotto and other websites.....................    7,082,587     4,825,781       2,256,806             47%
Net branch commission fees........................      347,416            --         347,416            100%
Email.............................................   14,663,959       758,702      13,905,257           1833%
Data sales and rentals............................    2,389,116            --       2,389,116            100%
                                                    -----------   -----------     -----------          -----
TOTAL E-COMMERCE..................................   28,475,225    10,498,186      17,977,039            171%
                                                    -----------   -----------     -----------          -----
OFF-LINE CUSTOMER ACQUISITION SERVICES COMPONENTS
Long distance customer acquisitions...............    1,693,453     4,565,435      (2,871,982)           (63)%
Long distance usage commissions...................           --     4,387,149      (4,387,149)          (100)%
Net branch commission fees........................      521,123            --         521,123            100%
Other customer acquisition services...............           --         6,190          (6,190)          (100)%
                                                    -----------   -----------     -----------          -----
TOTAL OFF-LINE CUSTOMER ACQUISITION SERVICES......    2,214,576     8,958,774      (6,744,198)           (75)%
                                                    -----------   -----------     -----------          -----
LEC BILLED PRODUCTS AND SERVICES COMPONENTS
"900" Entertainment Service royalties.............      486,406     3,393,428      (2,907,022)           (86)%
Club 900 Products.................................      148,830        85,417          63,413             74%
Enhanced Services, principally voice mail.........      884,373     3,590,463      (2,706,090)           (75)%
Telephone number list revenue.....................           --        65,523         (65,523)          (100)%
                                                    -----------   -----------     -----------          -----
TOTAL LEC BILLED PRODUCTS AND SERVICES............    1,519,609     7,134,831      (5,615,222)           (79)%
                                                    -----------   -----------     -----------          -----
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other....           --        20,072         (20,072)          (100)%
                                                    -----------   -----------     -----------          -----
        CONSOLIDATED NET REVENUES.................  $32,209,410   $26,611,863     $ 5,597,547             21%
                                                    ===========   ===========     ===========          =====
</Table>

     Net Revenue increased $5,597,547, or 21%, to $32,209,410 for the year ended
November 30, 2001 ("Fiscal 2001") when compared to revenues of $26,611,863 in
the year ended November 30, 2000 ("Fiscal 2000"). This increase was specifically
attributable to the Company's E-commerce segment, which recognized a net
increase in revenue of approximately $18 million, offset by combined declines in
net revenue from the Company's legacy segments of approximately $12.4 million.
The E-commerce segment revenue increase resulted from the Company's increasing
focus on generating revenue from its current core business, on-line direct
marketing. The Company expects this segment to continue to represent a
substantial part of the Company's revenue in future fiscal periods. As a
percentage of consolidated net revenue, the Company's on-line direct marketing
activities constituted 88% of Fiscal 2001 revenues, compared to 39% in Fiscal
2000.

     The declines in the Company's Off-line Customer Acquisition Services
Segment (decrease of $6.7 million) and LEC Billed Products and Services Segment
(decrease of $5.6 million) were attributable to the Company's termination of the
active marketing of such products and services during prior fiscal periods and
the Company's intentional migration to the Internet for the generation of the
bulk of its revenue. The Company's on-line revenues are generated on a higher
margin basis when compared to such legacy segments' operating activities. This
migration commenced at the end of the fiscal year ended November 30, 1999
("Fiscal 1999") and became fully implemented during Fiscal 2000.

                                        12
<PAGE>

     During the year ended November 30, 2001, the Company executed an on-line
customer acquisition program for a prominent long distance service provider.
Under such arrangement, the Company generated approximately $2 million of
revenue in Fiscal 2001, specifically during the fourth quarter. This represented
6.2% and 14.2% of consolidated net revenues for Fiscal 2001 and the fourth
quarter thereof, respectively. The Company's agreement with such long distance
carrier terminated during the first quarter of the fiscal year ending November
30, 2002 ("Fiscal 2002"). Although the Company has entered into a new agreement
with such long distance carrier, the Company anticipates that the impact thereof
on fiscal periods beyond the first quarter of Fiscal 2002 will not be material.
The revenue generated in Fiscal 2001 from the Company's original agreement with
this long distance carrier, coupled with the on-line portion of the TALK.com
settlement (more fully described below) of approximately $2 million, accounted
for Fiscal 2001's $3,992,147 of "long distance customer acquisitions"
sub-segment revenue included in the Company's E-commerce segment. This
represented a decline in such sub-segment of approximately $922,000 when
compared to Fiscal 2000. Fiscal 2000's E-commerce "long distance customer
acquisition" sub-segment revenues were entirely attributable to TALK.com
customer acquisition activity prior to the October 2000 termination of the
Company's agreement therewith.

     The net growth in the Company's E-commerce segment was primarily
attributable to an approximate $13.9 million increase in revenue generated from
the Company's E-mail marketing programs, as compared to only $758,702 of
revenues during Fiscal 2000. This substantial increase of approximately 1800%
over the prior year was the result of the Company generating significantly more
on-line generated consumer data and a number of on-line contracts with new
customers during the fiscal year ended November 30, 2001. During the prior year,
the Company had not significantly penetrated this method of revenue generation.

     During the second half of Fiscal 2001, the Company began the practice of
marketing E-mail promotional offers to third party databases on a revenue share
basis. The Company becomes obligated to pay these third parties only when a
transaction occurs and payment is made to the Company by the third parties whose
promotion was mailed. These "fee share basis" revenues provide operating income
at a reduced operating margin when compared to E-mail promotional offers mailed
to the Company's proprietary database. The Company reports the fees paid to the
owners of the third party databases as a component of "Selling Expenses". It is
the Company's intent to limit Fiscal 2002's "fee share basis" expenses to
approximately 10% of consolidated revenues, compared to approximately 7% in
Fiscal 2001.

     The second material factor contributing to the growth of the Company's
E-commerce segment was the approximately $2.4 million in on-line data sales and
rentals generated in Fiscal 2001 when compared to a negligible amount generated
in Fiscal 2000. The Company believes it was able to identify itself as a source
of valuable permission based data and nurtured relationships with third parties
to facilitate the sale and rental of such data.

     The third material factor contributing to the growth of the Company's
E-commerce segment was the approximately $2.3 million (or 47% increase) in net
revenues earned from the "GroupLotto and other website" sub-segment. The
GroupLotto site has developed increased brand recognition on the Internet and
has enabled the Company's sales force to increase its revenue generating
customer base on the site.

     During the year ended November 30, 2001, the Company was successful in its
legal action against Talk America, Inc. ("Talk"), resulting in an approximate
$6.2 million arbitration award. The award represented restitution for long
distance customers delivered to Talk, and for lost profits suffered by the
Company due to Talk's wrongful termination of an agreement between the parties.
This wrongful termination occurred during the fourth quarter of Fiscal 2000. The
Company recognized $3.7 million of revenue (11.5% of consolidated Fiscal 2001
revenues; this represented Talk's acceptance of such delivered customers, thus
fulfilling the Company's revenue recognition criteria.) from the settlement
during the year ended November 30, 2001, resulting from the receipt of Talk's
first of two installments due on the total award. The first installment was
comprised of approximately $2 million of revenue attributable to the "long
distance customer acquisition" sub-segment of the Company's E-commerce segment.
The balance of the first installment, or approximately $1.7 million of revenue,
was attributable to the Company's Off-line customer acquisition (legacy) segment
(primarily telemarketing). The Company recognized an approximate $1.25 million
contingent telemarketing

                                        13
<PAGE>

cost as a result of this settlement. This contingent cost is discussed in
further detail in the following "Cost of Goods Sold" section. The second, and
final, installment of approximately $2.5 million, plus interest at 6%, is due on
April 1, 2002. If the Company receives the second installment in Fiscal 2002, it
will record the revenue at that time. The Company expects that the segment
distribution of such second installment will be as follows: (a) approximately
$1.4 million of E-commerce revenue within that segment's "long distance customer
acquisition" sub-segment; and (b) approximately $1.1 million of Off-line
Customer Acquisition segment revenue. Based on the telecommunications industry's
present weakened state of financial affairs, and specifically management's
estimation of Talk's ability to pay, management determined that the second
installment of the settlement was a gain contingency and, as such, will record
any related revenue only upon collection.

     During the year ended November 30, 2001, revenues from the Company's 51%
majority owned subsidiary, Montvale Management LLC, contributed approximately
$868,539, or 2.7% of consolidated net revenues. The subsidiary generates revenue
by operating under net branch agreements, whereby it originates residential
mortgages and refinancings for licensed mortgage banking and brokerage
companies. The subsidiary became active as a result of reduced mortgage and
refinance loan interest rates, and increased government funds for low-income
homebuyers. The subsidiary's revenue was generated through on-line sources
($347,416, included in the E-commerce segment) and through conventional
marketing efforts, consisting of outbound telemarketing, direct mail and print
media ($521,123, included in the off-line customer acquisition segment).
Pursuant to a full year of consolidated operations, and management's
anticipation that the interest rate environment will remain stable and
beneficial to new homebuyers and people interested in refinancing, the Company
anticipates that the subsidiary will generate significantly more revenue in the
fiscal year ending November 30, 2002.

     See "Transactions with Major Customers and Termination of Economic
Dependence", "Prior Year Transactions Impacting Current and Future Fiscal
Periods" and "Service Bureaus and Local Exchange Carriers" following the
"Liquidity and Capital Resources" section for a detailed discussion of other
revenue decreases as they relate to the Company's comparative and future
revenues.

     In the fiscal periods prior to November 30, 1999, the Company's cost of
revenues were offset by net revenue generated from certain premium offerings
made in conjunction with the Company's marketing of other products and services.
The Company terminated the marketing of these products and services in
conjunction with the Transaction Agreements, all as more fully described in
"-- Prior Year Transactions Impacting Current and Future Fiscal Periods". All
such residual revenue from those premium offerings have been reflected in the
Company's other income (expense) section. For the year ended November 30, 2001,
such income(expense) included in "Other nonoperating income" was approximately
($57,000), compared to approximately $1,021,401 for the prior year.

     The Company's cost of sales, on a segmental basis, and with the components
of the individual segments, for each of the years ended November 30, 2001 and
2000 are set forth below:

              CONSOLIDATED COST OF SALES, BY SEGMENT, BY COMPONENT

<Table>
<Caption>
                                                                    CHANGE       CHANGE
                                                                   INC(DEC)     INC(DEC)
YEAR ENDED NOVEMBER 30,                   2001         2000           $$$         %%%
-----------------------                ----------   -----------   -----------   --------
<S>                                    <C>          <C>           <C>           <C>
E-COMMERCE
  ADVERTISING, PROMOTION AND
     FULFILLMENT COSTS
  Email marketing and related
     delivery costs..................  $4,046,881   $   631,446   $ 3,415,435      541%
  Data purchases and premium costs...   3,357,308     3,718,460      (361,152)     (10)%
  Promotional and creative
     development costs...............     115,322       121,417        (6,095)      (5)%
                                       ----------   -----------   -----------     ----
          Total E-commerce
            Advertising..............  $7,519,511   $ 4,471,323   $ 3,048,188       68%
                                       ----------   -----------   -----------     ----
</Table>

                                        14
<PAGE>

<Table>
<Caption>
                                                                    CHANGE       CHANGE
                                                                   INC(DEC)     INC(DEC)
YEAR ENDED NOVEMBER 30,                   2001         2000           $$$         %%%
-----------------------                ----------   -----------   -----------   --------
<S>                                    <C>          <C>           <C>           <C>
  SERVICE BUREAU FEES
  Contingent based prize
     indemnification costs...........     381,525     1,151,758      (770,233)     (67)%
                                       ----------   -----------   -----------     ----
          Total E-commerce Cost of
            Sales....................  $7,901,036   $ 5,623,081   $ 2,277,955       41%
                                       ----------   -----------   -----------     ----
OFF-LINE CUSTOMER ACQUISITION
  SERVICES
  ADVERTISING, PROMOTION AND
     FULFILLMENT COSTS
  Telemarketing and related costs....  $1,283,035   $ 4,985,183   $(3,702,148)     (74)%
  Premium fulfillment costs..........     (89,009)   (1,823,449)    1,734,440      (95)%
                                       ----------   -----------   -----------     ----
          Total Off-line Acquisition
            Cost of Sales............  $1,194,026   $ 3,161,734   $(1,967,708)     (62)%
                                       ----------   -----------   -----------     ----
LEC BILLED PRODUCTS AND SERVICES
  ADVERTISING, PROMOTION AND
     FULFILLMENT COSTS
  Telemarketing and related costs....  $       --   $   (17,643)  $    17,643     (100)%
  Premium fulfillment costs..........          --         2,286        (2,286)    (100)%
                                       ----------   -----------   -----------     ----
          Total LEC Billed
            Advertising..............  $       --   $   (15,357)  $    15,357     (100)%
                                       ----------   -----------   -----------     ----
  SERVICE BUREAU FEES
  Billing and collection fees........  $   57,400   $   287,569      (230,169)     (80)%
                                       ----------   -----------   -----------     ----
          Total LEC Billed Cost of
            Sales....................  $   57,400   $   272,212   $  (214,812)     (79)%
                                       ----------   -----------   -----------     ----
          CONSOLIDATED COST OF
            SALES....................  $9,152,462   $ 9,057,027   $    95,435        1%
                                       ----------   -----------   -----------     ----
</Table>

     Cost of sales on a consolidated basis remained relatively stable with a 1%
increase of approximately $95,000 over the fiscal year ended November 30, 2000.

     On a segmental level, the Company's E-commerce segment cost of sales
increased, on a net basis, approximately $2.3 million, or 41%, to $7.9 million,
when compared to $5.6 million incurred in the prior fiscal year. The Company's
increased focus on generating revenues from direct marketing campaigns delivered
on-line was the primary factor contributing to this increase. During the course
of the year, the Company realized increased costs for e-mailing on an absolute
basis (approximate increase of $3.4 million over $631,446 for Fiscal 2000), but
recognized decreased costs on a per-unit basis for e-mail services obtained from
third party e-mailers. As of the fourth quarter of Fiscal 2001, the price of
third party e-mail service provision was in the range of $.75 to $1.00 per
thousand e-mails sent. In prior fiscal periods, the Company paid as much as
$1.50 per thousand e-mails sent. This per-unit price reduction is the
contributing factor that enabled the Company to increase e-mail related revenue
approximately 1800%, while recognizing a smaller, 541% increase in e-mail and
related delivery costs over the comparable prior year. In December 2001, the
Company acquired the assets of a Canadian-based technology company and, with the
integration of this entity in Fiscal 2002, the Company believes it will further
reduce the unitary costs of its e-mailing promotions.

     The Company uses 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. During the fourth quarter of Fiscal 2000,
the Company restructured its lottery game prizes and concurrently reduced the
costs of the related premiums for the indemnification coverage. This premium
cost savings was realized in the year ended November 30, 2001 and is reflected
by a 67% indemnification cost decrease, compared to a 47% increase in related
revenues generated at the GroupLotto site. In October 2001, the Company had a $1
million winner on its GroupLotto site. The Indemnification agency acknowledged
the winner's claim, awarded payment, and the

                                        15
<PAGE>

Company did not incur any additional expense beyond the premiums. Additionally,
the Company's premium costs per game did not increase as a result of the
winner's claim.

     The Company's Off-line Customer Acquisition segment had been primarily
inactive for the first nine months of Fiscal 2001. During the fourth quarter,
the Company received the first of the two scheduled installments from the Talk
arbitration victory and recorded a portion of the revenue in the Off-line
Customer Acquisition segment. Pursuant to the receipt of the first installment
in November 2001, the Company recorded its obligation to make an approximate
$1.25 million contingent payment to a telemarketing vendor for their services
performed for the Company relating to marketing for Talk. The Company does not
have any other contingent liabilities related to the second, and final,
settlement installment that is scheduled for receipt in April 2002. In the
fourth quarter of Fiscal 2001, the Company released approximately $130,000 in
excess premium accruals from terminated off-line customer acquisition marketing
programs.

     The Company's gross profit in terms of dollars, on a segmental basis, and
the Company's gross profit percentage, on a segmental basis, for each of the
years ended November 30, 2001 and 2000 are presented below:

                     CONSOLIDATED GROSS PROFIT, BY SEGMENT

<Table>
<Caption>
                                                                    CHANGE       CHANGE
                                                                   INC(DEC)     INC(DEC)
YEAR ENDED NOVEMBER 30,                  2001          2000           $$$         %%%
-----------------------               -----------   -----------   -----------   --------
<S>                                   <C>           <C>           <C>           <C>
E-commerce..........................  $20,574,189   $ 4,875,105   $15,699,084      322%
Customer Acquisition services.......    1,020,550     5,797,040    (4,776,490)     (82)%
LEC Billed products and services....    1,462,209     6,862,619    (5,400,410)     (79)%
Corporate and other.................           --        20,072       (20,072)    (100)%
                                      -----------   -----------   -----------     ----
          CONSOLIDATED GROSS
            PROFIT..................  $23,056,948   $17,554,836   $ 5,502,112       31%
                                      ===========   ===========   ===========     ====
</Table>

               CONSOLIDATED GROSS PROFIT PERCENTAGES, BY SEGMENT

<Table>
<Caption>
                                                                    ABSOLUTE     RELATIVE
                                                                   PERCENTAGE   PERCENTAGE
                                                                     CHANGE       CHANGE
YEAR ENDED NOVEMBER 30,                             2001   2000     INC(DEC)     INC(DEC)
-----------------------                             ----   -----   ----------   ----------
<S>                                                 <C>    <C>     <C>          <C>
E-commerce........................................  72.3%   46.4%      25.8%        55.6%
Customer Acquisition services.....................  46.1%   64.7%     (18.6)%      (28.8)%
LEC Billed products and services..................  96.2%   96.2%       0.0%         0.0%
Corporate and other...............................   0.0%  100.0%    (100.0)%     (100.0)%
                                                    ----   -----     ------       ------
          CONSOLIDATED GROSS PROFIT PERCENTAGE....  71.6%   66.0%       5.6%         8.5%
                                                    ====   =====     ======       ======
</Table>

     Consolidated Gross Profit Percentage ("Gross Margin") as a percentage of
net revenue was 71.6% in Fiscal 2001, compared to 66.0% in Fiscal 2000,
representing an absolute percentage point increase of 5.6%, and an 8.5% increase
on a relative basis.

     On a segmental basis, the Company's E-commerce segment Gross Margin
increased to 72.3% in Fiscal 2001 compared to 46.4% in Fiscal 2000. The 25.8%
percentage point increase resulted from (a) the Company benefiting from the
cost-free revenue generating effect of databases purchased in the fiscal year
ended November 30, 2000 (the databases were fully expensed in Fiscal 2000 and
the Company owns and continues to use these databases in Fiscal 2001 without
additional cost); (b) decreased costs on a unitary-basis associated with the
Company's e-mailing activities; and (c) a significant decline in the Company's
free on-line lottery prize indemnification costs.

     The Company's Off-line Customer Acquisition Services segment's Gross Margin
declined to 46.1% in Fiscal 2001, compared to 64.7% in Fiscal 2000. The 18.6%
percentage point decline resulted from the costs of a contingent liability
realized upon the settlement of the arbitration dispute with Talk. The
contingency was of

                                        16
<PAGE>

a higher cost relationship to revenues than historically recognized within the
segment, due to the fact that the total contingency became payable as a result
of the first installment. The second installment will not have any contingent
payables if such second installment is collected in Fiscal 2002. To the extent
that the balance of the Talk settlement is received in Fiscal 2002, the Company
will report Gross Margin in its Off-line Customer Acquisition segment in excess
of 90%.

     The Company's LEC Billed Products and Services segment ("LEC Segment")
Gross Margin remained stable at 96.2%. See "Service Bureaus, Local Exchange
Carriers and Service Bureau Bankruptcy" following the "Liquidity and Capital
Resources" section for a detailed discussion of the LEC Segment gross profit
decreases as it relates to the Company's comparative and future operations.

