##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q

(Mark One)



|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the quarter ended February 28,
2002



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period
from                     to

Commission file number 0-27046

TRAFFIX, INC.

(Exact name of registrant as specified in its
charter)


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

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

Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

Yes  þ     No  o

The number of shares outstanding of the
Registrants common stock is 14,425,339 (as of 04/12/02).



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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I FINANCIAL INFORMATION
|                             | Item 1. Financial Statements                                                                 
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings                                                                    
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|EXHIBIT INDEX               



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##### Table of Contents



TRAFFIX, INC.

INDEX TO QUARTERLY REPORT ON FORM
10-Q

FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION


QUARTER ENDED FEBRUARY 28, 2002


ITEMS IN FORM 10-Q

|           |         |                       |                                                                                        |      |    |      | 
|---------- | ------- | --------------------- | -------------------------------------------------------------------------------------- | ---- | -- | ---- | 
|           |         |                       |                                                                                        | Page
|           |         |                       |                                                                                        |     
|Part I     |         | Financial Information |                                                                                        |      |    |     
|           | Item 1. |                       | Financial Statements                                                                   |      |    | 2    | 
|           | Item 2. |                       | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |      |    | 12   | 
|           | Item 3. |                       | Quantitative and Qualitative Disclosures About
	Market Risk                            |      |    | None | 
|Part II    |         | Other Information     |                                                                                        |      |    |     
|           | Item 1. |                       | Legal Proceedings                                                                      |      |    | 28   | 
|           | Item 2. |                       | Changes in Securities and Use of Proceeds                                              |      |    | None | 
|           | Item 3. |                       | Defaults Upon Senior Securities                                                        |      |    | None | 
|           | Item 4. |                       | Submission of Matters to a Vote of Security
	Holders                                   |      |    | None | 
|           | Item 5. |                       | Other Information                                                                      |      |    | None | 
|           | Item 6. |                       | Exhibits and Reports on Form 8-K                                                       |      |    | 29   | 
|Signatures |         |                       |                                                                                        |      | 30 |     

1



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##### Table of Contents






TRAFFIX, INC. AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |            |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                                                                                             |                                                                                                                                         | February 28,                               |            | November 30,
|                                                                                                                                             |                                                                                                                                         | 2002                                       |            | 2001        
|                                                                                                                                             |                                                                                                                                         |                                            |            |             
|                                                                                                                                             |                                                                                                                                         | (Unaudited)                                |            |             
|Assets                                                                                                                                       |                                                                                                                                         |                                            |            |              |            |  |            |           
|Current assets:                                                                                                                              |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             | Cash and cash equivalents                                                                                                               |                                            | $          | 12,488,835   |            |  | $          | 14,458,055 |           
|                                                                                                                                             | Marketable securities                                                                                                                   |                                            |            | 23,048,138   |            |  |            | 23,677,999 |           
|                                                                                                                                             | Accounts receivable, trade, net of allowance for
	doubtful accounts of $647,026 at February 28, 2002 and
	$383,676 at November 30, 2001 |                                            |            | 9,558,318    |            |  |            | 7,326,032  |           
|                                                                                                                                             | Deferred income taxes                                                                                                                   |                                            |            | 2,777,522    |            |  |            | 3,242,815  |           
|                                                                                                                                             | Due from related parties                                                                                                                |                                            |            | 180,928      |            |  |            | 106,654    |           
|                                                                                                                                             | Prepaid expenses and other current assets                                                                                               |                                            |            | 1,476,435    |            |  |            | 1,415,836  |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total current assets                       |            |              | 49,530,176 |  |            |            | 50,227,391 | 
|Property and equipment, at cost, net of
	accumulated depreciation                                                                            |                                                                                                                                         |                                            | 1,309,010  |              |            |  | 951,702    |           
|Goodwill and other intangibles, net                                                                                                          |                                                                                                                                         |                                            | 2,738,533  |              |            |  | 1,362,407  |           
|Deferred income taxes                                                                                                                        |                                                                                                                                         |                                            | 147,084    |              |            |  | 147,084    |           
|Other                                                                                                                                        |                                                                                                                                         |                                            | 54,000     |              |            |  | 54,000     |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total assets                               |            | $            | 53,778,803 |  |            | $          | 52,742,584 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|Liabilities and Shareholders
	Equity                                                                                                        |                                                                                                                                         |                                            |            |              |            |  |            |           
|Current liabilities:                                                                                                                         |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             | Accounts payable                                                                                                                        |                                            | $          | 1,536,446    |            |  | $          | 3,928,418  |           
|                                                                                                                                             | Accrued expenses                                                                                                                        |                                            |            | 4,546,412    |            |  |            | 4,098,921  |           
|                                                                                                                                             | Due to related parties                                                                                                                  |                                            |            | 501,766      |            |  |            | 469,935    |           
|                                                                                                                                             | Income taxes payable                                                                                                                    |                                            |            | 2,022,357    |            |  |            | 1,672,953  |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total current liabilities                  |            |              | 8,606,981  |  |            |            | 10,170,227 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|Minority interest                                                                                                                            |                                                                                                                                         |                                            | 184,460    |              |            |  | 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 14,409,672
	shares and 14,290,491 shares, respectively |                                                                                                                                         |                                            | 14,410     |              |            |  | 14,289     |           
|Common stock issuable  $.001 par
	value; 78,347 shares                                                                                      |                                                                                                                                         |                                            | 485,758    |              |            |  |           |           
|Additional paid-in capital                                                                                                                   |                                                                                                                                         |                                            | 42,098,862 |              |            |  | 41,395,784 |           
|Retained earnings                                                                                                                            |                                                                                                                                         |                                            | 4,610,187  |              |            |  | 3,206,770  |           
|Accumulated other comprehensive income                                                                                                       |                                                                                                                                         |                                            | 54,859     |              |            |  | 72,577     |           
|Common stock held in treasury, at cost, 961,403
	shares                                                                                      |                                                                                                                                         |                                            | (2,276,714 | )            |            |  | (2,276,714 | )         
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total shareholders equity                 |            |              | 44,987,362 |  |            |            | 42,412,706 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total liabilities and shareholders equity |            | $            | 53,778,803 |  |            | $          | 52,742,584 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           

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

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TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(LOSS)

|                                          |                                                   |                                                  |            |              |           |   |           |            |            |  
|----------------------------------------- | ------------------------------------------------- | ------------------------------------------------ | ---------- | ------------ | --------- | - | --------- | ---------- | ---------- | -
|                                          |                                                   |                                                 
|                                          |                                                   | Three Months Ended                              
|                                          |                                                   |                                                 
|                                          |                                                   | February 28,                                     |            | February 28,
|                                          |                                                   | 2002                                             |            | 2001        
|                                          |                                                   |                                                  |            |             
|                                          |                                                   |                                                 
|                                          |                                                   | (Unaudited)                                     
|Net revenue                               |                                                   | $                                                | 12,370,897 |              |           | $ | 4,925,554 |           
|Cost of sales                             |                                                   |                                                  | 3,378,611  |              |           |   | 1,067,026 |           
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          |                                                   | Gross profit                                     |            |              | 8,992,286 |   |           |            | 3,858,528  |  
|Selling expenses                          |                                                   |                                                  | 3,168,568  |              |           |   | 515,884   |           
|General and administrative expenses       |                                                   |                                                  | 3,578,591  |              |           |   | 2,450,246 |           
|Bad Debt expense                          |                                                   |                                                  | 329,334    |              |           |   |          |           
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          |                                                   | Income from operations                           |            |              | 1,915,793 |   |           |            | 892,398    |  
|Other income (expense):                   |                                                   |                                                  |            |              |           |   |           |           
|                                          | Interest expense                                  |                                                  |            | (10,502      | )         |   |           |           |           
|                                          | Interest income and dividends                     |                                                  |            | 210,213      |           |   |           | 649,952    |           
|                                          | Realized gains on marketable securities           |                                                  |            | 62,593       |           |   |           |           |           
|                                          | Permanent impairment charges                      |                                                  |            |             |           |   |           | (4,690,258 | )         
|                                          | Other non-operating income                        |                                                  |            | 134,437      |           |   |           | 8,467      |           
|                                          | Minority interest in (income) loss of
	subsidiary |                                                  |            | (26,647      | )         |   |           |           |           
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          |                                                   | Income (loss) before provision for income
	taxes |            |              | 2,285,887 |   |           |            | (3,139,441 | )
|Provision for income taxes                |                                                   |                                                  | 882,470    |              |           |   | 631,418   |           
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          |                                                   | Net income (loss)                                |            | $            | 1,403,417 |   |           | $          | (3,770,859 | )
|                                          |                                                   |                                                  |            |              |           |   |           |           
|Basic income (loss) per share (Note 3):   |                                                   |                                                  |            |              |           |   |           |           
|                                          | Net income (loss)                                 |                                                  | $          | 0.10         |           |   | $         | (0.26      | )         
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          | Weighted average shares outstanding               |                                                  |            | 13,452,943   |           |   |           | 14,755,790 |           
|                                          |                                                   |                                                  |            |              |           |   |           |           
|Diluted income (loss) per share (Note 3): |                                                   |                                                  |            |              |           |   |           |           
|                                          | Net income (loss)                                 |                                                  | $          | 0.10         |           |   | $         | (0.26      | )         
|                                          |                                                   |                                                  |            |              |           |   |           |           
|                                          | Weighted average shares outstanding               |                                                  |            | 14,675,395   |           |   |           | 14,755,790 |           
|                                          |                                                   |                                                  |            |              |           |   |           |           