     The Company's Selling Expenses and General and Administrative Expenses for
each of the years ended November 30, 2001 and 2000 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

<Table>
<Caption>
                                                                     CHANGE      CHANGE
                                                                    INC(DEC)    INC(DEC)
        YEAR ENDED NOVEMBER 30,             2001         2000         $$$         %%%
        -----------------------          ----------   ----------   ----------   --------
<S>                                      <C>          <C>          <C>          <C>
E-COMMERCE
Fee share commissions..................  $2,157,921   $  224,109   $1,933,812      863%
Other commissions......................     356,133           --      356,133      100%
Selling salaries and related
  expenses.............................   1,372,934      659,747      713,187      108%
Occupancy and equipment costs..........      23,118           --       23,118      100%
Travel, entertainment and other........     244,913       87,998      156,915      178%
                                         ----------   ----------   ----------     ----
TOTAL E-COMMERCE SELLING EXPENSE.......  $4,155,019   $  971,854   $3,183,165      328%
                                         ----------   ----------   ----------     ----
OFF-LINE CUSTOMER ACQUISITION SERVICES
Fee share commissions..................  $       --   $  189,139   $ (189,139)    (100)%
Other commissions......................      87,573           --       87,573      100%
Selling salaries and related
  expenses.............................     191,211      274,137      (82,926)     (30)%
Travel, entertainment and other........       3,470       36,565      (33,095)     (91)%
                                         ----------   ----------   ----------     ----
TOTAL OFF-LINE SELLING EXPENSE.........  $  282,254   $  499,841   $ (217,587)     (44)%
                                         ----------   ----------   ----------     ----
LEC BILLED PRODUCTS AND SERVICES
                                         $       --   $       --   $       --        0%
                                         ----------   ----------   ----------     ----
CORPORATE AND OTHER....................  $       --   $       --   $       --        0%
                                         ----------   ----------   ----------     ----
          CONSOLIDATED SELLING
            EXPENSES...................  $4,437,273   $1,471,695   $2,965,578      202%
                                         ----------   ----------   ----------     ----
</Table>

     Selling expenses on a consolidated basis increased approximately $3
million, or 202%, from $1,471,695 in Fiscal 2000 to $4,437,273 in Fiscal 2001.
The increase was attributable to the Company's E-commerce segment, with an
increase of approximately $3.2 million in selling expenses, offset by a decrease
of $217,588 in the Company's selling expenses within its Off-line Customer
Acquisition Services segment.

     The significant factors contributing to the increase in selling expenses
were (a) increased fee share commissions incurred in the Company's E-commerce
segment of approximately $1.9 million (see below for a detailed description of
this expense category); and (b) increased compensation and related selling costs
($713,187 and $536,166, respectively) arising from the expansion of the
Company's E-commerce segment's sales force and selling activities.

                                        17
<PAGE>

     Regarding the increase in fee share commissions, in the second half of
Fiscal 2001, the Company significantly expanded the practice of marketing
promotional offers on behalf of its marketing clients ("Clients") to third party
databases on a fee share commission basis. The fee share commission relationship
generally arises after the Company concludes a contractual arrangement with a
Client pursuant to which the Company modifies or develops the copy, offer form
and promotional materials for the Client's product or service. The Company then
tests the promotion, and agrees to deliver a minimum level of new customers,
and/or targeted leads to the Client. Simultaneously with the execution of these
contractual arrangements, the Company obtains the exclusive rights from the
Client to market their promotions to a list of third parties with whom the
Company has marketing relationships (the "Third Parties"). The Company enters
into contracts with each Third Party with whom it intends 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 sets
forth the terms of the Third Party's compensation, which range from fixed fees
paid for each customer or lead, generated for the Client, to a revenue share
that is a percentage of the revenue generated (after deduction for certain
direct costs) by the Company for marketing that offer to the Third Party
database. The Company utilizes 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 the Company, and the Company is able to account for revenue generated
under the fee share arrangement with Third Parties.

     Selling expenses within the Company's Off-line Customer Acquisition
Services segment declined 44%, or $217,588 in Fiscal 2001, when compared to
Fiscal 2000. The Company expects that in the fiscal year ended November 30, 2002
it will realize an increase in this segment's selling expenses. The anticipated
increase arises from the Company's expected expansion of the operations of its
majority owned subsidiary, Montvale Management LLC, which conducts business
off-line, as well as on-line, as a net branch for licensed mortgage banking and
brokerage companies.

SEGMENT DATA -- GENERAL AND ADMINISTRATIVE EXPENSES

   CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES, BY SEGMENT, BY COMPONENT

<Table>
<Caption>
                                                                     CHANGE      CHANGE
                                                                    INC(DEC)    INC(DEC)
YEAR ENDED NOVEMBER 30,                   2001          2000          $$$         %%%
-----------------------                -----------   -----------   ----------   --------
<S>                                    <C>           <C>           <C>          <C>
E-COMMERCE
Compensation costs and related
  expenses...........................  $ 2,558,010   $   807,412   $1,750,598      217%
Professional fees....................      853,050       311,193      541,857      174%
Insurance costs......................      532,901       211,504      321,397      152%
Occupancy and equipment costs........      284,148        97,490      186,658      191%
Site development, maintenance and
  modifications......................    1,750,638     2,623,173     (872,535)     (33)%
All other G&A expenses...............      740,883       743,921       (3,038)       0%
                                       -----------   -----------   ----------     ----
TOTAL G&A -- E-COMMERCE SEGMENT......  $ 6,719,630   $ 4,794,693   $1,924,937       40%
                                       -----------   -----------   ----------     ----
</Table>

                                        18
<PAGE>

<Table>
<Caption>
                                                                     CHANGE      CHANGE
                                                                    INC(DEC)    INC(DEC)
YEAR ENDED NOVEMBER 30,                   2001          2000          $$$         %%%
-----------------------                -----------   -----------   ----------   --------
<S>                                    <C>           <C>           <C>          <C>
OFF-LINE CUSTOMER ACQUISITION
  SERVICES
Compensation costs and related
  expenses...........................  $   217,327   $   351,502   $ (134,175)     (38)%
Professional fees....................      158,821        33,534      125,287      374%
Insurance costs......................       84,142       205,299     (121,157)     (59)%
Occupancy and equipment costs........       22,550        97,490      (74,940)     (77)%
All other G&A expenses...............       55,050       309,602     (254,552)     (82)%
                                       -----------   -----------   ----------     ----
TOTAL G&A -- OFF-LINE SEGMENT........  $   537,890   $   997,427   $ (459,537)     (46)%
                                       -----------   -----------   ----------     ----
LEC BILLED PRODUCTS AND SERVICES
Compensation costs and related
  expenses...........................  $   146,200   $   541,646   $ (395,446)     (73)%
Professional fees....................           --         7,758       (7,758)    (100)%
Insurance costs......................       84,142       177,506      (93,364)     (53)%
Occupancy and equipment costs........       22,549        83,956      (61,407)     (73)%
All other G&A expenses...............       15,097      (233,465)     248,562     (106)%
                                       -----------   -----------   ----------     ----
TOTAL G&A -- LEC SEGMENT.............  $   267,988   $   577,401   $ (309,413)     (54)%
                                       -----------   -----------   ----------     ----
CORPORATE AND OTHER
Compensation costs and related
  expenses...........................  $ 2,054,173   $ 1,692,637   $  361,536       21%
Professional fees....................    1,183,800     1,437,860     (254,060)     (18)%
Insurance costs......................        3,474         2,330        1,144       49%
Occupancy and equipment costs........           --         7,940       (7,940)    (100)%
All other G&A expenses...............      495,601       580,657      (85,056)     (15)%
                                       -----------   -----------   ----------     ----
TOTAL G&A -- CORPORATE AND OTHER.....  $ 3,737,048   $ 3,721,424   $   15,624        0%
                                       -----------   -----------   ----------     ----
          CONSOLIDATED TOTALS........  $11,262,556   $10,090,945   $1,171,611       12%
                                       -----------   -----------   ----------     ----
</Table>

     General and Administrative expenses ("G&A") on a consolidated basis
increased approximately $1.2 million, or 12%, when comparing G&A of $10,090,945
in Fiscal 2000 to G&A of $11,262,556 in Fiscal 2001. The net increase was
attributable to the Company's E-commerce segment, with a net increase of
approximately $1.9 million in such segment's G&A expenses, offset by net
declines of $459,537 and $309,413 in G&A within the Company's Off-line Customer
Acquisition Services segment and LEC Billed Product and Services segment,
respectively.

     The E-commerce segment's 40% net increase in G&A expenses was the result of
(a) increased compensation expenses ($1.75 million) and (b) increased
professional fee, insurance and occupancy expenses (combined at $1,049,912),
with such increases necessary to support the 171% increase in net revenues
reported by the Company's E-commerce segment. These net increases were partially
offset by a decline in the E-commerce segment's costs ($872,535, or 33%)
realized in operating, maintaining and modifying the Company's GroupLotto
website. During the year ended November 30, 2001, the Company was able to
negotiate more favorable terms with third party hosting facilities resulting in
the reduced expense.

     The Company's Off-line Customer Acquisition Services segment G&A expenses
declined $459,537, or 46%, when compared to the prior fiscal year. The segment's
expense decreases directly correlate to the significant decline in such
segment's activity during the year ended November 30, 2001.

     The Company's LEC Billed Products and Services segment G&A expenses
declined $309,413, or 54%, when compared to the prior fiscal year. The segment's
expense decreases directly correlate to the significant decline in such
segment's activity during the year ended November 30, 2001. The Company does not
anticipate conducting business within this segment in future fiscal periods and,
as such, does not expect a material contribution to G&A expenses from this
segment in future fiscal periods. See "Service Bureaus, Local Exchange Carriers
and Service Bureau Bankruptcy" following the "Liquidity and Capital Resources"
section for a detailed discussion of factors impacting the LEC Billed Products
and Services segment.

                                        19
<PAGE>

              CONSOLIDATED BAD DEBT EXPENSE (RECOVERY), BY SEGMENT

<Table>
<Caption>
                                                                 CHANGE INC    CHANGE INC
                                                                   (DEC)         (DEC)
YEAR ENDED NOVEMBER 30,                   2001         2000         $$$           %%%
-----------------------                ----------    --------    ----------    ----------
<S>                                    <C>           <C>         <C>           <C>
SEGMENT
E-Commerce...........................  $  301,933    $517,903    $(215,970)        (42%)
Off-line Customer Acquisitions.......          --          --           --           0%
LEC Billed Products and Services.....     826,893          --      826,893         100%
Corporate and Other..................     (45,000)         --      (45,000)       (100%)
                                       ----------    --------    ---------        ----
          CONSOLIDATED NET BAD DEBT
            EXPENSE..................  $1,083,826    $517,903    $ 565,923         109%
                                       ----------    --------    ---------        ----
</Table>

     Bad Debt expense increased $565,923, or 109%, to $1,083,826 in Fiscal 2001
from $517,903 in Fiscal 2000. The material portion of the increase was
attributable to an $826,893 bad debt recognized as a result of the bankruptcy
filing of the Company's inactive LEC Billed Product segment's primary service
bureau.

     The Company continuously evaluates 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) the 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 Company's components of "Other income(expense)" for the years ended
November 30, 2001 and 2000 are presented below:

                      CONSOLIDATED OTHER INCOME (EXPENSE)

<Table>
<Caption>
                                                                  CHANGE INC   CHANGE INC
                                                                    (DEC)        (DEC)
YEAR ENDED NOVEMBER 30,                  2001          2000          $$$          %%%
-----------------------               -----------   -----------   ----------   ----------
<S>                                   <C>           <C>           <C>          <C>
Other income (expense):
Interest expense....................  $    (5,900)  $  (286,655)     280,755       (98%)
Interest income and dividends.......    1,780,546     2,646,622     (866,076)      (33%)
Realized gains on marketable
  securities........................      387,948       863,384     (475,436)      (55%)
Permanent impairment charges........   (4,690,258)   (2,139,315)  (2,550,943)      119%
Gain on nonmonetary cost basis
  exchange..........................           --       565,572     (565,572)     (100%)
Other nonoperating income (expense):
  Sale of telecommunications license
     assets.........................           --       135,000     (135,000)     (100%)
  Residuals from terminated
     programs-revenue (loss)........      (57,344)    1,021,401   (1,078,745)     (106%)
  Other non-operating...............       74,043       198,322     (124,279)      (63%)
Minority interest...................      (69,629)      140,000     (209,629)     (150%)
                                      -----------   -----------   ----------      ----
          TOTAL CONSOLIDATED OTHER
            INCOME (EXPENSE)........  $(2,580,594)  $ 3,144,331   (5,724,925)     (182%)
                                      -----------   -----------   ----------      ----
</Table>

                                        20
<PAGE>

     Consolidated Other Income (Expense) decreased approximately $5.7 million,
from $3.1 million for the year ended November 30, 2000 to $2.6 million for the
year ended November 30, 2001.

     The primary factors contributing to the decrease, in the order of the table
detailed above, are as follows:

          (a) a decrease in interest and dividend income of approximately
     $866,000 resulting from significant decreases in the interest rates
     available on short-term commercial paper during the year ended November 30,
     2001, coupled with a decreased amount of cash available for commercial
     paper investment, resulting from an approximate $6 million stock redemption
     and net federal income tax payments of approximately $6.1 million for a
     settlement of tax audits relating to the calendar years 1996 through 1998
     (for which the related federal tax expense had been charged to operations
     in prior fiscal periods);

          (b) a decrease in gains realized on marketable securities of
     approximately $475,000 resulting from significant declines in the values of
     marketable equity securities held in the Company's investment portfolio. As
     of the November 30, 2001 balance sheet date, the Company has significantly
     reduced its exposure to market fluctuations in its investment portfolio by
     limiting the contents of such portfolio to approximately $22.9 million in
     high grade, short term, commercial paper and auction rate securities (with
     yields ranging from 2.4% to 3.8%, with maturities of 30 to 180 days), with
     only approximately $760,000 in high risk investments, consisting
     exclusively of real estate investment trust equities;

          (c) increases in impairment losses of $2.5 million. During the year
     ended November 30, 2001 (specifically within the three months ended
     February 28, 2001), the Company recognized losses due to "other than
     temporary" declines in the value of its marketable security portfolio.
     These securities had "mark-to-market" valuation adjustments in previous
     quarters, with such adjustments being classified in "other comprehensive
     income (loss)" (a contra equity account on the Company's balance sheet)
     pursuant to their "available-for-sale" classification. Such noncash pretax
     losses recognized during the year ended November 30, 2001 were $4,190,207.
     During the year ended November 30, 2000, the Company recognized
     approximately $2.1 million in long-term investment impairment charges.
     Additionally, during the year ended November 30, 2001, the Company had
     evaluated its long-term investments (specifically within the quarter ended
     February 28, 2001 and during the period March 1, 2001 to April 1, 2001) and
     determined that an investment made in a privately held company during
     Fiscal 2000 was impaired. A long-lived asset impairment write down, related
     to this continuing evaluation, of $500,051 was charged to the "permanent
     impairment charge" account during the year ended November 30, 2001. During
     Fiscal 2002 this entity effectively wound down operations and ceased doing
     business; and

          (d) the reduction in the pre-tax net income attributable to the
     residual activity related to the Company's terminated legacy 900 business,
     as such activity decreased to a loss of approximately $57,000 in Fiscal
     2001, from income of approximately $1 million in the year ended November
     30, 2000.

PROVISION FOR INCOME TAXES

     The Company's 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. The Company recorded income tax expense of $3,275,200 for the year ended
November 30, 2001 on pre-tax income of approximately $3,692,699. This equates to
an effective tax rate of approximately 88.6% and is the result of the Company
taking a full valuation allowance in Fiscal 2001 against the future tax benefits
attributable to the Fiscal 2002 capital loss carryover arising from permanent
impairment charges of $4,690,258, net of realized capital gains of $387,948.
This deferred tax asset valuation allowance has been recorded in the fiscal 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 Fiscal 2001 impairment charges.

     The Company's effective tax rate was approximately 40% for the year ended
November 30, 2000. The majority of impairment losses, recognized in such fiscal
year were related to partnership flow-through

                                        21
<PAGE>

investments and, therefore, such impairments did not generate capital losses,
subject to deductibility limitations, deferred tax asset valuations and
effective rate distortions. For additional discussion and detail on the
Company's tax expense see Note 6 of the Consolidated Financial Statements that
appear elsewhere in this report.

YEAR ENDED NOVEMBER 30, 2000 COMPARED TO YEAR ENDED NOVEMBER 30, 1999

     The Company's net revenues, on a segmental basis, with disclosure of the
components of the individual segments, for the years ended November 30, 2000 and
1999, are presented below:

               SEGMENT DATA -- NET REVENUES, BY SEGMENT COMPONENT

<Table>
<Caption>
                                                                                CHANGE-INC(DEC)   CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30,                                2000          1999             $$$               %%%
-----------------------                             -----------   -----------   ---------------   ---------------
<S>                                                 <C>           <C>           <C>               <C>
E-COMMERCE COMPONENTS
Talk.com Long Distance customer acquisitions......  $ 4,913,703   $        --    $  4,913,703          100%
Traffix e-mailings................................      122,663            --         122,663          100%
GroupLotto -- co-registrations and games..........    4,307,878         7,634       4,300,244          100%
GroupLotto -- barter on e-mail database...........      360,000            --         360,000          100%
Traffix E-mail, Inc. .............................      276,039            --         276,039          100%
                                                    -----------   -----------    ------------          ----
TOTAL E-COMMERCE..................................  $ 9,980,283   $     7,634       9,972,649          100%
                                                    -----------   -----------    ------------          ----
OFF-LINE CUSTOMER ACQUISITION SERVICES COMPONENTS
Talk.com Long Distance customer acquisitions......  $ 4,146,987   $        --    $  4,146,987          100%
Qwest Long distance customer acquisitions.........      418,448    21,593,504     (21,175,056)         (98%)
Qwest Long distance usage commissions.............    4,387,149     9,093,505      (4,706,356)         (52%)
Other customer acquisition services...............        6,190            --           6,190          100%
                                                    -----------   -----------    ------------          ----
        TOTAL OFF-LINE CUSTOMER ACQUISITION
          SERVICES................................  $ 8,958,774   $30,687,009     (21,728,235)         (71%)
                                                    -----------   -----------    ------------          ----
LEC BILLED PRODUCTS AND SERVICES COMPONENTS
"900" Entertainment Service termination
  royalties.......................................  $ 3,393,428   $ 2,769,169    $    624,259           23%
Club 900 Products.................................       85,417     1,693,373      (1,607,956)         (95%)
Enhanced Services, principally voice mail.........    3,590,463     7,513,080      (3,922,617)         (52%)
Telephone number lists rentals....................       65,523            --          65,523          100%
                                                    -----------   -----------    ------------          ----
TOTAL LEC BILLED PRODUCTS AND SERVICES............  $ 7,134,831   $11,975,622      (4,840,791)         (40%)
                                                    -----------   -----------    ------------          ----
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other....  $    20,072   $   169,575        (149,503)         (88%)
                                                    -----------   -----------    ------------          ----
        CONSOLIDATED TOTALS.......................  $26,093,960   $42,839,840    $(16,745,880)         (39%)
                                                    ===========   ===========    ============          ====
</Table>

     Net Revenue for the year ended November 30, 2000 decreased $16,745,880, or
39%, when compared to the year ended November 30, 1999. The revenue increase in
the Company's E-commerce segment of approximately $10 million helped offset
decreases of approximately $21.7 and $4.8 million in the Off-line Customer
Acquisition services and LEC Billed products and services segments,
respectively.

     The majority of the approximate $10 million E-commerce segment net revenue
generated during the fiscal year ended November 30, 2000, when compared to the
$7,634 of net revenue generated during the fiscal year ended November 30, 1999,
is attributable to marketing sale agreements with marketing partners and
corporate customers. The provisions of each agreement determine the type and
timing of revenue to be recorded, which fall into four basic categories: (1)
registration revenue generated from the delivery of qualified registrants to
corporate customers and marketing partners, (2) "click" or "game" revenue for
the delivery of "on-line traffic" to the Company's corporate advertisers' and
marketing partners' websites (which, when combined with the aforementioned
registration revenue, approximated $4.3 million, or 43% of the segment's net
revenue during Fiscal 2000), (3) fees paid by corporate customers for the
delivery of customers obtained through the Company's on-line based marketing
programs (which approximated $4.9 million, or 49% of the segment's net revenue
during Fiscal 2000) and, (4) transmission of permission based opt-in e-mail

                                        22
<PAGE>

advertisements to the Company's on-line database population (which approximated
$759,000, or 8% of the segment's net revenue during Fiscal 2000).

     For a more detailed discussion of the decrease in Off-line Customer
Acquisition services segment revenues see "-- Transactions with Major
Customers".

     The decline in the LEC Billed products and services segment was primarily
due to the residual effects of the Company's termination of the active marketing
of such services in November 1998. See "-- Service Bureaus and Local Exchange
Carriers" and "-- Prior Year Transactions Impacting Current and Future Fiscal
Periods" for an expanded discussion of such decrease. Additionally, decreases in
net revenues from the LEC Billed products and services segment were partially
offset by adjustments to chargeback estimates from prior fiscal periods. Due to
the fact that a significant portion of these previously offered LEC segment
services have reached their contractual settlement phase, it was determined that
certain chargeback reserves were no longer necessary, and approximately $1.8
million was credited to income for the year ended November 30, 2000.

     The Company's cost of sales are comprised of (1) direct and indirect
marketing costs directly associated with the procurement and retention of
customers, including direct response advertising costs, marketing partner
profit-participation costs, promotional costs and premium fulfillment costs, and
(2) the related billing, collection and customer service costs. During the year
ended November 30, 1999, the Company's cost of revenues were offset by net
revenue generated from certain premium offerings made in conjunction with the
Company's marketing of other products and services. The Company terminated the
marketing of these products and service in conjunction with the Transaction
Agreements more fully described in "-- Prior Year Transactions Impacting Current
and Future Fiscal Periods". All such residual revenues from those premium
offerings are reflected in the Company's Other income (expense) section, as a
component of "Other non-operating income", and amounted to approximately $1
million for the year ended November 30, 2000.

     The Company's cost of sales for the years ended November 30, 2000 and 1999
are presented below:

                         SEGMENT DATA -- COST OF SALES

<Table>
<Caption>
                                              COST OF SALES
                                        -------------------------    CHANGE-INC(DEC)    CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30,                    2000          1999              $$$                %%%
-----------------------                 ----------    -----------    ---------------    ---------------
<S>                                     <C>           <C>            <C>                <C>
E-commerce............................  $6,025,010    $     2,084     $  6,022,926            100%
Off-line Customer Acquisition
  services............................   3,010,215     24,416,056      (21,405,841)           (88%)
LEC Billed products and services......     435,050      2,518,547       (2,083,497)           (83%)
Corporate and other...................          --         15,410          (15,410)          (100%)
                                        ----------    -----------     ------------           ----
         CONSOLIDATED TOTALS..........  $9,470,275    $26,952,097     $(17,481,822)           (65%)
                                        ==========    ===========     ============           ====
</Table>

                    CONSOLIDATED COST OF SALES, BY COMPONENT

<Table>
<Caption>
                                              COST OF SALES           CHANGE-INC      CHANGE-INC
                                        -------------------------        DEC             DEC
YEAR ENDED NOVEMBER 30,                    2000          1999            $$$             %%%
-----------------------                 ----------    -----------    ------------    ------------
<S>                                     <C>           <C>            <C>             <C>
Advertising, promotion and fulfillment
  costs...............................  $7,679,542    $29,207,076    $(21,527,534)        (74%)
Service Bureau fees, including
  customer service and psychic
  operators...........................   1,790,733      6,980,932      (5,190,199)        (74%)
"900" Pay-per-call Premium net
  revenue.............................          --     (9,235,911)      9,235,911        (100%)
                                        ----------    -----------    ------------        ----
          TOTAL.......................  $9,470,275    $26,952,097    $(17,481,822)        (65%)
                                        ----------    -----------    ------------        ----
</Table>

     The decrease in cost of sales is directly attributable to the Company's
significantly reduced marketing efforts and related expenditures for the year
ended November 30, 2000, when compared to the year ended November 30, 1999. The
primary factor contributing to this reduction was the termination of the
marketing of the residential long distance customer acquisition activities with
Qwest. This termination was effective

                                        23
<PAGE>

November 30, 1999, and, therefore, the year ended November 30, 2000 did not
include the cost of revenues regarding this arrangement. This agreement was
active during the entire year ended November 30, 1999 and caused the Company to
incur all of the attendant costs of revenue, such as outbound telemarketing,
direct mail, television broadcast media, fulfillment costs and customer service.
See "Transactions with Major Customers". The advertising, promotion and
fulfillment decreases associated with the Qwest agreement termination were
partially offset by increases in customer acquisition costs in obtaining
registered users for its websites and the costs associated with acquiring long
distance customers, both on-line and off-line, for the Company's customer
acquisition agreement with Talk.com. The Talk.com agreement, initially entered
into in May 2000, and then replaced by a long-term contract in September 2000,
was terminated by Talk.com on October 23, 2000 (see "-- Transactions with Major
Customers"), which termination the Company is contesting in arbitration (see
"Legal Proceedings"). The decrease in cost of revenues is also attributable to
the significant decrease in service bureaus fees during the year ended November
30, 2000 of approximately $5.2 million, or 74%, when compared to the year ended
November 30, 1999. The primary factor contributing to this decrease in service
bureau fees relates to the decrease in the Company's LEC segment products and
services billed during the year ended November 30, 2000, when compared to the
year ended November 30, 1999, with net revenues generated from the offering of
such products and services (subject to service bureau fees) having decreased
approximately 60%. The billing of these LEC products and services generated (a)
bill delivery costs, (b) post billing and collection management costs and (c)
data maintenance costs, with the majority of those costs being invoiced as a
percentage of the related gross revenue billed. During the year ended November
30, 2000, the cost of revenue was also reduced for adjustments made to prior
period fulfillment liability estimates. The adjustments reduced prior year
estimates to amounts actually redeemed. The total amount of these reductions to
cost of sales approximated $2,428,000.

     The Company's selling, general and administrative expenses ("SG&A") are
principally comprised of (a) compensation costs and related expenses for
executive, sales, finance, information systems and general administration
personnel, (b) professional fees, (c) insurance costs, (d) occupancy and other
equipment rental costs, (e) site development and modification costs related to
the Company's E-commerce segment, and (f) all other general and miscellaneous
corporate expense items.

     The Company's SG&A expenses for the years ended November 30, 2000 and 1999
are presented, on a segment distribution basis, below:

  Consolidated -- Selling, General and Administrative Expenses

<Table>
<Caption>
                                             SG&A               CHANGE-INC     CHANGE-INC
                                  --------------------------       (DEC)         (DEC)
YEAR ENDED NOVEMBER 30,              2000           1999            $$$           %%%
-----------------------           -----------    -----------    -----------    ----------
<S>                               <C>            <C>            <C>            <C>
E-commerce......................  $ 5,542,435    $   441,974    $ 5,100,461       100%
Off-line Customer Acquisition
  services......................    1,037,476      5,997,437     (4,959,961)      (83%)
LEC Billed products and
  services......................      851,537      1,259,547       (408,010)      (32%)
Corporate and other.............    3,717,944      3,182,198        535,746        17%
                                  -----------    -----------    -----------       ---
          CONSOLIDATED TOTALS...  $11,149,392    $10,881,156    $   268,236         3%
                                  -----------    -----------    -----------       ---
</Table>

     The increase in SG&A expense in the year ended November 30, 2000, compared
to the year ended November 30, 1999, is primarily attributable to the Company's
expansion of its operations into the Internet and on-line marketplace. During
the year ended November 30, 2000 the Company expended approximately $2.6 million
on website development, hosting, enhancements, maintenance, and consulting fees.
The Company also expended approximately $1.2 million on contingent prize based
insurance to cover the possibility of winners of its free on-line lottery
website. These increases were partially offset by reductions in personnel
utilized in maintaining the Company's legacy businesses. Such decreases were
principally recognized during the first six months of the fiscal year ended
November 30, 2000. The legacy business personnel cost reductions were partially
offset by increases in human resources and development costs associated with the
Company's E-commerce segment. Additional reductions in SG&A are attributable to
the terms of an agreement entered

                                        24
<PAGE>

into by the Company in the third quarter of the fiscal year ended November 30,
1999, pursuant to which the Company (i) eliminated its media buying operation,
which included a staff of approximately twenty-one employees, (ii) was released
from a continuing rent expense obligation under an assignment of a lease for the
office space occupied by such media department, and (iii) disposed of all the
media operation's property and equipment. See "-- Prior Year Transactions
Impacting Current and Future Fiscal Periods."

     The Company's "Other income (expense)" for the years ended November 30,
2000 and 1999, are presented below:

                      CONSOLIDATED OTHER INCOME (EXPENSE)

<Table>
<Caption>
                                    OTHER INCOME (EXPENSE)      CHANGE-INC     CHANGE-INC
                                   -------------------------       (DEC)         (DEC)
YEAR ENDED NOVEMBER 30,               2000           1999           $$$           %%%
-----------------------            -----------    ----------    -----------    ----------
<S>                                <C>            <C>           <C>            <C>
Other income (expense):
Interest expense.................  $  (286,655)   $  (70,701)   $   215,954        305%
Interest income and dividends....    2,646,622     1,390,829      1,255,793         90%
Net gains (losses) on sale of
  marketable securities..........      863,384      (494,351)     1,357,735        275%
Long-lived asset impairment
  charges........................   (2,139,315)           --     (2,139,315)       100%
Loss on disposal of fixed
  assets.........................           --      (157,553)       157,553       (100%)
Gain on nonmonetary cost basis
  exchange.......................      565,572            --        565,572        100%
Other nonoperating income:
  Sale of telecommunication
     license assets..............      135,000            --        135,000        100%
  Residual revenues from
     terminated programs.........    1,021,401       555,394        466,007         84%
  Other miscellaneous,
     non-operating income........      198,322       152,175         46,147         30%
Minority interest................      140,000            --        140,000        100%
                                   -----------    ----------    -----------       ----
                                     3,144,331     1,375,793    $ 2,200,446        160%
                                   -----------    ----------    -----------       ----
</Table>

     The Company recorded Long-lived asset impairment charges of $2.1 million,
and recognized a nonmonetary gain of $565,572 on an asset exchange, during the
year ended November 30, 2000. See Note 5 to the Consolidated Financial
Statements.

     The Company's effective income tax rate was 40.3% and 38.5% for the years
ended November 30, 2000 and 1999, respectively, and is a result of the
combination of federal income taxes at statutory rates and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's financial and liquidity position maintained its strength in
the face of the current Internet and Technology Sector weakness and global
economic downturn, as exhibited by the Company's cash, cash equivalent and
short-term marketable securities balance of approximately $37.3 million at
November 30, 2001. Cash, cash equivalent and short-term marketable securities
were approximately $41.9 million at November 30, 2000. On a comparative basis,
the Company's working capital remained stable between November 30, 2000 and
2001, at approximately $41 million. During the fiscal year ended November 30,
2001, the Company's cash flows from the excess of marketable securities
maturities, and sales over marketable securities purchases, were primarily used
to fund repurchases of our common stock, fund our investment in working capital
and fund our capital expenditures.

     Net cash provided by operating activities was approximately $250,000 during
Fiscal 2001 compared to approximately $2.3 million in Fiscal 2000. The
significant components resulting in this decrease were a decline

                                        25
<PAGE>

in net income, increases in accounts receivable generated by the Company's
E-commerce segment, and decreases in income tax and related party payables,
partially offset by noncash impairment charges and the timing of payments on
accounts payable and accrued expenses.

     On March 20, 2001, the Company made a $5 million partial payment against a
tentative settlement with the Internal Revenue Service ("IRS") based upon the
current status of tax audits covering the tax years January 1, 1996 to December
31, 1998. This payment and other payments referenced below were factored into
the Company's tax accrual and corresponding earnings in prior fiscal years.
Therefore, the Company does not expect to recognize a future impact on earnings
for these payments. The March 2001 payment was made to reduce the Company's
interest expense related to the final settlement, which was accepted by the
Internal Revenue Service ("IRS") in August 2001, pending IRS Joint Committee
review based on the fact that one of the tax years in the tax period under audit
had generated a refund in excess of $1 million due to a tax basis net operating
loss carryback. In September 2001, the Company expended $1 million as an
additional installment against the settlement of the tax audits. A final
disbursement of approximately $400,000 will be made upon the IRS's issuance of a
final statement of interest expense due on the matter. It is expected that the
IRS's final statement will be received, either late in the second quarter or in
the third quarter of Fiscal 2002, with payment being made upon receipt.

     Trade accounts receivable as a percentage of net revenues increased to
22.7% at November 30, 2001, from 14.1% at November 30, 2000. The primary reason
for the increase is attributable to an increase in the aggregate number of
days-sales-outstanding ("DSO") in accounts receivable when comparing the full
fiscal year ended November 30, 2001 with 2000. For the fiscal year ended
November 30, 2001, the Company's DSO on a quarterly basis were as follows: first
quarter -- 106 days; second quarter -- 88 days; third quarter -- 91 days; fourth
quarter -- 47 days; aggregate annual DSO 83 days. The majority of the Company's
customers are extended 30-day credit terms. The Company continually monitors
customer adherence to such terms and constantly strives to improve the
effectiveness of its collection efforts with the goal of achieving a DSO in the
40-day range. Future fiscal year quarters might not reflect this goal of a
40-day DSO, or the 47-day DSO recognized in the fourth quarter of Fiscal 2001.

     During the year ended November 30, 2001, approximately $15.3 million of net
cash was provided by investing activities, resulting from approximately $16
million provided by net proceeds from the sale of investments in short-term,
high-grade commercial paper, auction rate securities and marketable securities,
offset by cash outflows for capital expenditures of approximately $720,000 and
long-term investments of $49,000. The Company invests its excess cash in
short-term investments predicated on operating cash requirements, capital
expenditure plans and other business needs. To date, the Company has not been
required to supplement its internally generated cash with third-party financing
or borrowings.

     Cash used in financing activities during the year ended November 30, 2001
amounted to $5,593,908. Included in the use of financing funds was (a) a $6
million purchase and retirement of common stock acquired from a former director
and officer, and (b) $74,814 in open market purchases of the Company's stock,
held in treasury, with both of these being offset by $480,906 in proceeds
generated by the exercise of the Company's stock options.

     Historically, the Company's primary cash requirements have been used to
fund the cost of advertising and promotion, with additional funds having been
used in the purchasing of equipment and services in connection with the
commencement of new business lines and further development of businesses being
test marketed. During the fiscal year ended November 30, 2000, the Company
executed its on-line direct marketing strategy. The Company's future plans and
business strategy continue to call for its Internet based E-commerce segment to
be its primary operating focus, with such segment generating a material portion
of future revenues. If the Company's on-line activities fail to generate
sufficient revenue, then the continuation of the Company's on-line growth could
have a material adverse impact on the Company's capital and liquidity resources
relating to possible expenditures for (a) marketing campaigns, (b) product
development costs, (c) site development and maintenance and related technology
based costs, (d) potential on-line business acquisitions, (e) costs associated
with developing alternative means of e-mail promotion delivery, or (f) other
unexpected and/or currently unidentifiable costs. During the year ended November
30, 2001, the Company

                                        26
<PAGE>

expended approximately $720,000 in capital expenditures to support its
E-commerce activities. In December 2001, the Company acquired the assets of a
Canadian based Internet technology company. The Company believes that this
acquisition will decrease certain costs relative to its reliance on third
parties in the provision of e-mailing services and other Internet hosting
services. The realization of those proposed cost savings will require capital
expenditures on behalf of the Company. Should the business climate, Internet
operating environment or technology environment change significantly, the
Company could be faced with circumstances that would limit or prevent its
utilization of these capital expenditures.

     During the fiscal year ended November 30, 1999, the Company's Internet
business plan and strategy prompted the Company to terminate the active
marketing of its legacy products and services. Accordingly, this legacy activity
may contribute, but in a significantly decreasing degree, to the Company's cash
flows and net income in subsequent fiscal periods, as was the case during the
year ended November 30, 2001 when compared to the years ended November 30, 2000
and 1999. This should be considered when using the Company's historical results
in evaluating future operations, cash flows and financial position.
Nevertheless, the Company will continue to explore opportunities to offer other
Off-line Customer Acquisition Services and LEC Billed Products and Services in
the future.

     Under currently proposed operating plans and assumptions, management
believes that projected cash flows from operations and available cash resources
will be sufficient to satisfy the Company's anticipated cash requirements for at
least the next twelve months. Currently, the Company does not have any material
long-term obligations other than those described in note   "Commitments and
Contingent Liabilities" included in the Company's financial statements included
in Part IV of this document, nor has the Company identified any long-term
obligations that it contemplates incurring in the near future. As the Company
seeks to further extend its reach into the E-commerce arena, as well as identify
new and other consumer oriented products and services in the off-line arena, the
Company may use existing cash reserves, long-term financing, or other means to
finance such diversification.

PRIOR YEAR TRANSACTIONS IMPACTING CURRENT AND FUTURE FISCAL PERIODS

     In June 1999, the Company entered into certain agreements (the "Transaction
Agreements"), including the Agreement Regarding 900 Pay-Per-Call Psychic
Services (the "900 Agreement"), dated as of May 26, 1999, by and between the
Company and ARS ("Access Resource Services, Inc."), pursuant to which the
Company agreed to refrain until January 17, 2001 from conducting, marketing,
advertising or promoting certain "stand alone" 900 Pay-Per-Call Psychic Services
described in the 900 Agreement (the "900 Psychic Services") directly or
indirectly through any affiliate. In addition, the Company agreed to cease the
conduct of the media buying operation which it conducted under the name "Quintel
Media" and ARS agreed to assume responsibility for the "Quintel Media" employees
and for the lease of the premises used by "Quintel Media" in Fort Lauderdale,
Florida, and to acquire the computer equipment and other furniture, fixtures and
leasehold improvements used by "Quintel Media" at such premises.

     In consideration for the Company's acceptance of the terms of the 900
Agreement, ARS and any of its affiliates offering 900 Pay-Per-Call Psychic
Services and/or membership club services, agreed to pay to the Company certain
royalty fees ("900" Entertainment Service termination royalties, included in the
Company's LEC Billed Products and Services Segment) relative to such service
offerings. ARS was required to pay such royalty fees from and after the
consummation of the transactions contemplated by the Transaction Agreements, and
until January 16, 2001. For the years ended November 30, 2001, 2000 and 1999,
these royalties amounted to approximately $486,000, $3,393,000 and $2,769,000,
or 1.5%, 12.8% and 6.5%, respectively, of the Company's related net revenues. As
of November 30, 2001, the Company has received all funds due under this
arrangement and will no longer recognize revenue or cash flows from this
activity in future fiscal periods.

                                        27
<PAGE>

TRANSACTIONS WITH MAJOR CUSTOMERS

     During the fiscal year ended November 30, 2001, the Company had six major
customers, five within its E-commerce segment and one within its Off-line
Customer Acquisition Services segment, which, in the aggregate, accounted for
approximately 54.9% of consolidated net revenues during the year ended November
30, 2001, and approximately 69.1% of consolidated trade accounts receivable-net
as of November 30, 2001. The Company did not conduct business with the five
E-commerce segment customers referenced above in Fiscal 2000.

     During the fiscal year ended November 30, 2000, the Company derived
approximately 52% of net revenues from two major customers in its Off-line
Customer Acquisition Services segment (as discussed below). In the year ended
November 30, 1999, the Company had derived approximately 72% of its revenue from
one major customer. As at November 30, 2000, the Company had either terminated,
or had been terminated, from providing services to such major customers.
Accounts receivable from Fiscal 2000's major customers were approximately $-0-
and $611,000 at November 30, 2001 and 2000, respectively.

     During the fiscal year ended November 30, 2000, the Company generated its
Off-Line Customer Acquisition revenue exclusively from long distance customer
acquisition agreements with two long distance providers, Qwest Communications
and Talk.com.

     The Company provided marketing services to the long distance carrier LCI
International Telecom Corp., d/b/a Qwest Communications Services ("Qwest")
during that time, primarily through outbound telemarketing and broadcast media,
directed at the acquisition of residential long distance customers for Qwest. In
addition to commissions paid to the Company for its successful customer
acquisitions on behalf of Qwest, the Company also received a portion of Qwest's
net revenues earned from such acquired customers' residential long distance
usage. This marketing arrangement with Qwest was terminated in Fiscal 2000
through the execution of settlement, termination and release agreements. The
Company does not expect to receive any further revenue from Qwest relative to
these agreements.

     During the fiscal year ended November 30, 2000, the Company entered into a
series of agreements with Talk.com Holding Corp. ("Talk"), pursuant to which the
Company provided marketing services to Talk directed at the acquisition of
residential long distance customers for Talk. Such agreements obligated Talk to
pay the Company fees for its successful customer acquisitions on behalf of Talk.
In October 2000, Talk terminated its agreements with the Company. In response to
Talk's action the Company had commenced legal proceedings, via arbitration, to
contest what it believed to be Talk's wrongful termination of its agreements
with the Company. The efforts of the Company's general counsel secured a victory
against Talk resulting in an approximate $6.2 million arbitration award. The
award represented the settlement for long distance customers delivered to Talk
(approximately $3.7 million) which represented Talk's acceptance of such
delivered customers thus fulfilling the Company's revenue recognition criteria.
The Company recognized $3.7 million of revenue (11.5% of consolidated Fiscal
2001 revenues) from the settlement during the year ended November 30, 2001,
resulting from the receipt of Talk's first of two installments due on the total
settlement. Talk is included above as one of the Company's major customers in
Fiscal 2001. The first installment was comprised of approximately $2 million of
revenue attributable to the Company's E-commerce segment's acquired long
distance customers. The balance of the first installment, or approximately $1.7
million of revenue, was attributable to the Company's Off-line customer
acquisition (legacy) segment. The additional portion of the award was
approximately $2.5 million pursuant to the contract's early termination penalty
being invoked. This second, and final, installment of approximately $2.5
million, plus interest at 6%, is required to be paid on April 1, 2002. If the
Company receives the second installment in Fiscal 2002 it will record the
revenue at that time, with the segment distribution thereof to be as follows:
(a) approximately $1.4 million of E-commerce revenue within that segment's "long
distance customer acquisition" sub-segment; and (b) approximately $1.1 million
of Off-line Customer Acquisition segment revenue. Based on the telecommunication
industry's present weakened state of financial affairs, and specifically
management's estimation of Talk's ability to pay, management determined that the
second installment of the settlement was a gain contingency and, as such, will
record any related revenue only upon collection.

                                        28
<PAGE>

SERVICE BUREAUS, LOCAL EXCHANGE CARRIERS, AND SERVICE BUREAU BANKRUPTCY

     In November 1998, three of the existing LECs at that time, specifically
Ameritech Corp., Bell Atlantic Corp. and SBC Communications, Inc., refused to
bill customers for enhanced services provided by the Company. This was a result
of what the LECs claimed was excessive complaints by customers for "cramming"
(unauthorized charges billed to a customer's phone bill) against the Company and
its affiliates. This billing cessation effectively prevented the Company from
selling its enhanced services in those areas serviced by such LECs.

     As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continued
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Federal Transtel ("FTT"), whereby FTT provided the
billing services previously provided by BIC. In effect, between the termination
of the BIC billing service arrangement and the commencement of billing under the
agreement with FTT (approximately two months), the Company was unable to bill
for any enhanced services provided during such prior fiscal year ended November
30, 1998.

     The Company continued to bill an attriting customer base relative to these
enhanced services through FTT, until October 2001 resulting in net revenues of
approximately $884,000 and $3,590,000, for the years ended November 30, 2001 and
2000, respectively. This billing activity was terminated in October 2001
resulting from an action brought by the Company against FTT, filed in the United
States District Court, Southern District of New York, entitled Traffix, Inc.
f/k/a Quintel Entertainment, Inc. v. Federal Transtel, Inc. ("FTT") and Daniel
Nishrie, Docket No. 01 Civ. 8807 (the "FTT Action").

     In the FTT Action, the Company seeks to recover approximately $2.1 million
relative to FTT's voice mail billing and collection services. This amount, after
being offset by approximately $1.3 million in reserves for customer chargebacks
for a combined total of approximately $827,000, was charged to bad debt expense
at November 30, 2001 in response to FTT's December 2001 bankruptcy filing.

     In a related action, Quintel Communications, Inc. v. Federal Transtel,
Inc., Southern District of New York, Docket No. 00 Civ. 3803, the Company sought
to recover approximately $1 million the Company believed were wrongfully
withheld by FTT in connection with FTT's billing and collection services for a
membership club that the Company ceased operating in June 1999. The Company has
been granted summary judgment on liability, and a hearing to determine the exact
amount of damages to be awarded to the Company was held in October 2001. The
damages and interest determined at such hearing exceed $1 million. At November
30, 2001, the Company has not recorded a receivable associated with this related
action. The Company had charged such amounts involved in the proceeding against
net revenues in the year ended November 30, 1999. Therefore, the Company is
treating this action as a "gain contingency", with any potential recovery
received by the Company being reflected as a recovery of bad debt at the time of
receipt, subject to the conclusion of the FTT bankruptcy proceedings.

CURRENT YEAR COMPLETED ACQUISITION

     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. See Note 5 to
the Consolidated Financial Statements for additional information about this
acquisition.

                                        29
<PAGE>

FISCAL 2002 COMPLETED ACQUISITIONS

     In the fourth quarter of Fiscal 2001, the Company began the process of
negotiation and due diligence regarding the potential asset acquisitions of two
private companies in the Internet sector. Both acquisitions closed in the first
quarter of the fiscal year ending November 30, 2002. See Note 14 to the
Consolidated Financial Statements for additional information about the financial
commitments and contingent obligations relative to these asset acquisitions.

CRITICAL ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION

     In accordance with the Securities and Exchange Commission's (the
"Commission") Release Nos. 33-8040; 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", the Company
has set forth below what it believes to be the most pervasive accounting
policies and estimates that could have a material effect on the Company's
results of operations and cash flows, if general business conditions, or
individual customer financial circumstances, change in an adverse way relative
to the policies and estimates used in the attached financial statements or in
any "forward looking" statements contained herewith.

FACTORS THAT COULD EFFECT FUTURE RESULTS

  Revenue Recognition, Variable Costs and Bad Debts

     The Company currently earns the largest portion of its revenue from the
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 invoices its customers in accordance with the terms of the underlying
agreement, and the related marketing activity delivered and/or marketing service
provided. 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 provide for reductions to the final amounts paid
by the Corporate Customer, and typically consist of allowances for duplicate
records delivered, invalid address records delivered, age restricted records
delivered and other contractually determined reductions to the gross records
delivered. The Company's revenues are adjusted in later fiscal periods if the
Company's 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 the
Company's 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, the Company could suffer material deterioration in future fiscal
period gross margins, therefore, our profitability and cash flows could be
adversely affected.

     Certain obligations are recorded at the time revenue is recognized. They
include costs payable to other on-line, as well as off-line, advertisers for
registered user acquisitions and consumer data, fee sharing costs under third
party database use agreements, e-mail message delivery costs, contingent based
prize indemnification coverage (for potential free on-line lottery winners),
premium fulfillment costs related to the promotion and all other variable costs
directly associated with completing the Company's obligations relative to the
revenue recognized.

     Should the Internet operating landscape affecting the Company adversely
change resulting in (a) higher costs of acquiring consumer data and registered
users for the Company's websites; (b) higher costs of acquiring data for our
marketing partners, compromising such marketing partners' ability to maintain
adequate databases to allow for continued third party database use agreements;
(c) the Company's fiscal 2002 asset acquisition failing to reduce the cost of
the Company's e-mail delivery activities, or the Company being required to
depend on third party e-mailing service bureaus to provide an increased portion
of its commercial e-mail delivery at a cost in excess of anticipated internally
generated costs; (d) the Company's contingent based prize indemnification
premiums for indemnification coverage increasing due to an increase in the
number of prize winners at the site, or other currently unknown factors; (e) the
Company's accruals for fulfillment obligations arising out of its promotions
proving to be less than the actual redemptions processed in

                                        30
<PAGE>

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 in subsequent fiscal periods, the Company could
suffer material deterioration in future fiscal period gross margins and,
therefore, our profitability and cash flows could be 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 (a) the length of time the receivables
are past due, (b) historical experience, and (c) other factors obtained during
the conduct of collection efforts. If circumstances change regarding our
specific customers on an individual basis, or if demand for Internet direct
marketing softens, or if a continuation of the current global economic downturn
prevails, our estimates for bad debt provisions could be further increased,
which could adversely affect our operating margins, our profitability and our
cash flows.

  Continuation of Major Customers and Prospects of Majority-Owned Subsidiary

     During the fiscal year ended November 30, 2001, the Company derived
approximately $17.7 million, or 55% of its revenues, from six major customers.
Three of such customers each exceeded 10% of net revenues, with the remaining
three each accounting for 6.5% of net revenues. Five of the six customers
continued to conduct business with the Company at November 30, 2001. Should the
Company not be able to continue its relationships with these companies on
equivalent, or similarly favorable terms, or replace any of these companies with
other third parties on similar revenue and gross margin generating terms, the
Company could suffer material deterioration in future fiscal period gross
margins and, therefore, our profitability and cash flows would be adversely
affected. Our potential decreased profitability relative to such possible
failure to continue current relationships, or our inability to replace them with
new relationships, could be partially mitigated by the execution of reductions
in our workforce. It is not known how rapidly the Company could respond with
such reductions, if at all.

     During the year ended November 30, 2001, the Company's 51% majority-owned
subsidiary, Montvale Management LLC, contributed approximately $868,539, or 2.7%
of consolidated net revenues. The subsidiary became active in Fiscal 2001 (in
the Company's fourth quarter). The subsidiary generates revenue by operating
under net branch agreements, whereby it originates residential mortgages and
refinancings for licensed mortgage banking and brokerage companies. The
subsidiary became active as a result of reduced mortgage and refinance loan
interest rates, and increased government funds for low-income homebuyers. The
Company's future business plans and operating assumptions anticipate that the
subsidiary will contribute significantly more revenue to the Company in terms of
absolute dollars, and in terms of percentage of total revenues and operating
income, in the fiscal year ending November 30, 2002. Such assumptions are
subject to the continuation of the current interest rate market, the continued
acceptance by the general public of off-line and on-line marketing promotions
for mortgage and mortgage related products, the continued ability of the
independently operated majority-owned subsidiary to hire and maintain competent
staff and management personnel, trained in the specific field of net branch
operations, as well as other factors currently not identifiable. The Company can
make no assurance that it will realize an increased contribution of revenue and
related profits from the majority owned subsidiary in future fiscal periods.

 The Company's revenues and profitability from operations have historically
 varied

     Our revenues, cost of providing revenues, profit margins and overhead
expenses have varied historically among segments. 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 and
potential regulatory issues that may exist in future periods. Therefore, it is
difficult to predict revenue and gross margin trends. Actual trends may cause
the Company to adjust its operating emphasis, which could result in continued
period-to-period fluctuations in the Company's results of operations.
Historically, the Company has had to react to rapid changes in the business
environment within which it operates. Management responded to these
                                        31
<PAGE>

rapid changes as deemed appropriate 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 the Company's current
operations and marketing methods, as well as the still emerging status of the
Internet marketing environment, it is possible that management could institute
significant changes to the Company's business model in response to unforeseen
rapid changes in future fiscal periods.

 Impairment of Goodwill, other Intangibles and investment portfolios could
 impact net income

     The Company carries Goodwill and other Intangibles on its balance sheet
arising from a current year acquisition of the minority interest of a previously
majority-owned subsidiary. If the cash flows generated from such subsidiary
should fall to levels that are less than the applicable amortization expense
resulting from the Goodwill recorded on the purchase, then the Company 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, the Company 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.

     The Company maintains an investment portfolio that is managed by a
prominent financial institution. The portfolio includes high-grade corporate
commercial paper and auction rate securities, and equity securities of real
estate investment trusts ("REITs"), all of which are held for varying periods of
time, pursuant to maturity dates, market conditions and other factors. The
values of our investments in publicly-traded companies, which as of November 30,
2001 was limited to our REIT investments, are subject to significant market
price volatility.

     Moreover, due to the economic downturn 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 in fulfilling their
responsibility of adhering to the repayment of principal upon maturity.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141
requires that all business combinations be accounted for by the purchase method
of accounting and changes the criteria for recognition of intangible assets
acquired in a business combination. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. We do not expect that the
adoption of SFAS 141 will have a material effect on our consolidated financial
position or results of operations. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, once SFAS
142 is adopted, which will be in our fiscal year ending November 30, 2003;
however, these assets must be reviewed at least annually for impairment
subsequent to adoption. Intangible assets with finite useful lives will continue
to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for our fiscal year ending November 30, 2003; earlier adoption is
not available pursuant to the terms of SFAS 142. However, goodwill and
intangible assets acquired after June 30, 2001 are subject immediately to the
non-amortization provisions of SFAS 142. While we are currently in the process
of evaluating the potential impact that the adoption of SFAS 142 will have on
our consolidated financial position and results of operations, our preliminary
assessment is that the adoption of SFAS 142 will have an immaterial impact on
the Company.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for the disposition of long-lived assets. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses

                                        32
<PAGE>

on such operations. The provisions of SFAS 144 will be effective for our fiscal
year ending November 30, 2003 and will be applied prospectively. We are
currently in the process of evaluating the potential impact that the adoption of
SFAS 144 will have on our consolidated financial position and results of
operations. Based on the relative components of our balance sheet at November
30, 2001, we believe that the adoption of SFAS 144 will have an immaterial
impact on the Company's consolidated financial position and results of
operations, if any effect at all.

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 January 25, 2002.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

     Set forth below are the directors and executive officers of the Company,
their respective names and ages, positions with the 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.

<Table>
<Caption>
NAME                                   AGE                           POSITION
----                                   ---                           --------
<S>                                    <C>   <C>
Jeffrey L. Schwartz..................  53    Chairman of the Board and Chief Executive Officer
Andrew Stollman......................  36    Chief Operating Officer, Secretary and Director
Eric Aroesty.........................  31    President and Director
Joshua B. Gillon, Esq................  39    Executive Vice President -- Corporate Affairs and
                                             General Counsel
Daniel Harvey........................  43    Chief Financial Officer
Murray L. Skala......................  55    Director
Edwin A. Levy........................  62    Director
Lawrence Burstein....................  59    Director
Jack Silver..........................  58    Director
</Table>

  Directors

     Jeffrey L. Schwartz has been Chairman and Chief Executive Officer of the
Company since January 1995, President from January 2001 to December 2001,
Secretary/Treasurer from September 1993 to December 1994 and a director since
inception of the Company 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 the Chief Operating Officer since January 1, 2001
and Secretary and a director of the Company since January 1995. From February
2000 until January 2001, Mr. Stollman was also the Company's Executive Vice
President and from January 1995 until February 2000, he was the Company's Senior
Vice President. Mr. Stollman was the Company's President from September 1993 to
December 1994.

     Eric Aroesty was appointed the Company's President in December 2001 and has
been a director since January 23, 2002. From 1999 until December 2001, Mr.
Aroesty was President of Group Lotto, Inc. and MultiBuyer, Inc., two
wholly-owned subsidiaries of the Company. Mr. Aroesty was Senior Vice President
of

                                        33
<PAGE>

the Company from 1997 to 1999 and Vice President of Marketing from 1995 to 1997.
Mr. Aroesty has been an employee of the Company since 1994.

     Murray L. Skala has been a director of the Company 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 of the Company 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.

     Lawrence Burstein has been a director of the Company 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 several companies, being,
respectively, THQ, Inc., engaged in the development and marketing of games for
Sony, Nintendo and Sega game systems; Brazil Fast Food Corporation, which owns
and operates the second largest chain of fast food outlets in Brazil; CAS
Medical Systems, Inc., engaged in the manufacture and marketing of blood
pressure monitors and other disposable products, principally for the neonatal
market; MNI Group, Inc., engaged in the manufacturing and distribution of
nutritional supplements; I.D. Systems Inc., engaged in the design, development
and production of a wireless monitoring and tracking system which uses radio
frequency technology; and Unity First Acquisition Corporation, a publicly-held
acquisition vehicle, of which Mr. Burstein is also President.

     Jack Silver has been a director of the Company since January 1, 2001. He is
the principal investor and manager of SIAR Capital, an independent investment
fund that invests primarily in undervalued, emerging growth companies. Mr.
Silver, a certified public accountant by background, has managed SIAR capital
for over twenty years.

     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
employees of the Company are compensated for their services and attendance at
meetings through the grant of options pursuant to the Company's Stock Option
Plan.

  Executive Officers

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

     The remaining executive officers are Joshua B. Gillon, Esq., the Company's
Executive Vice President -- Corporate Affairs and General Counsel, and Mr.
Daniel Harvey, the Company's Chief Financial Officer.

     Mr. Gillon, age 39, was appointed Chief Investment Officer and General
Counsel of the Company in April 2000. In April 2001, Mr. Gillon's title was
changed to Executive Vice President -- Corporate Affairs 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.

                                        34
<PAGE>

     Mr. Harvey, age 43, has been Chief Financial Officer of the Company since
January 1997. He joined the Company 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.

     The Company has 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.

     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 the Company's system of internal accounting
controls. The current members of the Audit Committee are Messrs. Levy, Burstein
and Silver.

     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 the Company's stock option plans, relating to
employee benefits, incentives and compensation. The current members of the
Compensation Committee are Messrs. Skala and Burstein.

     Stock Option Committee.  The Stock Option Committee determines the persons
to whom options should be granted under the Company's 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, 2000 through November 30, 2001, the Board of Directors,
Stock Option Committee, Audit Committee and Compensation Committee each met or
acted without a meeting pursuant to unanimous written consent four times, ten
times, one time and one time, respectively.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     To the best of the Company's knowledge, during the fiscal year ended
November 30, 2001, (i) Jeffrey L. Schwartz, Andrew Stollman and Jack Silver each
untimely filed one report on Form 4, each reporting three transactions; (ii) Jay
Greenwald untimely filed one report on Form 4, reporting eleven transactions;
and (iii) Jay Greenwald failed to file a report on Form 4 to report one
transaction. These individuals were executive officers, directors and/or
beneficial owners of more than 10% of the Common Stock of the Company during the
fiscal year ended November 30, 2001. To the best of the Company's knowledge, all
other Forms 3, 4 and 5 required to be filed during the fiscal year ended
November 30, 2001 were done so on a timely basis.

                                        35
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth the Company's executive compensation paid
during the three fiscal years ended November 30, 2001, 2000 and 1999 for (i) the
Company's Chief Executive Officer; (ii) the Company's four most highly
compensated executive officers (other than the Chief Executive Officer) whose
cash compensation for the fiscal year ended November 30, 2001 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").

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                                                     LONG TERM COMPENSATION
                                                                        -------------------------------------------------
                                            ANNUAL COMPENSATION                        AWARDS             PAYOUTS
                                      -------------------------------                ----------   -----------------------
             (A)               (B)      (C)        (D)         (E)         (F)          (G)           (H)          (I)
-----------------------------  ----   --------   --------   ---------   ----------   ----------   -----------   ---------
                                                              OTHER                  SECURITIES                 ALL OTHER
                                                             ANNUAL     RESTRICTED   UNDERLYING                  COMPEN-
NAME AND                               SALARY     BONUS     COMPENSA-     STOCK       OPTIONS        PLAN        SATION
PRINCIPAL POSITION             YEAR     ($)        ($)        TION        AWARDS        (#)       PAYOUTS ($)      ($)
------------------             ----   --------   --------   ---------   ----------   ----------   -----------   ---------
<S>                            <C>    <C>        <C>        <C>         <C>          <C>          <C>           <C>
Jeffrey L. Schwartz..........  2001   $444,000   $200,000          0        0         150,000           0           0
  Chairman and                 2000   $405,000   $185,000          0        0         100,000           0           0
  Chief Executive Officer      1999   $362,000   $100,000          0        0               0           0           0
Andrew Stollman..............  2001   $401,000   $200,000          0        0         135,000           0           0
  Chief Operating              2000   $367,000   $165,000          0        0         100,000           0           0
  Officer and Secretary        1999   $266,000   $100,000          0        0               0           0           0
Eric Aroesty.................  2001   $294,000   $150,000          0        0               0           0           0
  President(1)                 2000   $185,000          0          0        0               0           0           0
                               1999   $189,000   $ 10,155          0        0               0           0           0
Joshua B. Gillon, Esq. ......  2001   $225,000   $ 50,000          0        0         175,000           0           0
  Executive Vice President -   2000   $133,000   $ 25,000          0        0         100,000           0           0
  Corporate Affairs and
  General Counsel(2)
Daniel Harvey................  2001   $184,000   $ 40,000          0        0          79,000           0           0
  Chief Financial Officer      2000   $177,000   $ 30,000          0        0          29,000           0           0
                               1999   $155,800   $ 20,000          0        0               0           0           0
Jay Greenwald(3).............  2001   $ 32,000   $100,000(3)  $60,000(4)     0         12,500           0           0
  Former President and         2000   $405,000          0          0        0         100,000           0           0
  Chief Operating Officer      1999   $362,000   $100,000          0        0               0           0           0
</Table>

---------------
(1) Mr. Aroesty has served as an employee of the Company since 1994, but he
    first became an Executive Officer of the Company in December 2001 upon his
    appointment as President.

(2) Mr. Gillon's Salary during 2000 was $200,000 per annum, however he was first
    employed by the Company on April 5, 2000.

(3) Mr. Greenwald resigned as an Executive Officer and employee of the Company
    on December 22, 2000 and was paid a severance payment at that time of
    $100,000.

(4) Represents consulting fees paid to Mr. Greenwald after his resignation from
    the Company.

                                        36
<PAGE>

     The following table sets forth certain information regarding the granting
of options to the Named Officers during the fiscal year ended November 30, 2001.

                       OPTION GRANTS IN LAST FISCAL YEAR

<Table>
<Caption>
                                                                                        POTENTIAL REALIZABLE
                                                                                          VALUE AT ASSESSED
                                                                                           ANNUAL RATES OF
                                                                                             STOCK PRICE
                                                                                          APPRECIATION FOR
                                                 INDIVIDUAL GRANTS                         OPTION TERM(2)
                              -------------------------------------------------------   ---------------------
            (A)                  (B)             (C)             (D)          (E)          (F)         (G)
----------------------------  ----------   ---------------   -----------   ----------   ---------   ---------
                              NUMBER OF
                              SECURITIES     % OF TOTAL
                              UNDERLYING   OPTIONS GRANTED   EXERCISE OR
                               OPTIONS     TO EMPLOYEES IN   BASE PRICE    EXPIRATION
NAME                          GRANTED(#)   FISCAL YEAR(1)     ($/SHARE)       DATE        5%($)      10%($)
----                          ----------   ---------------   -----------   ----------   ---------   ---------
<S>                           <C>          <C>               <C>           <C>          <C>         <C>
Jeffrey L. Schwartz.........    50,000           5.03%         $2.31          4/9/11    $ 72,638    $184,078
                                50,000           5.03           2.50          4/9/11      63,138     174,578
                                50,000           5.03           3.00          4/9/11      38,138     149,578
Andrew Stollman.............    45,000           4.53           2.31          4/9/11      65,374     165,670
                                45,000           4.53           2.50          4/9/11      56,824     157,120
                                45,000           4.53           3.00          4/9/11      43,324     134,620
Joshua B. Gillon............    50,000(3)        5.03           1.625       12/21/05      22,448      49,604
                                25,000(3)        2.51           3.00        12/21/05           0           0
                               100,000(4)       10.07           3.86          8/2/07     131,277     297,823
Daniel Harvey...............    25,000(3)        2.51           1.875        12/8/05      12,951      28,618
                                14,000(3)        1.41           1.625       12/21/05       6,286      13,890
                                40,000(5)        4.02           3.86          8/2/06      42,658      94,263
</Table>

---------------
(1) Options to purchase a total of 992,562 shares of Common Stock were granted
    to the Company's employees, including the Named Officers, during the fiscal
    year ended November 30, 2001.

(2) Based upon the closing price of the Common Stock, as listed by the Nasdaq
    National Market, on the date of grant of the respective options.

(3) One-third ( 1/3) of these options became exercisable on their date of grant
    and on the one-year anniversary thereof, and the remaining one-third ( 1/3)
    become exercisable on the two-year anniversary thereof.

(4) One-third ( 1/3) of this option became exercisable on each of the one-, two-
    and three-year anniversaries of its date of grant.

(5) One-third ( 1/3) of this option became exercisable on its date of grant and
    one-third ( 1/3) becomes exercisable on each of the one- and two-year
    anniversaries thereof.

                                        37
<PAGE>

     The following table sets forth certain information regarding options
exercised and exercisable during the fiscal year ended November 30, 2001 and the
value of the options held as of November 30, 2001 by the Named Officers.

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUE

<Table>
<Caption>
         (A)                 (B)             (C)                     (D)                            (E)
---------------------  ---------------   ------------   -----------------------------   ---------------------------
                                                            NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                                                           UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS
                                                        OPTIONS AT FISCAL YEAR-END(#)    AT FISCAL YEAR-END(1)($)
                       SHARES ACQUIRED      VALUE       -----------------------------   ---------------------------
NAME                   ON EXERCISE(#)    REALIZED($)    EXERCISABLE     UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                   ---------------   ------------   -----------     -------------   -----------   -------------
<S>                    <C>               <C>            <C>             <C>             <C>           <C>
Jeffrey L.
  Schwartz...........           0                0        387,245                0      $1,025,612             0
Andrew Stollman......           0                0        340,010                0         850,793             0
Eric Aroesty.........           0                0        365,789                0       1,499,735             0
Joshua B. Gillon.....           0                0        116,665          158,335         272,080       335,046
Daniel Harvey........      20,335          $38,421         48,000           39,665          84,807       105,903
Jay Greenwald........           0                0        249,715                0         461,481             0
</Table>

---------------
(1) The product of (x) the difference between $5.85 (the closing price of the
    Company's Common Stock at November 30, 2001, as reported by Nasdaq) and the
    exercise price of the unexercised options, multiplied by (y) the number of
    unexercised options.

BOARD COMPENSATION

     As a result of the Company's policy to compensate non-employee directors
for their services, the Company's 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

     The Company has 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 will be paid $500,000 and
$450,000 per annum, respectively, for the fiscal year ending November 30, 2002,
and in each subsequent 12 month period at a rate to be determined by the
Company's 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 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; (iv) Messrs. Schwartz and Stollman were
each issued 10 year options to acquire 105,000 shares of the Company's 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 the business
of the Company 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), he 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),
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.

                                        38
<PAGE>

     The foregoing is only a summary of the material terms of the Company's
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 the Company's Board of Directors from
December 1, 2000 through November 3, 2001 consisted of Murray L. Skala and
Lawrence Burstein. See "Certain Relationships and Related Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information, as of February 26, 2002, based
upon information obtained from the persons named below, regarding beneficial
ownership of the Company's Common Stock by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of its Common
Stock, (ii) each director of the Company, (iii) each of the Named Officers, and
(iv) all executive officers and directors of the Company as a group.

<Table>
<Caption>
NAME AND ADDRESS OF                                             NUMBER OF SHARES         PERCENT
BENEFICIAL OWNER(1)                                           BENEFICIALLY OWNED(2)    OF CLASS(2)
-------------------                                           ---------------------    -----------
<S>                                                           <C>                      <C>
Jeffrey L. Schwartz.........................................        2,520,110(3)          14.54%
Jack Silver.................................................        1,737,450(4)          12.03
  660 Madison Avenue
  New York, NY 10021
Michael G. Miller...........................................        1,703,323             11.84
  5 Sky Drive
  New City, NY 10956
Andrew Stollman.............................................        1,222,242(5)           8.28
Eric Aroesty................................................          702,032(6)           4.76
Edwin A. Levy...............................................          175,100(7)           1.20
  570 Lexington Avenue
  New York, NY 10022
Joshua B. Gillon, Esq. .....................................          150,000(8)           1.03
Murray L. Skala.............................................          117,750(9)              *
  750 Lexington Avenue
  New York, NY 10022
Lawrence Burstein...........................................           93,750(10)             *
  245 Fifth Avenue
  New York, NY 10016
Daniel Harvey...............................................           48,000(11)             *
All executive officers and directors as a group (9
  persons)..................................................        6,766,434(12)         41.86%
</Table>

---------------
  *  Less than 1% of the Company's outstanding shares.

 (1) Unless otherwise provided, such person's address is c/o the Company, One
     Blue Hill Plaza, Pearl River, New York 10965.

 (2) The number of shares of Common Stock beneficially owned by each person or
     entity is determined under the rules promulgated by the Securities and
     Exchange Commission (the "Commission"). Under such rules, beneficial
     ownership includes any shares as to which the person or entity has sole or
     shared voting power or investment power. The percentage of the Company's
     outstanding shares is calculated by including among the shares owned by
     such person any shares which such person or entity has the right to acquire
     within 60 days after February 26, 2002. The inclusion herein of any shares
     deemed beneficially owned does not constitute an admission of beneficial
     ownership of such shares.

 (3) Includes 422,205 shares of Common Stock issuable upon exercise of options
     held by Mr. Schwartz.

                                        39
<PAGE>

 (4) Includes (i) 992,300 shares of Common Stock owned by a profit sharing plan
     of which Mr. Silver is a Trustee; (ii) 117,000 shares of Common Stock owned
     by Mr. Silver's children; (iii) 148,000 shares of Common Stock owned by a
     pension plan of which Mr. Silver is a Trustee; (iv) 423,900 shares of
     Common Stock held by a trust for the benefit of Mr. Silver's children, of
     which Mr. Silver was the donor; and (v) 56,250 shares of Common Stock
     issuable upon the exercise of options held by Mr. Silver.

 (5) Includes 375,010 shares of Common Stock issuable upon exercise of options
     held by Mr. Stollman.

 (6) Includes 365,789 shares of Common Stock issuable upon exercise of options
     held by Mr. Aroesty.

 (7) Represents 25,100 shares of Common Stock held by a fund of which Mr. Levy
     is the General Partner and 150,000 issuable upon exercise of options held
     by Mr. Levy.

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

 (9) Includes 113,750 shares of Common Stock issuable upon exercise of options
     held by Mr. Skala.

(10) Represents shares of Common Stock issuable upon exercise of options held by
     Mr. Burstein.

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

(12) Includes 1,774,754 shares of Common Stock issuable upon the exercise of
     options held by the executive officers and directors of the Company. See
     footnotes (3) through (11), above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On December 14, 2001, each of Jeffrey L. Schwartz and Andrew Stollman,
executive officers of the Company, entered into a Purchase Agreement with a
group of investment funds unaffiliated with the Company, 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 to each of
them of $1,150,000). 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
the Company. In such Purchase Agreements, the Company 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. The Company agreed to indemnify the
investment funds (limited to the amount of the proceeds received by Messrs.
Schwartz and Stollman) for its breach of any of the covenants it made in the
Purchase Agreements.

     Murray L. Skala, a director of the Company, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, the Company's
attorneys ("Feder Kaszovitz"). The Company incurred charges of approximately
$745,000 during the fiscal year ended November 30, 2001. Feder Kaszovitz
continues to provide services to the Company during its current fiscal year. Its
fees are based primarily on hourly rates. The Company believes that its
relationship with such firm is on terms no less favorable to the Company than
could have been obtained from unaffiliated third parties.

                                        40
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

  (i) Financial Statements:

     See Index to Financial Statements.

  (ii) Financial Statement Schedules

     Schedule of Valuation and Qualifying Accounts and Reserves

     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.

     (b) REPORTS ON FORM 8-K.

     The Company filed no Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended November 30, 2001.

     (c) EXHIBITS.

<Table>
<Caption>
 EXHIBIT
 NUMBER
---------
<S>         <C>
 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        Third 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
10.3.2*     December 1, 2001 Employment Agreement by and between the
            Company and Andrew Stollman
21*         Subsidiaries of the Company
</Table>

---------------

 *  Filed herewith.

(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
    dated October 23, 1995 and incorporated herein by reference.

(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
    fiscal quarter ended August 31, 1998 and incorporated herein by reference.

(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
    dated September 6, 1995 (File No. 33-96632) and incorporated herein by
    reference.

(4) Filed as an Exhibit to the Company's Proxy Statement filed with the
    Commission, dated August 16, 2000 and incorporated herein by reference.

(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
    December 26, 2000 and incorporated herein by reference.

                                        41
<PAGE>

                                   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.

                                          Traffix, Inc.

                                          By: /s/  JEFFREY L. SCHWARTZ
                                            ------------------------------------
                                                    Jeffrey L. Schwartz
                                                      Chairman and CEO

Dated: March 1, 2002

     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.

<Table>
<Caption>
              SIGNATURE                                TITLE                       DATE
              ---------                                -----                       ----
<C>                                    <S>                                     <C>

       /s/ JEFFREY L. SCHWARTZ         Chairman and Chief Executive Officer    March 1, 2002
-------------------------------------    (Principal Executive Officer)
         Jeffrey L. Schwartz

          /s/ DANIEL HARVEY            Chief Financial Officer (Principal      March 1, 2002
-------------------------------------    Financial and Accounting Officer)
            Daniel Harvey

         /s/ ANDREW STOLLMAN           Chief Operating Officer, Secretary      March 1, 2002
-------------------------------------    and Director
           Andrew Stollman

          /s/ ERIC AROESTY             President and Director                  March 1, 2002
-------------------------------------
            Eric Aroesty

         /s/ MURRAY L. SKALA           Director                                March 1, 2002
-------------------------------------
           Murray L. Skala

          /s/ EDWIN A. LEVY            Director                                March 1, 2002
-------------------------------------
            Edwin A. Levy

        /s/ LAWRENCE BURSTEIN          Director                                March 1, 2002
-------------------------------------
          Lawrence Burstein

           /s/ JACK SILVER             Director                                March 1, 2002
-------------------------------------
             Jack Silver
</Table>

                                        42
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS
        AS OF NOVEMBER 30, 2001 AND 2000 AND FOR EACH OF THE THREE YEARS
                     IN THE PERIOD ENDED NOVEMBER 30, 2001
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

<Table>
<Caption>
                                                                 PAGE
                                                                 ----
<S>                                                           <C>
Report of Independent Accountants...........................     F-1
Consolidated Balance Sheets as of November 30, 2001 and
  2000......................................................     F-2
Consolidated Statements of Operations for the years ended
  November 30, 2001, 2000 and 1999..........................     F-3
Consolidated Statements of Shareholders' Equity for the
  years ended November 30, 2001, 2000 and 1999..............     F-4
Consolidated Statements of Cash Flows for the years ended
  November 30, 2001, 2000 and 1999..........................     F-5
Notes to Consolidated Financial Statements..................  F-6 - F-25
Schedule II -- Valuation and Qualifying Accounts and
  Reserves..................................................     S-1
</Table>
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended November 30, 2001 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
January 25, 2002

                                       F-1
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF NOVEMBER 30, 2001 AND 2000

<Table>
<Caption>
                                                                 2001           2000
                                                              -----------    -----------
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $14,458,055    $ 4,551,344
  Marketable securities.....................................   23,677,999     38,676,890
  Accounts receivable, trade, net of allowance for doubtful
     accounts and adjustments of $383,676 in 2001 and
     $795,024 in 2000.......................................    7,326,032      3,743,144
  Deferred income taxes.....................................    3,242,815      2,095,026
  Due from related parties..................................      106,654        467,877
  Prepaid expenses and other current assets.................    1,415,836      1,514,775
                                                              -----------    -----------
          Total current assets..............................   50,227,391     51,049,056
Property and equipment, at cost, net of accumulated
  depreciation..............................................      951,702        512,958
Goodwill and other intangibles, net.........................    1,362,407             --
Long-term investments, at cost..............................       54,000        565,051
Deferred income taxes.......................................      147,084         71,778
                                                              -----------    -----------
          Total assets......................................  $52,742,584    $52,198,843
                                                              ===========    ===========
LIABILITIES
Current liabilities:
  Accounts payable..........................................  $ 3,928,418    $ 2,091,331
  Accrued expenses..........................................    4,097,443      2,613,046
  Reserve for customer chargebacks..........................        1,478      1,225,040
  Due to related parties....................................      469,935      1,446,619
  Income taxes payable......................................    1,672,953      3,434,995
  Deferred income taxes.....................................           --         59,252
                                                              -----------    -----------
          Total current liabilities.........................   10,170,227     10,870,283
                                                              -----------    -----------
Commitments and contingencies (Note 10)
Minority interest...........................................      159,651             --
                                                              -----------    -----------
SHAREHOLDERS' EQUITY
Preferred stock -- $.001 par value; 1,000,000 shares
  authorized; none issued and outstanding...................           --             --
Common stock -- $.001 par value; authorized 50,000,000
  shares; issued and outstanding 14,290,491 shares and
  15,681,116 shares, respectively...........................       14,289         15,680
Additional paid-in capital..................................   41,395,784     39,208,992
Retained earnings...........................................    3,206,770      8,691,438
Accumulated other comprehensive income (loss)...............       72,577     (4,385,650)
Common stock held in treasury, at cost, 961,403 shares and
  942,853 shares, respectively..............................   (2,276,714)    (2,201,900)
                                                              -----------    -----------
          Total shareholders' equity........................   42,412,706     41,328,560
                                                              -----------    -----------
          Total liabilities and shareholders' equity........  $52,742,584    $52,198,843
                                                              ===========    ===========
</Table>

          See accompanying notes to consolidated financial statements
                                       F-2
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

<Table>
<Caption>
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net revenue.........................................  $32,209,410    $26,611,863    $42,839,840
Cost of sales.......................................    9,152,462      9,057,027     26,952,097
                                                      -----------    -----------    -----------
     Gross profit...................................   23,056,948     17,554,836     15,887,743
Selling expenses....................................    4,437,273      1,471,695      1,477,248
General and administrative expenses.................   11,262,556     10,090,945      9,403,908
Bad debt expense....................................    1,083,826        517,903             --
                                                      -----------    -----------    -----------
     Income from operations.........................    6,273,293      5,474,293      5,006,587
Other income (expense):
  Interest expense..................................       (5,900)      (286,655)       (70,701)
  Interest income and dividends.....................    1,780,546      2,646,622      1,390,829
  Realized gains (losses) on marketable
     securities.....................................      387,948        863,384       (494,351)
  Permanent impairment charges......................   (4,690,258)    (2,139,315)            --
  Loss on disposal of fixed assets..................           --             --       (157,553)
  Gain on nonmonetary cost basis exchange...........           --        565,572             --
  Other nonoperating income.........................       16,699      1,354,723        707,569
  Minority interest in (income) loss of
     subsidiaries...................................      (69,629)       140,000             --
                                                      -----------    -----------    -----------
     Income before provision for income taxes.......    3,692,699      8,618,624      6,382,380
Provision for income taxes..........................    3,275,200      3,471,754      2,458,520
                                                      -----------    -----------    -----------
     Net income.....................................  $   417,499    $ 5,146,870    $ 3,923,860
                                                      ===========    ===========    ===========
Basic income per share:
  Net income........................................  $      0.03    $      0.35    $      0.26
                                                      -----------    -----------    -----------
  Weighted average shares outstanding...............   14,794,159     14,792,734     15,119,610
                                                      ===========    ===========    ===========
Diluted income per share:
  Net income........................................  $      0.03    $      0.33    $      0.26
                                                      -----------    -----------    -----------
  Weighted average shares outstanding...............   15,396,619     15,494,663     15,241,662
                                                      ===========    ===========    ===========
</Table>

          See accompanying notes to consolidated financial statements
                                       F-3
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
<Table>
<Caption>

                                                    COMMON STOCK       ADDITIONAL     RETAINED        TREASURY STOCK
                                                --------------------     PAID-IN      EARNINGS     ---------------------
                                                  SHARES     AMOUNTS     CAPITAL      (DEFICIT)    SHARES      AMOUNT
                                                ----------   -------   -----------   -----------   -------   -----------
<S>                                             <C>          <C>       <C>           <C>           <C>       <C>
BALANCE, NOVEMBER 30, 1998....................  16,679,746   $16,679   $38,955,275   $  (379,292)  773,066   $(1,900,030)
Unrealized gains on available-for-sale
  securities..................................
Stock option exercises........................      89,844       90        157,137
Tax benefit from exercise of stock options....                             123,767
Purchase of common stock, held in treasury, at
  cost........................................                                                     169,787      (301,870)
Purchase and retirement of common stock.......  (1,300,000)  (1,300)    (1,753,700)
Net income for the year.......................                                         3,923,860
                                                ----------   -------   -----------   -----------   -------   -----------
BALANCE, NOVEMBER 30, 1999....................  15,469,590   15,469     37,482,479     3,544,568   942,853    (2,201,900)
Unrealized (losses) on available-for-sale
  securities..................................
Stock option exercises........................     211,526      211        408,479
Tax benefit from exercise of stock options....                             448,880
Common stock issued in connection with
  long-term investment........................     229,862      230      1,615,976
Purchase and retirement of common stock.......    (229,862)    (230)      (746,822)
Net income for the year.......................                                         5,146,870
                                                ----------   -------   -----------   -----------   -------   -----------
BALANCE, NOVEMBER 30, 2000....................  15,681,116   15,680     39,208,992     8,691,438   942,853    (2,201,900)
Realized losses on available-for-sale
  securities..................................
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 minority interest............     336,243      336      1,445,509
Purchase of common stock, held in treasury, at
  cost........................................                                                      18,550       (74,814)
Purchase and retirement of common stock.......  (2,000,000)  (2,000)       (95,833)   (5,902,167)
Net income for the year.......................                                           417,499
                                                ----------   -------   -----------   -----------   -------   -----------
BALANCE, NOVEMBER 30, 2001....................  14,290,491   $14,289   $41,395,784   $ 3,206,770   961,403   $(2,276,714)
                                                ==========   =======   ===========   ===========   =======   ===========

<Caption>
                                                 ACCUMULATED
                                                    OTHER
                                                COMPREHENSIVE       TOTAL
                                                   (LOSS)       SHAREHOLDERS'
                                                   INCOME          EQUITY
                                                -------------   -------------
<S>                                             <C>             <C>
BALANCE, NOVEMBER 30, 1998....................   $   (10,488)    $36,682,144
Unrealized gains on available-for-sale
  securities..................................     1,056,150       1,056,150
Stock option exercises........................                       157,227
Tax benefit from exercise of stock options....                       123,767
Purchase of common stock, held in treasury, at
  cost........................................                      (301,870)
Purchase and retirement of common stock.......                    (1,755,000)
Net income for the year.......................                     3,923,860
                                                 -----------     -----------
BALANCE, NOVEMBER 30, 1999....................     1,045,662      39,886,278
Unrealized (losses) on available-for-sale
  securities..................................    (5,431,312)     (5,431,312)
Stock option exercises........................                       408,690
Tax benefit from exercise of stock options....                       448,880
Common stock issued in connection with
  long-term investment........................                     1,616,206
Purchase and retirement of common stock.......                      (747,052)
Net income for the year.......................                     5,146,870
                                                 -----------     -----------
BALANCE, NOVEMBER 30, 2000....................    (4,385,650)     41,328,560
Realized losses on available-for-sale
  securities..................................     4,458,227       4,458,227
Stock option exercises........................                       480,906
Tax benefit from exercise of stock options....                       240,265
Compensation expense related to options.......                       116,218
Common stock issued in connection with
  acquisition of minority interest............                     1,445,845
Purchase of common stock, held in treasury, at
  cost........................................                       (74,814)
Purchase and retirement of common stock.......                    (6,000,000)
Net income for the year.......................                       417,499
                                                 -----------     -----------
BALANCE, NOVEMBER 30, 2001....................   $    72,577     $42,412,706
                                                 ===========     ===========
</Table>

          See accompanying notes to consolidated financial statements
                                       F-4
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

<Table>
<Caption>
                                                               2001            2000            1999
                                                           -------------   -------------   -------------
<S>                                                        <C>             <C>             <C>
Cash flows from operating activities:
  Net income.............................................  $     417,499   $   5,146,870   $   3,923,860
  Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization.......................        389,404         263,669         249,073
     Reserve for customer chargebacks....................     (1,223,562)     (3,393,068)    (10,876,030)
     Provision for uncollectible accounts................      1,083,826         517,903              --
     Deferred income taxes...............................     (1,282,347)        653,809       9,037,569
     Compensation expense related to options.............        116,218              --              --
     Net (gains) losses on sale of marketable
       securities........................................       (390,560)       (863,384)        494,351
     Discounts and premiums on marketable securities.....       (362,359)       (330,843)             --
     Loss on disposal of fixed assets....................             --              --         255,783
     Gain on nonmonetary cost basis exchange.............             --        (565,572)             --
     Permanent impairment charges........................      4,750,258       2,139,315              --
     Equity in net losses of joint ventures..............             --          11,952              --
     Minority interest...................................        134,649        (140,000)             --
     Changes in assets and liabilities of business:
       Accounts receivable...............................     (4,666,714)      1,450,920      25,518,612
       Due from related parties..........................        361,223         121,283         203,977
       Prepaid expenses and other current assets.........         98,939        (826,461)      1,462,956
       Accounts payable..................................      1,837,087         297,700      (2,660,032)
       Income taxes payable..............................     (1,521,776)       (281,229)      3,743,674
       Accrued expenses..................................      1,484,397      (2,935,830)     (1,404,453)
       Due to related parties............................       (976,684)      1,078,443         227,420
                                                           -------------   -------------   -------------
          NET CASH PROVIDED BY OPERATING ACTIVITIES......        249,498       2,345,477      30,176,760
                                                           -------------   -------------   -------------
Cash flows from investing activities:
  Purchases of securities................................   (225,810,152)   (333,623,263)   (149,802,510)
  Proceeds from sales of securities......................    241,829,982     329,205,886     129,560,235
  Capital expenditures...................................       (719,709)       (225,410)       (436,296)
  Purchases of long-term investments, net................        (49,000)       (892,551)     (2,097,500)
  Proceeds from the disposal of fixed assets.............             --              --         258,808
                                                           -------------   -------------   -------------
          NET CASH PROVIDED BY (USED IN) INVESTING
            ACTIVITIES...................................     15,251,121      (5,535,338)    (22,517,263)
                                                           -------------   -------------   -------------
Cash flows from financing activities:
  Proceeds from stock options exercised..................        480,906         408,690         213,310
  Capital contribution from minority interest............             --         140,000              --
  Purchase of common stock...............................     (6,074,814)       (747,052)     (2,056,870)
                                                           -------------   -------------   -------------
          NET CASH USED IN FINANCING ACTIVITIES..........     (5,593,908)       (198,362)     (1,843,560)
                                                           -------------   -------------   -------------
Net increase (decrease) in cash and cash equivalents.....      9,906,711      (3,388,223)      5,815,937
Cash and cash equivalents, beginning of year.............      4,551,344       7,939,567       2,123,630
                                                           -------------   -------------   -------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................  $  14,458,055   $   4,551,344   $   7,939,567
                                                           =============   =============   =============
Supplemental disclosures:
  Cash paid during the year for:
     Interest............................................  $          --   $          --   $      70,701
     Income tax (refunds)................................      6,079,114       3,065,105     (11,675,498)
</Table>

Noncash investing activities:

  During the fiscal year ended November 30, 2001, the Company issued 336,243
  shares of its common stock, valued at $1,445,845, for the purchase of a
  minority interest (See note 5).

  During the fiscal year ended November 30, 2000, the Company issued 229,862
  shares of its common stock, valued at $1,616,206, in the purchase of a
  long-term investment (See note 5).

          See accompanying notes to consolidated financial statements
                                       F-5
<PAGE>

                         TRAFFIX, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES

  Nature of Business

     Traffix, Inc. and its consolidated subsidiaries (collectively, "Traffix" or
the "Company", formerly known as Quintel Communications, Inc.) 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
Customer Acquisition Services, and c) LEC Billed Products and services, with (b)
and (c) principally inactive during the fiscal year ended November 30, 2001. In
the prior fiscal year the Company changed its name to Traffix, Inc. This name
change was made to better reflect the Company's business of generating and
directing on-line consumer traffic for businesses. 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. Prior to December 1, 1999, the Company had
relied exclusively on conventional ("off-line") marketing channels, specifically
television broadcast media, telemarketing, direct-mail, and print advertising to
facilitate its consumer targeted direct marketing activities.

  Principles of Consolidation and Presentation

     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. The
Company's other investments (classified in the "Long-term investments, at cost"
financial caption, See Note 5) that are accounted for under the equity method,
are immaterial, with the majority of its investments valued under the cost
method of accounting. Such cost method investments represent ownership interests
of less than 20%, with the absence of control and significant influence over
such investments. All significant inter-company accounts and transactions have
been eliminated in consolidation. Certain amounts for prior periods have been
reclassified to conform to current year presentations.

  Revenue recognition

     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 six basic
categories: (1) delivery of consumer traffic to the websites and inbound
telemarketing call centers of our Corporate Customers (e.g., click-thrus from
the game banners on the Company's GroupLotto.com website), (2) delivery of
consumer data to our Corporate Customers with respect to the consumers who have
registered for our Corporate Customers' products or services (e.g., a consumer
who registered via the GroupLotto.com registration page to receive on-line
promotions from our Corporate Customers), (3) delivery of pre-qualified consumer
data to our 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 our Corporate Customers products
or services (e.g., a consumer who responds to a Traffix e-mail promotion on
behalf of a Corporate Customer by completing an on-line application for a credit
card or a term life insurance product), (5) generating revenue from any of the
foregoing categories by placing our Corporate Customers' offers on the media of
third parties with whom we have a marketing relationship on a revenue share
basis, and (6) rentals and sales of copies of specific segments of its databases
to Corporate Customers for their proprietary marketing and database
enhancements.

     The Company invoices its 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 (normally, either daily or

                                       F-6
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. In accordance with newly developing revenue recognition
pronouncements, specifically Staff Accounting Bulletin 101, "Revenue Recognition
in Financial Statements" ("SAB 101") issued in December 1999, and in accordance
with the Company's historical accounting policies and reporting practices, the
Company records all related obligations associated with the related net revenue
at its point of recognition. The Company adopted SAB 101 during the first three
months of the current fiscal year ended November 30, 2001; such adoption did not
materially impact financial position or results of operations.

     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. 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 prepaid cellular telephones and/or other
suitable premiums. These costs were estimated and accrued, based upon historical
rates and costs, as a component of marketing expense and included in the cost of
sales, at the time the associated revenues were recognized.

     Revenue from the Company's LEC Billed Product and Service segment, (the
Company has not marketed such services since November 1998), consisted of
various enhanced telephone services, principally voice mail services, and were
recognized net of an estimated provision for refunds and credits subsequently
granted to customers ("customer chargebacks"). Since the provision for customer
chargebacks was established prior to the periods in which chargebacks are
actually expended, the Company's revenues are adjusted in later periods when the
Company's incurred chargebacks vary from the amounts previously estimated.

The Company's majority owned subsidiary, Montvale Management LLC ("Montvale"),
employs both on-line and off-line marketing channels to solicit from consumers
and on behalf of financial institutions mortgage banking sources. Montvale
recognizes its commission upon closing of the loan and final consumer
acceptance.

  Concentration of credit risk

     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 of
less than nine months, and therefore has significantly reduced its future
exposure to market risk.

     Consistent with the above, the Company has historically invested a portion
of its excess cash in debt instruments and has maintained guidelines relative to
diversification yielding safety and liquidity. The bulk of these funds
(approximately $23 million) are professionally managed by a major investment
bank pursuant to guidelines established by the Company's Board of Directors.

     During the years ended November 30, 2000 and 1999, the Company had invested
approximately $1.9 and $3.9 million, respectively, at cost, in equity-based
marketable securities, with a significant concentration in the Internet
industry. Such investments were made pursuant to the potentially significant
synergistic benefits to the Company's operations resulting from associated
marketing agreements executed at the time of the Internet industry based, equity
security purchases. During the year ended November 30, 2001, the Company
recognized losses (through a permanent impairment charge) of $4,190,207 on the
cost basis investments noted above. The impairment charge and subsequent
disposition of these securities eliminated their related credit risk as of
November 30, 2001. At November 30, 2000, the related cost basis of these
securities amounted to approximately $5.6 million (See Note 3).

                                       F-7
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Collections from the Company's legacy telecommunication product and service
revenues, billed through the LEC Billed Product and Service segment, were
received through three unrelated, unaffiliated service bureaus. In the current
fiscal year only, one service bureau continued the provision of billing and
collection services. In conjunction with servicing the accounts receivable, the
service bureaus remit amounts based on eligible accounts receivable, and
withhold certain cash receipts as a reserve. As a result, the Company's exposure
to the concentration of credit risk is primarily related to funds held on behalf
of the Company by its active service bureaus. On December 11, 2001, the
remaining significant service bureau that the Company conducted business with
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. In response to this service bureau's bankruptcy filing, the Company,
effective November 30, 2001, charged off its net receivable from such service
bureau, resulting in an approximate $826,000 charge to earnings that is included
in the Company's bad debt expense. The Company's change of business and the
aforementioned write-off has effectively reduced the Company's service bureau
credit risk to zero.

     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.

  Transactions With Major Customers

     During the fiscal year ended November 30, 2001, the Company derived
approximately $17.7 million, or 55% of its revenues from six major customers,
five within its E-commerce segment and one within its off-line customer
acquisition services segment; three of such customers each exceeded 10% of net
revenues, with the remaining three each averaging 6.5% of net revenues. The
current year's six major customers comprised approximately $5.1 million, or
69.1% of the Company's accounts receivable at November 30, 2001. In the prior
years ended November 30, 2000 and 1999, the Company had derived approximately
53.0% of its revenue from two customers, and 72.0% of its revenue from one
customer, respectively. As of November 30, 2001, the Company has either
terminated, or has been terminated, from providing services to the customers
included in the fiscal 2000 and 1999 major customer percentages.

  Cash and cash equivalents

     All short-term investments with an original maturity of three months or
less are considered to be cash equivalents.

  Marketable securities

     The Company's marketable securities have historically consisted of
corporate commercial paper, auction rate securities, equity securities and real
estate investment trusts ("REITs"), 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 estimated tax effects, included in other comprehensive income
(loss) as a separate component of shareholders' equity, until realized. During
the current fiscal year ended November 30, 2001, the Company recognized losses
(through a permanent impairment charge) of $4,190,207 on the above referenced
available-for-sale securities. At November 30, 2000, the Company had
approximately $4.4 million in accumulated unrealized losses and, due to the
absence of other appreciated capital gain property, a full valuation allowance
was taken against the estimated deferred tax asset. This deferred tax asset
valuation allowance, taken at November 30, 2000, amounted to approximately $1.8
million. The Company continues to record a full valuation allowance against the
capital losses recognized above. Actual sales of securities resulting in
realized gains and losses on marketable securities are

                                       F-8
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

  Property and equipment

     Property and equipment are stated at cost and are depreciated using the
straight-line method over a three to seven 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 intangibles

     Goodwill and other 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 $108,000 in 2001. The Company is reviewing its preliminary
allocation of the purchase price. Allocation of amounts to other identifiable
intangible assets may be necessary in subsequent periods.

  Long-lived assets

     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 4, 5 and 14).

  Income taxes

     The Company recognizes deferred tax assets and liabilities 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 assets which are not likely to be realized (see Note 7).

  Advertising and marketing expenses

     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 e-mail
advertisements, (2) costs associated with on-line customer acquisition data, and
(3) e-mail program promotional and creative development costs. Such costs are
charged to operations (1) at the time of the e-mail transmission, (2) upon
receipt of the qualified customer acquisition data, and (3) at the time the
promotional and creative services are provided, respectively, and are included
as a component of cost of sales.

                                       F-9
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During the year ended November 30, 2000, the Company began to concentrate
its efforts in the Internet direct marketing sector and as such moved away from
its historical methods of advertising and marketing. Total advertising and
marketing expenses by segment for fiscal 2001, 2000 and 1999 were as follows:

<Table>
<Caption>
                                                   CONSOLIDATED ADVERTISING AND MARKETING COSTS
                                                             YEAR ENDED NOVEMBER 30,
                                                  ----------------------------------------------
                                                      2001            2000             1999
                                                  -------------   -------------   --------------
<S>                                               <C>             <C>             <C>
E-commerce......................................   $7,519,511      $4,471,323      $     2,084
Customer Acquisition services...................    1,194,026       3,161,734       19,534,539
LEC Billed products and services................           --         (15,357)         402,492
Corporate and other.............................           --              --           32,050
                                                   ----------      ----------      -----------
          Consolidated totals...................   $8,713,537      $7,617,700      $19,971,165
                                                   ==========      ==========      ===========
</Table>

     In fiscal years ended prior to December 1, 2000, the Company's advertising
and marketing costs had consisted of television broadcast media and related
production costs, outbound and inbound telemarketing, direct-mailing costs and
print media.

  Comprehensive Income (Loss)

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

<Table>
<Caption>
                                                         YEAR ENDED NOVEMBER 30,
                                                  -------------------------------------
                                                     2001         2000          1999
                                                  ----------   -----------   ----------
<S>                                               <C>          <C>           <C>
Net income......................................  $  417,499   $ 5,146,870   $3,923,860
Other comprehensive income (loss), net of tax:
  Unrealized gain (loss) from available-for-sale
     securities, net of income taxes of, $-0-
     for 2001, $-0- for 2000 and $704,100 for
     1999,......................................     614,561    (5,431,312)   1,056,150
  Less: reclassification adjustment for losses
     realized in net income.....................   4,188,957            --           --
  Add: reclassification adjustment for (gains)
     realized in net income.....................    (345,291)           --           --
                                                  ----------   -----------   ----------
          Comprehensive income (loss)...........  $4,875,726   $  (284,442)  $4,980,010
                                                  ==========   ===========   ==========
</Table>

  Segment Information

     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 Customer Acquisition services, and c)
LEC Billed products and services, with the related segment disclosure
information presented in Note 13.

  Estimates

     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

                                       F-10
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 reserve for customer
chargebacks, reserves for uncollectible receivables, data qualification
allowances, recoverability of long-lived assets, the realizability of deferred
tax assets, fulfillment accruals for customer acquisition costs and valuations
relative to long-term investments in privately held companies whose market
values are not readily determinable.

  Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141
requires that all business combinations be accounted for by the purchase method
of accounting and changes the criteria for recognition of intangible assets
acquired in a business combination. The provisions of SFAS 141 apply to all
business combinations initiated after June 30, 2001. We do not expect that the
adoption of SFAS 141 will have a material effect on our consolidated financial
position or results of operations. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, once SFAS
142 is adopted, which will be in our fiscal year ending November 30, 2003;
however, these assets must be reviewed at least annually for impairment
subsequent to adoption. Intangible assets with finite useful lives will continue
to be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS 142 will
be effective for our fiscal year ending November 30, 2003; earlier adoption is
not available pursuant to the terms of SFAS 142. However, goodwill and
intangible assets acquired after June 30, 2001 are subject immediately to the
non-amortization provisions of SFAS 142. While we are currently in the process
of evaluating the potential impact that the adoption of SFAS 142 will have on
our consolidated financial position and results of operations, our preliminary
assessment is that the adoption of SFAS 142 will have an immaterial impact on
the Company.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting model
for long-lived assets to be disposed of. Among other provisions, the new rules
change the criteria for classifying an asset as held-for-sale. The standard also
broadens the scope of businesses to be disposed of that qualify for reporting as
discontinued operations, and changes the timing of recognizing losses on such
operations. The provisions of SFAS 144 will be effective for our fiscal year
ending November 30, 2003 and will be applied prospectively. We are currently in
the process of evaluating the potential impact that the adoption of SFAS 144
will have on our consolidated financial position and results of operations.
Based on the relative components of our balance sheet at November 30, 2001 we
believe that the adoption of SFAS 144 will have an immaterial impact on the
Company's consolidated financial position and results of operations, if any
effect at all.

  Reclassifications

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

2. RELATED PARTY TRANSACTIONS

     The Company incurred approximately $745,000, $630,000 and $367,000,
respectively, during fiscal 2001, 2000 and 1999, in legal fees to a firm having
a member who is also a director of the Company. In addition, The Company
incurred approximately $10,000 during fiscal 1999, in accounting fees to a firm
having a member who was also a director of the Company up until the time of his
resignation in November 1999.

                                       F-11
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company incurred approximately $125,000 in compensation expense during
the fiscal year ended November 30, 1999, related to an employment agreement that
was executed in connection with an acquisition consummated in fiscal 1996.
Simultaneous with this acquisition, such individual, who was a principal
shareholder at that time, was elected as a director of the Company and served in
such capacity until his resignation in January 1999. This employment agreement
was terminated effective June 1, 1999, commensurate with the Company's
termination of its 900 entertainment services business (See Note 9). For the
year ended November 30, 1999, the Company paid aggregate fees for services
related to this business of approximately $1,019,000. This agreement was
terminated in June of 1999 (See Note 9).

     The Company received commissions of approximately $365,000 during fiscal
1999, from ARS for purchasing television media time on their behalf. Effective
June 1, 1999, pursuant to the Company's termination of its 900 entertainment
services business, ARS assumed the responsibility for all media buying
personnel, therefore such revenue ceased at that time and any corresponding
receivable was collected (See Note 8).

     The Company had a consulting agreement with a director/shareholder, which
expired on November 30, 1998. Under the terms of such agreement, the
director/shareholder provided services in connection with identification and
engagement of celebrities to endorse the Company's services, engagement of
independent producers to produce commercials and infomercials and the
development of new entertainment services. The Company incurred approximately
$8,000 and $113,000 in expense relating to this agreement in 2000 and 1999.
Although the consulting agreement had expired in 1998, the director/shareholder
continued to provide consulting services to the Company until the time of his
resignation from all company positions in January of 2000.

3. MARKETABLE SECURITIES

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

<Table>
<Caption>
                                                       NOVEMBER 30,
                                ----------------------------------------------------------
                                           2001                           2000
                                ---------------------------    ---------------------------
                                   COST        MARKET VALUE       COST        MARKET VALUE
                                -----------    ------------    -----------    ------------
<S>                             <C>            <C>             <C>            <C>
Available-for-sale securities:
  REITs.......................  $   759,730    $   812,999     $   940,830    $   923,163
  Corporate commercial                                          37,449,932
     paper....................   22,845,692     22,865,000                     37,331,694
  Equity securities...........           --             --       4,671,778        422,033
                                -----------    -----------     -----------    -----------
          Total...............  $23,605,422    $23,677,999     $43,062,540    $38,676,890
                                ===========    ===========     ===========    ===========
</Table>

     Marketable securities shown in the above table are carried at historical
cost, net of unamortized discounts of $54,308 and $115,068 as at November 30,
2001 and 2000, respectively, and stated at fair value; the cost basis of
marketable securities with scheduled maturities within one year were $22,845,692
and $37,449,932 for fiscal 2001 and fiscal 2000, respectively.

     Proceeds, realized gains and realized losses from sales of securities
classified as available-for-sale for fiscal year 2001, 2000 and 1999 consisted
of the following:

<Table>
<Caption>
                                               2001            2000            1999
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Proceeds from sales of securities........  $241,829,982    $329,205,886    $129,560,235
Gross realized gains.....................       412,115         943,143          64,718
Gross realized losses....................       (24,168)        (79,759)       (559,069)
</Table>

                                       F-12
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PROPERTY AND EQUIPMENT

     Property and equipment for the years ended November 30, 2001 and 2000
consists of the following:

<Table>
<Caption>
                                                                 2001          2000
                                                              ----------    ----------
<S>                                                           <C>           <C>
Furniture and fixtures......................................  $  173,929    $  173,929
Computers and equipment.....................................   1,760,543     1,051,834
Leasehold improvements......................................      44,113        33,113
                                                              ----------    ----------
                                                               1,978,585     1,258,876
  Less, accumulated depreciation............................   1,026,883       745,918
                                                              ----------    ----------
                                                              $  951,702    $  512,958
                                                              ==========    ==========
</Table>

     Depreciation expense for the years ended November 30, 2001, 2000 and 1999
was approximately $281,000, $264,000 and $249,000, respectively.

     During the year ended November 30, 2000, the Company evaluated certain
capitalized costs associated with internally developed software incurred in
fiscal 1999, which was included with computers and equipment at November 30,
1999. The results of the evaluation revealed that the unamortized software costs
were fully impaired based on their failure to generate revenue, and their
failure to provide cash flow to the Company. During the year ended November
2000, the Company recorded an impairment charge of $265,316 relating to such
internally developed software, and is included as a component of other income
(expense) "Permanent impairment charges".

5. MARKETABLE SECURITIES, LONG-TERM INVESTMENTS, AT COST, AND CURRENT YEAR
ACQUISITION

     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.

CURRENT YEAR COMPLETED ACQUISITION

     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 current
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 current fiscal year's second
quarter ended May 31, 2001, this entity effectively wound down operations and
ceased doing business.

                                       F-13
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During the fiscal year ended November 30, 1999, the Company had invested
$2,046,500 of cash into five private companies, carried under the cost method.
As of November 30, 2000, four of those five private companies had failed to
achieve their initial goals, as set forth in their business plans, and all four
of those companies had events that fell within our impairment evaluation
criteria. This portion of the Company's impairment loss amounted to $1,546,500,
and is included as a component of fiscal 2000's other income (expense)
"Permanent impairment charges."

     The remaining investee, itarget.com, Inc. (which at that time was a
privately held company that specialized in on-line permission based e-mail
marketing and consumer data information services), was an entity in which the
Company had originally invested $500,000 in November 1999. In January 2000, the
Company increased its cost-based investment position through the issuance of its
common stock pursuant to a stock swap agreement. The agreement required that
229,862 Traffix common shares be issued in exchange for 42,372 newly issued
Series B, convertible preferred shares of itarget.com, Inc. The Traffix share
issuance increased the cost-based carrying value of the itarget.com investment
by $1,616,206. On March 29, 2000, itarget.com merged with Cybergold, Inc., (at
that time a public company that traded as Nasdaq:CGLD). Pursuant to the merger,
the Company received Cybergold, Inc. shares in exchange for its itarget.com,
Inc. shares. This merger event caused the previously classified long- term,
cost-based investment to be transferred to the available-for-sale marketable
security classification. In fiscal 2000, the Company recognized a nonmonetary,
pre-tax gain of approximately $566,000 on the new accounting basis of the
Cybergold, Inc. shares, which is included as a component of other income
(expense). On April 17, 2000, MyPoints.com, Inc. (Nasdaq:MYPT) agreed to acquire
Cybergold, Inc. in a tax-free, stock-for-stock, fixed share transaction. The
transaction closed on August 7, 2000, whereby the Company received approximately
117,000 shares of MyPoints.com, Inc. in return for its Cybergold, Inc. shares in
accordance with the terms of the merger. During the current 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 current fiscal year ended November
30, 2001 and recorded an approximate $224,000 gain at that time.

     During the year ended November 30, 2000, the Company expended an additional
$1,060,051 on cost-based investments. As of November 30, 2000, the Company had
evaluated those long-term investment purchases and recorded an impairment loss
of $327,500 against the carrying value of such investments, and included such
adjustment as a component of other income (expense) "Permanent impairment
charges" in that year.

6. ACCRUED EXPENSES

     Accrued expenses were comprised of the following at:

<Table>
<Caption>
                                                                   NOVEMBER 30,
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Accrued payroll and bonuses.................................  $  882,817   $  631,000
Advances from customers.....................................     631,665      692,000
Accrued fee share liabilities...............................     609,596           --
Other.......................................................   1,973,365    1,290,046
                                                              ----------   ----------
Total accrued liabilities...................................  $4,097,443   $2,613,046
                                                              ==========   ==========
</Table>

                                       F-14
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

     The provision for income taxes consists of the following:

<Table>
<Caption>
                                                        YEAR ENDED NOVEMBER 30,
                                                ---------------------------------------
                                                   2001           2000          1999
                                                -----------    ----------    ----------
<S>                                             <C>            <C>           <C>
Federal:
  Current.....................................  $ 3,444,673    $2,191,023    $  365,543
  Deferred....................................   (1,154,105)      774,953     1,813,018
                                                -----------    ----------    ----------
                                                  2,290,568     2,965,976     2,178,561
                                                -----------    ----------    ----------
State:
  Current.....................................    1,112,875       426,922       342,367
  Deferred....................................     (128,243)       78,856       (62,408)
                                                -----------    ----------    ----------
                                                    984,632       505,778       279,959
                                                -----------    ----------    ----------
          Total provision.....................  $ 3,275,200    $3,471,754    $2,458,520
                                                ===========    ==========    ==========
</Table>

     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:

<Table>
<Caption>
                                                        YEAR ENDED NOVEMBER 30,
                                                 --------------------------------------
                                                    2001          2000          1999
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Income tax expense at federal statutory rate...  $1,217,170    $2,930,332    $2,170,008
State income taxes, net of federal income tax
  benefit......................................     649,857       333,813       184,774
Capital losses generating no tax benefit.......   1,456,390            --            --
Change in valuation allowance -- state.........    (133,237)     (200,000)           --
Nondeductible items............................      85,020       407,609       103,738
                                                 ----------    ----------    ----------
                                                 $3,275,200    $3,471,754    $2,458,520
                                                 ==========    ==========    ==========
</Table>

     The components of net deferred tax assets are as follows:

<Table>
<Caption>
                                                                   NOVEMBER 30,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Deferred tax assets:
  Current:
     Accrued expenses and reserves not currently
       deductible..........................................  $ 2,432,670   $ 2,063,314
     Realized capital losses on marketable securities and
       long term investments...............................    1,641,424            --
     Valuation allowance on realized capital losses........   (1,641,424)           --
     Unrealized losses on marketable securities............           --     1,754,260
     Valuation allowance on unrealized losses..............           --    (1,754,260)
     Intangibles...........................................      278,675            --
     Net operating loss carryforward.......................      531,470            --
     Capital loss carryforward.............................           --        31,712
                                                             -----------   -----------
          Total current assets.............................    3,242,815     2,095,026
                                                             -----------   -----------
</Table>

                                       F-15
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                   NOVEMBER 30,
                                                             -------------------------
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
  Noncurrent:
     Accrued expenses and reserves not currently
       deductible..........................................       40,677            --
     Fixed assets and intangibles..........................       44,000         9,370
     State net operating losses............................    1,408,252     1,541,490
     Valuation allowance...................................   (1,345,845)   (1,479,082)
                                                             -----------   -----------
          Total noncurrent assets..........................      147,084        71,778
                                                             -----------   -----------
          Total assets.....................................    3,389,899     2,166,804
Deferred tax liabilities:
  Current:
     Other.................................................           --        59,252
                                                             -----------   -----------
          Net deferred tax assets..........................  $ 3,389,899   $ 2,107,552
                                                             ===========   ===========
</Table>

     At November 30, 2001 and 2000, valuation allowances of $1,345,845 and
$1,479,082, respectively 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 year ended November 30, 2001, a valuation allowance of
$1,641,424 was established for realized capital losses. The Company does not
have prior year capital gains for purposes of establishing carryback value, and
the Company does not have appreciated capital gain property to provide future
carryforward value, therefore a full valuation allowance was taken to reduce the
deferred tax assets to an amount which the Company believes is more likely than
not to be realized.

     The Company has approximately $51.9 million of state net operating losses
expiring through 2014.

8. REGULATORY ISSUES AND OTHER RISK CONSIDERATIONS PENDING FROM REGULATORY
COUNSEL

     On September 30, 1998, a letter was received from the Division of Marketing
Practices of the Federal Trade Commission (the "FTC") initiating an inquiry into
whether the Company had engaged in any unlawful marketing practices. In response
to the letter, documents were supplied to the Division by the Company and the
Company's regulatory counsel has held informational meetings with Staff of the
FTC. The Company's regulatory counsel has been notified by the Staff of the FTC
that the investigation has been terminated and no action would be instituted
against the Company.

     In the fiscal year ended November 30, 1999, the Company's regulatory
counsel has responded to inquiries or subpoenas from attorneys general of
Vermont, Pennsylvania and Kansas concerning the Company's marketing practices
associated with its LEC based billing services. In the more than nineteen months
since the information was sent to Kansas, there has been no follow-up.
Similarly, information was sent to Pennsylvania more than sixteen months ago.
Also, in the latter part of the fiscal year ending November 30, 1999,
Pennsylvania requested additional information, but there has been no other
action by that office. The information was furnished to Vermont in February
2000, and the Company has continued to discuss Vermont's request for additional
data.

     The Company recently has been asked to enter into a voluntary cease and
desist agreement with the Montgomery County (Maryland) Department of Housing and
Consumer Affairs. The genesis of this request was certain consumer complaints
about 900 services and club products dating from 1997 and 1998 that were
addressed at that time. In early 1999, that office requested additional
information from the Company, but

                                       F-16
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

when the Company asked to discuss the request, the county office did not respond
and was not in contact until early 2000, when it presented the cease and desist
agreement. The Company has advised the county office that it has not engaged in
900 or other psychic services since May 1998, and has asked the county office to
reconsider its request that the Company enter into any agreement.

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

9. CESSATION OF 900 PAY-PER-CALL BUSINESS

     In accordance with the Company's business strategy of separating itself
from the 900 Pay-Per-Call business which was reported as a component of LEC
Billed products and services (see Note 13), on June 4, 1999, the Company entered
into an agreement (the "ARS Agreement") with ARS, pursuant to which the Company
agreed to cease conducting, marketing, advertising or promoting certain "stand
alone" 900 Pay-Per-Call Psychic Services described in the ARS Agreement (the
"900 Psychic Services") directly or indirectly through any affiliate, until
January 17, 2001. ARS agreed to assume responsibility for the employees and for
the lease of the premises used by this business in Fort Lauderdale, Florida, to
acquire the computer equipment and other furniture, fixtures and leasehold
improvements used by this business.

     In consideration for the Company's agreement to suspend the offering of the
900 Psychic Services, ARS agreed to pay to the Company certain royalty fees for
each billable minute generated by 900 Pay-Per-Call Psychic Services on ARS' 900
numbers and on ARS' billings to membership clubs from and after the consummation
of the transactions contemplated by the ARS Agreement and until January 17,
2001, all as more fully described in the ARS Agreement.

     The ARS Agreement was effective as of May 31, 1999. During the fiscal years
ended November 30, 2001, 2000 and 1999, the Company has recorded royalty revenue
under the terms of the ARS Agreement amounting to $486,406, $3.4 million and
$2.8 million, respectively, all of which has been collected. Additionally,
during the fiscal year 1999, the Company received $258,808 in consideration for
the sale of the media department assets discussed above.

10. COMMITMENTS AND CONTINGENCIES

  Leases

     The Company is obligated under a noncancelable real property operating
lease agreement that expires in fiscal 2006. Future minimum rents consist of the
following at November 30, 2001:

<Table>
<S>                                                           <C>
2002........................................................  $  352,200
2003........................................................     325,000
2004........................................................     322,500
2005........................................................     322,500
2006........................................................     215,000
Thereafter..................................................          --
                                                              ----------
                                                              $1,537,200
                                                              ==========
</Table>

     The lease contains 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 was $352,000, $279,000 and $312,000 for fiscal 2001, 2000 and 1999,
respectively.

                                       F-17
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Employment Agreements

     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 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.

  Litigation

     Nancy Garen

     On or about October 16, 2001, Nancy Garen, author of "Tarot Made Easy",
commenced an action against a series of defendants, including the Company, in
the United States District Court for the Central District of California,
entitled Nancy Garen v. Steven L. Feder, Peter L. Stolz, Thomas H. Lindsey,
Galactic Telcom, Inc., Access Resource Services, Inc., Psychic Readers Network,
Inc. d/b/a Miss Cleo, Oshun 5 Communications, Inc., Circle of Light, Inc.,
Central Talk Management, Inc., Traffix, Inc., Wekare Readers & Interpreters,
Inc., West Corporation, and Does 1 through 10 (EDCV 01-790 (VAP-SGLx)).
Plaintiff alleges that defendants are liable for a copyright infringement,
contributory copyright infringement, vicarious copyright infringement, unfair
competition, contributory federal unfair competition and state statutory and
common law unfair competition, and further requests a constructive trust, a
temporary restraining order, and damages from alleged infringement of a
copyright or, alternatively, statutory damages for each act of infringement in
"an amount provided by law in excess of $250,000,000," all as the same may have
arisen from the defendants' marketing of tarot card reading and other psychic
services. As yet, no answer has been filed in this action. The Company does not
believe that there is any merit to Ms. Garen's claims as they relate to the
Company, and intends to vigorously defend against them.

     Philip Michael Thomas

     In an arbitration before the American Arbitration Association in New York
entitled Philip 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. (No. 131400004900), the
claimants allege that they are owed an aggregate of $8,573,339, with interest of
$3,576,264, arising from agreements among the parties pursuant to which the
respondents were permitted to use Mr. Thomas' name and likeness in connection
with certain programs and membership clubs and pursuant to which he was to make
certain infomercials. The claimants allege that they were not paid the
appropriate percentage of revenues allegedly due them and have asserted claims
for fraud and deceit, constructive fraud, civil conspiracy, breach of
constructive trust, quantum meruit/unjust enrichment, and unauthorized
publication of Mr. Thomas' name and likeness. Hearings on the arbitration have
been adjourned on a number of occasions and are currently scheduled for late
February and early March of 2002. The Company does not believe that there is any
merit to the claims and intends to vigorously defend against them.

                                       F-18
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Mavies Wingler

     On or about May 9, 2001, Mavies Wingler commenced an action against Group
Lotto, Inc. ("GLI"), a wholly owned subsidiary of the Company 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 entitled Wingler v. GroupLotto, Inc., Docket Number 2:01 -- CV -- 518.
The action is in the initial stages of discovery. The Company does not believe
that there is any merit to Ms. Wingler's claim, and intends to vigorously defend
against it. GLI has a contract of indemnification with SCA Promotions, Inc.
("SCA") to be indemnified for prizes paid out to qualified winners.

     Other Contingencies

     At November 30, 2001 and 2000, accrued expenses, applicable to the off-line
customer acquisition services, included approximately $-0- and $746,000 of such
costs, respectively. This estimation is adjusted to actual amounts experienced
in subsequent periods. As of November 30, 2001, the approximate $605,000 accrued
expense is funded to the extent of approximately $641,000 by an escrow account
managed by a major financial institution, with such amounts being netted against
each other in the financial statements. The Company has incurred de minimis
customer redemption requests against the accrued liability, and is pursuing
recovery of the funds held in escrow. Any escrow recovered will be recognized as
off-line customer acquisition services revenue at the time of receipt. During
the years ended November 30, 2001 and 2000, the Company recorded approximately
$131,000 and $2,428,000, respectively, as reductions of cost of revenues related
to expired fulfillment obligations. During the fiscal year ended November 30,
1999, similar adjustments, if any, were immaterial in amount.

11. EARNINGS PER SHARE

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

<Table>
<Caption>
                                                         YEAR ENDED NOVEMBER 30,
                                                   ------------------------------------
                                                      2001         2000         1999
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>
Denominator:
  Denominator for basic earnings per
     share -- weighted average shares............  14,794,159   14,792,734   15,119,610
Effect of dilutive securities:
  Stock options..................................     602,460      701,929      122,052
                                                   ----------   ----------   ----------
  Denominator for diluted earnings per share --
     adjusted weighted average shares............  15,396,619   15,494,663   15,241,662
                                                   ==========   ==========   ==========
</Table>

     Options and warrants to purchase 661,250, 515,896 and 243,474 shares of
common stock that were outstanding at November 30, 2001, 2000 and 1999,
respectively, were not included in the computation of diluted earnings per share
because their effect would be anti-dilutive.

12. 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

                                       F-19
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 was
amended in September 1996, June 1997, September 1999 and September 2000 to
provide for the granting of options to purchase an additional 500,000, 600,000,
1,000,000 and 2,000,000 shares, respectively, of the Company's common stock.
After these amendments, there were a total of 4,850,000 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 187,500, 81,250 and 150,000 options to the nonemployee directors
during fiscal 2001, 2000 and 1999, respectively.

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

<Table>
<Caption>
                                      2001                   2000                   1999
                              --------------------   --------------------   --------------------
                                          WEIGHTED               WEIGHTED               WEIGHTED
                                          AVERAGE                AVERAGE                AVERAGE
                                          EXERCISE               EXERCISE               EXERCISE
                               SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                              ---------   --------   ---------   --------   ---------   --------
<S>                           <C>         <C>        <C>         <C>        <C>         <C>
Options outstanding,
  beginning of year.........  1,636,132    $3.80     1,301,864    $2.48     1,304,978    $2.52
Granted.....................  1,130,062     2.55       560,250     6.11       153,489     1.58
Exercised...................   (273,132)    1.79      (211,526)    1.96       (89,844)    1.75
Cancelled or lapsed.........     (9,719)    1.85       (14,456)    1.75       (66,759)    2.13
                              ---------              ---------              ---------
Options outstanding, end of
  year......................  2,483,343    $3.45     1,636,132    $3.80     1,301,864    $2.48
                              =========    =====     =========    =====     =========    =====
Options exercisable, end of
  year......................  2,025,836              1,521,633              1,006,387
                              =========              =========              =========
Options available for grant,
  end of year...............  1,619,957              2,741,300              1,279,794
                              =========              =========              =========
Weighted average fair value
  of options granted during
  the year..................      $2.55                  $4.60                  $1.08
                                  -----                  -----                  -----
                                  -----                  -----                  -----
</Table>

     The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been

                                       F-20
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized with regard to options granted under the Plan in the accompanying
financial statements. If stock-based compensation costs had been recognized
based on the estimated fair values at the dates of grant for options awarded
during the years ended November 30, 2001, 2000 and 1999, the Company's net
income and earnings per share would have been as follows:

<Table>
<Caption>
                                                     2001         2000         1999
                                                   ---------   ----------   ----------
<S>                                                <C>         <C>          <C>
Net income -- as reported........................  $ 417,499   $5,146,870   $3,923,860
Net income -- pro forma..........................  $(565,967)  $3,653,723   $3,758,078
Basic EPS -- as reported.........................  $    0.03   $     0.35   $     0.26
Diluted EPS -- as reported.......................  $    0.03   $     0.33   $     0.26
Basic EPS -- pro forma...........................  $   (0.04)  $     0.25   $     0.25
Diluted EPS -- pro forma.........................  $   (0.04)  $     0.24   $     0.25
</Table>

     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 for volatility of 62.62% in
2001, 109.6% in 2000 and 90% in 1999; risk-free interest rate ranging from 3.94%
to 5.31% in 2001, 5.87% to 6.53% in 2000 and 4.53% to 5.89% in 1999; and
expected lives of approximately 4.8 years.

     The following table summarizes information about stock options outstanding
at November 30, 2001:

<Table>
<Caption>
                                 WEIGHTED
                                  AVERAGE      WEIGHTED                    WEIGHTED
                                 REMAINING      AVERAGE                     AVERAGE
   RANGE OF                     CONTRACTUAL   EXERCISABLE     SHARES      EXERCISABLE
EXERCISE PRICE    OUTSTANDING      LIFE          PRICE      EXERCISABLE      PRICE
--------------    -----------   -----------   -----------   -----------   -----------
<S>               <C>           <C>           <C>           <C>           <C>
$ 1.50 - $ 2.13    1,113,094        3.5         $ 1.87         994,916      $ 1.89
$ 2.28 - $ 3.35      414,833        9.3           2.68         367,502        2.70
$ 3.81 - $ 5.69      536,666        8.4           4.48         244,668        4.78
$ 5.88 - $ 6.75      350,000        8.2           6.64         350,000        6.64
$ 9.00 - $11.31       56,250        6.3          10.07          56,250       10.07
$15.56 - $15.56       12,500        5.6          15.56          12,500       15.56
---------------    ---------        ---         ------       ---------      ------
$ 1.50 - $15.56    2,483,343       3$.45      2,025,836      $    3.52
===============    =========        ===         ======       =========      ======
</Table>

     As of November 30, 2000 and 1999, there were 275,818 warrants outstanding
to purchase common stock at an exercise price of $8.25 per share. The warrants
expired in December 2001.

     During fiscal 2001, 2000 and 1999, options for shares of the Company's
common stock were exercised by certain employees and directors. A tax benefit of
$240,265, $448,880 and $123,767 in fiscal 2001, 2000 and 1999, 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.

13. SEGMENT INFORMATION

     The Company's segments operate principally in the United States with an
immaterial portion of revenue earned in Canada during the fiscal year ended
November 30, 1999. 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

                                       F-21
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(E-commerce), (2) Off-line Customer Acquisition services billed directly to long
distance carriers, wireless carriers and other service providing businesses
(Off-line Customer Acquisition services) and (3) Products and Services billed to
consumers by Local Exchange Carriers (LEC Billed products and services). 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) long-lived asset impairment charges, (vi) gains on
nonmonetary cost basis exchanges, (vii) other nonoperating income, (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 $27.3 million at November 30, 2001,
consist principally of cash, cash equivalents and marketable securities.

  Segment Data -- Net revenues

<Table>
<Caption>
                                                                     NET REVENUE
                                                               YEAR ENDED NOVEMBER 30,
                                                      -----------------------------------------
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
E-commerce..........................................  $28,475,225    $10,498,186    $     7,634
Off-line Customer Acquisition Services..............    2,214,576      8,958,774     30,687,009
LEC Billed Products and Services....................    1,519,609      7,134,831     11,975,622
Corporate and other.................................           --         20,072        169,575
                                                      -----------    -----------    -----------
          Consolidated totals.......................  $32,209,410    $26,611,863    $42,839,840
                                                      ===========    ===========    ===========
</Table>

  Segment Data -- Gross Profit

<Table>
<Caption>
                                                                    GROSS PROFIT
                                                               YEAR ENDED NOVEMBER 30,
                                                      -----------------------------------------
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
E-commerce..........................................  $20,574,189    $ 4,875,105    $     5,550
Off-line Customer Acquisition Services..............    1,020,550      5,797,040      6,270,953
LEC Billed Products and Services....................    1,462,209      6,862,619      9,457,075
Corporate and other.................................           --         20,072        154,165
                                                      -----------    -----------    -----------
          Consolidated totals.......................  $23,056,948    $17,554,836    $15,887,743
                                                      ===========    ===========    ===========
</Table>

                                       F-22
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Segment Data -- EBITDA

<Table>
<Caption>
                                                                       EBITDA
                                                               YEAR ENDED NOVEMBER 30,
                                                      -----------------------------------------
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
E-commerce..........................................  $ 9,554,829    $(1,341,711)   $  (427,253)
Off-line Customer Acquisition Services..............      200,406      4,299,772        339,046
LEC Billed Products and Services....................      367,328      6,285,218      8,197,531
Corporate and other.................................   (3,459,866)    (3,505,317)    (2,853,664)
                                                      -----------    -----------    -----------
          Consolidated totals.......................  $ 6,662,697    $ 5,737,962    $ 5,255,660
                                                      ===========    ===========    ===========
</Table>

  Segment Data -- Depreciation and Amortization

<Table>
<Caption>
                                                              DEPRECIATION AND AMORTIZATION
                                                                 YEAR ENDED NOVEMBER 30,
                                                             --------------------------------
                                                               2001        2000        1999
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
E-commerce.................................................  $157,222    $ 67,634    $     --
Off-line Customer Acquisition Services.....................        --          --      65,530
LEC Billed Products and Services...........................        --          --       9,171
Corporate and other........................................   232,182     196,035     174,372
                                                             --------    --------    --------
          Consolidated totals..............................  $389,404    $263,669    $249,073
                                                             ========    ========    ========
</Table>

  Segment Data -- Long-Lived Assets

<Table>
<Caption>
                                                                    LONG-LIVED ASSETS
                                                                 YEAR ENDED NOVEMBER 30,
                                                            ----------------------------------
                                                               2001         2000        1999
                                                            ----------    --------    --------
<S>                                                         <C>           <C>         <C>
E-commerce................................................  $1,868,627    $ 65,232    $324,283
Off-line Customer Acquisition services....................          --          --          --
LEC Billed products and services..........................          --          --          --
Corporate and other.......................................     499,482     447,726     492,250
                                                            ----------    --------    --------
          Consolidated totals.............................  $2,368,109    $512,958    $816,533
                                                            ==========    ========    ========
</Table>

  Segment Data -- Total Assets

<Table>
<Caption>
                                                                    TOTAL ASSETS
                                                               YEAR ENDED NOVEMBER 30,
                                                      -----------------------------------------
                                                         2001           2000           1999
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
E-commerce..........................................  $23,087,920    $ 4,536,473    $ 7,610,364
Off-line Customer Acquisition services..............    1,057,530        856,567      8,249,232
LEC Billed products and services....................    1,321,192      3,120,889      8,411,901
Corporate and other.................................   27,275,942     43,684,914     33,005,782
                                                      -----------    -----------    -----------
          Consolidated totals.......................  $52,742,584    $52,198,843    $57,277,279
                                                      ===========    ===========    ===========
</Table>

14. SUBSEQUENT EVENTS

     In December 2001, Traffix acquired the assets of Infiknowledge, a Canadian
software development and Internet services firm. The key assets purchased
include an email delivery system, a suite of over 50 on-line
                                       F-23
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

games as well as a team of highly skilled, interactive game developers who
possess the capabilities to enhance, develop and add support to the Company's
on-line marketing business.

     The agreement calls for the purchase to be made for $1,150,000 in a
combination of cash and the Company's stock. The cash portion of $462,500 is to
be paid (a) $262,500 at closing and (b) $200,000 on the first anniversary of the
closing. The stock portion of $687,500 (representing approximately 117,000
shares of the Company's stock) will be delivered in three equal installments,
one at closing (which occurred in December 2001) and subsequently on the first
two anniversary dates following the closing. Concurrent with this, two key
senior executives of Infiknowledge will enter into five year employment
agreements which will include non-compete covenants.

     Additionally, in December 2001, the Company completed an acquisition of the
assets of an on-line direct marketing company known as ThanksMuch.com, LLC
("ThanksMuch"). ThanksMuch specializes in the on-line sale of costume jewelry
and other small gift items. The total consideration tendered for the assets was
$435,000, and was paid in full at closing. The Company anticipates that the
assets acquired will be utilized to provide an opportunity for increased
revenue, gross profits and cash flows in future fiscal periods.

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following is a summary of the unaudited quarterly results of operations
for fiscal 2001, 2000 and 1999:

<Table>
<Caption>
                                                       QUARTER ENDED
                                 ---------------------------------------------------------
                                 NOVEMBER 30,    AUGUST 31,      MAY 31,      FEBRUARY 28,
                                 ------------    ----------    -----------    ------------
<S>                              <C>             <C>           <C>            <C>
2001:
Net revenues...................  $14,050,493     $7,404,820    $ 5,828,543    $ 4,925,554
Gross profit...................    9,805,348      5,123,105      4,180,806      3,947,689
Income (loss) before income
  taxes........................    2,875,971      2,260,304      1,695,865     (3,139,441)
Net income (loss)..............    1,709,882      1,462,992      1,015,484     (3,770,859)
Basic income per share.........  $      0.13     $     0.10    $      0.07    $     (0.26)
Diluted income per share.......  $      0.12     $     0.10    $      0.07    $     (0.26)
2000:
Net revenues...................  $ 8,829,967     $7,862,386    $ 7,220,864    $ 2,698,646
Gross profit...................    3,878,148      5,480,259      5,856,759      2,399,670
Income before income taxes.....      853,284      2,616,751      3,210,748      1,937,841
Net income.....................      516,705      1,561,600      1,906,859      1,161,706
Basic income per share.........  $      0.03     $     0.11    $      0.13    $      0.08
Diluted income per share.......  $      0.03     $     0.10    $      0.12    $      0.07
1999:
Net revenues...................  $ 4,526,274     $8,084,023    $10,423,942    $19,805,601
Gross profit...................    4,275,515      4,503,692      4,056,306      3,052,230
Income before income taxes.....    2,393,277      2,390,715        926,273        672,115
Net income.....................    1,669,073      1,298,190        555,289        401,308
Basic income per share.........  $      0.12     $     0.09    $      0.03    $      0.03
Diluted income per share.......  $      0.11     $     0.09    $      0.03    $      0.03
</Table>

     During the fourth quarter to fiscal 2001, the Company recorded $3.7 million
in revenue related to an arbitration award granted to the Company regarding the
settlement of a dispute brought against Talk.com (NASDAQ:TALK). The Company's
total award was approximately $6.2 million with $3.7 million having been
collected in November 2001 and recorded as revenue at the time of the receipt.
The balance of the award

                                       F-24
<PAGE>
                         TRAFFIX, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is treated as a gain contingency pursuant to the overall financial condition of
the telecommunications sector, and management's estimation of Talk.com's ability
to pay. As a result of the award's collection the Company recognized a $1.25
million contingent liability in the fourth quarter of fiscal 2001 relative to
telemarketing costs incurred in the prior fiscal year. The collection of the
Talk.com award triggered the recognition of the contingency. There are no other
contingencies related to the potential collection of the balance of the award.

     During the fourth quarter of fiscal 2001, the Company charged approximately
$826,000 to bad debt expense related to the bankruptcy of its LEC Billed Product
and Service segment's billing and collection service bureau.

     During the fourth quarter of fiscal 2000, the Company adjusted certain
accrued expenses related to fulfillment accruals ($1,007,237), and accrued
annual bonuses ($260,060), the combined effect of which increased fiscal 2000's
fourth quarter pre-tax income by $1,267,297. The fourth quarter of fiscal 2000
was negatively impacted by long-lived asset impairment charges of $602,500. The
combined effect of these fourth quarter fiscal 2000 adjustments increased
pre-tax income by $664,797.

     During the fourth quarter of fiscal 1999, there were no material events.

                                       F-25
<PAGE>

         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<Table>
<Caption>
           COL. A                COL. B               COL. C                 COL. D           COL. E
           ------              -----------   ------------------------     -------------     ----------
                                                    ADDITIONS
                                             ------------------------
                               BALANCE AT    CHARGED TO   CHARGED TO                         BALANCE
                                BEGINNING    COSTS AND       OTHER        DEDUCTIONS --       AT END
         DESCRIPTION            OF PERIOD     EXPENSES     ACCOUNTS         DESCRIBE        OF PERIOD
         -----------           -----------   ----------   -----------     -------------     ----------
<S>                            <C>           <C>          <C>             <C>               <C>
YEAR ENDED NOVEMBER 30, 2001
Reserve for customer
  chargebacks................  $ 1,225,040     $  --      $   574,969(1)   $ 1,798,531(9)   $    1,478
                               -----------     -----      -----------      -----------      ----------
Reserve for fulfillment
  costs......................  $   746,415     $  --      $   158,228      $   141,200(10)  $  763,443
                               -----------     -----      -----------      -----------      ----------
Allowance for doubtful
  accounts and adjustments...  $   795,024     $  --      $ 8,369,011(5)   $ 8,780,359(6)   $  383,676
                               -----------     -----      -----------      -----------      ----------

YEAR ENDED NOVEMBER 30, 2000
Reserve for customer
  chargebacks................  $ 4,618,108     $  --      $   988,669(1)   $ 4,381,737(7)   $1,225,040
                               -----------     -----      -----------      -----------      ----------
Reserve for fulfillment
  costs......................  $ 4,132,809     $  --      $   518,335(2)   $ 3,904,729(8)   $  746,415
                               -----------     -----      -----------      -----------      ----------
Allowance for doubtful
  accounts and adjustments...  $        --     $  --      $ 3,885,656(5)   $ 3,090,632(6)   $  795,024
                               -----------     -----      -----------      -----------      ----------

YEAR ENDED NOVEMBER 30, 1999
Reserve for customer
  chargebacks................  $15,494,138     $  --      $11,968,645(1)   $22,844,675(3)   $4,618,108
                               -----------     -----      -----------      -----------      ----------
Reserve for fulfillment
  costs......................  $ 1,405,248     $  --      $ 7,133,012(2)   $ 4,405,451(4)   $4,132,809
                               -----------     -----      -----------      -----------      ----------
</Table>

---------------

<Table>
<S>   <C>                                           <C>          <C>
 (1)  Charges against revenues.
 (2)  Charges against cost of sales.
 (3)  Chargebacks refunded to consumers.
 (4)  Payments made to fulfillment vendors.
 (5)  Charges to allowance
 (6)  Charges against the allowance
 (7)  Chargebacks refunded to consumers..........   $2,556,119
      Prior year chargebacks credited to
        income...................................   $1,825,618   $4,381,737
                                                    -----------------------
 (8)  Payments made to fulfillment vendors.......   $  991,169
      Prior year accrual reversals reducing
        costs....................................   $2,428,235
      Current year (4th qtr.) accrual
        reversals................................   $  485,325   $3,904,729
                                                    -----------------------
 (9)  Reserves written off with corresponding
        receivables -- FTT bankruptcy............   $1,384,483
      Reserves written off because of immaterial
        chargeback activity -- West..............   $   60,535
      Chargebacks refunded to customers..........   $  353,513   $1,798,531
                                                    -----------------------
(10)  Payments made to fulfillment vendors.......   $   10,317
      Prior year accrual exceeded actual
        redemptions..............................   $  130,883   $  141,200
                                                    -----------------------
</Table>

                                       S-1
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER
-------
<S>       <C>
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      Third 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
10.3.2*   December 1, 2001 Employment Agreement by and between the
          Company and Andrew Stollman
21*       Subsidiaries of the Company
</Table>

---------------
 *  Filed herewith.

(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
    dated October 23, 1995 and incorporated herein by reference.

(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
    fiscal quarter ended August 31, 1998 and incorporated herein by reference.

(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
    dated September 6, 1995 (File No. 33-96632) and incorporated herein by
    reference.

(4) Filed as an Exhibit to the Company's Proxy Statement filed with the
    Commission, dated August 16, 2000 and incorporated herein by reference.

(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
    December 26, 2000 and incorporated herein by reference.