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

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TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |             |           |            |            |  
|------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ------- | ---------- | ---------- | ----------- | --------- | ---------- | ---------- | -
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | Three Months Ended                                        
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | February 28,                                               |                                           | February 28,                                        
|                                      |                                                                                       | 2002                                                       |                                           | 2001                                                
|                                      |                                                                                       |                                                            |                                           |                                                     
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | (Unaudited)                                               
|Cash flows from operating activities: |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      | Net income (loss)                                                                     |                                                            | $                                         | 1,403,417                                            |         |            | $          | (3,770,859  | )        
|                                      | Adjustments to reconcile net income
	(loss) to net cash used in operating activities: |                                                            |                                           |                                                      |         |            |            |             |          
|                                      |                                                                                       | Depreciation and amortization                              |                                           |                                                      | 233,695 |            |            |             | 61,793    |           
|                                      |                                                                                       | Reserve for customer chargebacks                           |                                           |                                                      |        |            |            |             | 40,954    |           
|                                      |                                                                                       | Provision for uncollectible accounts                       |                                           |                                                      | 329,334 |            |            |             |          |           
|                                      |                                                                                       | Exchange loss                                              |                                           |                                                      | 269     |            |            |             |          |           
|                                      |                                                                                       | Deferred income taxes                                      |                                           |                                                      | 465,293 |            |            |             | (118,911  | )         
|                                      |                                                                                       | Net (gains) on sale of marketable securities               |                                           |                                                      | (62,593 | )          |            |             |          |           
|                                      |                                                                                       | Permanent impairment charges                               |                                           |                                                      |        |            |            |             | 4,690,258 |           
|                                      |                                                                                       | Amortized discounts and premiums on marketable
	securities |                                           |                                                      | (27,368 | )          |            |             | (116,606  | )         
|                                      |                                                                                       | Minority interest                                          |                                           |                                                      | 24,809  |            |            |             |          |           
|                                      |                                                                                       | Changes in assets and liabilities of business:             |                                           |                                                      |         |            |            |             |           |           
|                                      |                                                                                       |                                                            | Accounts receivable                       |                                                      |         | (2,561,620 | )          |             |           | (1,432,911 | )         
|                                      |                                                                                       |                                                            | Prepaid expenses and other current assets |                                                      |         | (60,599    | )          |             |           | 482,839    |           
|                                      |                                                                                       |                                                            | Accounts payable                          |                                                      |         | (2,391,972 | )          |             |           | (801,995   | )         
|                                      |                                                                                       |                                                            | Income taxes payable                      |                                                      |         | 493,445    |            |             |           | 440,276    |           
|                                      |                                                                                       |                                                            | Due from/to related parties               |                                                      |         | (42,443    | )          |             |           | (715,082   | )         
|                                      |                                                                                       |                                                            | Other, principally accrued expenses       |                                                      |         | 247,491    |            |             |           | (227,792   | )         
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      |                                                                                       |                                                            |                                           | Net cash used in operating activities                |         |            | (1,948,842 | )           |           |            | (1,468,036 | )
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|Cash flows from investing activities: |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      | Purchases of securities                                                               |                                                            |                                           | (55,428,671                                          | )       |            |            | (59,862,617 | )        
|                                      | Proceeds from sales of securities                                                     |                                                            |                                           | 56,130,507                                           |         |            |            | 74,325,000  |          
|                                      | Capital expenditures                                                                  |                                                            |                                           | (490,011                                             | )       |            |            | (8,410      | )        
|                                      | Payments for asset acquisitions, net of cash
	received                                |                                                            |                                           | (548,482                                             | )       |            |            |            |          
|                                      | Proceeds from long-term investments                                                   |                                                            |                                           |                                                     |         |            |            | 5,000       |          
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      |                                                                                       |                                                            |                                           | Net cash (used in) provided by investing
	activities |         |            | (336,657   | )           |           |            | 14,458,973 |  
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|Cash flows from financing activities: |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      | Proceeds from stock options exercised                                                 |                                                            |                                           | 201,876                                              |         |            |            | 54,950      |          
|                                      | Proceeds-net on settled Section 16-b action                                           |                                                            |                                           | 114,403                                              |         |            |            |            |          
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      |                                                                                       |                                                            |                                           | Net cash provided by financing activities            |         |            | 316,279    |             |           |            | 54,950     |  
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      | Net (decrease) increase in cash and cash
	equivalents                                 |                                                            |                                           | (1,969,220                                           | )       |            |            | 13,045,887  |          
|                                      | Cash and cash equivalents, beginning of period                                        |                                                            |                                           | 14,458,055                                           |         |            |            | 4,551,344   |          
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            
|                                      | Cash and cash equivalents, end of period                                              |                                                            | $                                         | 12,488,835                                           |         |            | $          | 17,597,231  |          
|                                      |                                                                                       |                                                            |                                           |                                                      |         |            |            |            

During the three months ended February 28,
2002, the Company issued 117,521 shares of common stock, valued
at $728,636, in the purchase of the assets of a closely held,
private company (See note 8.)

During the three months ended February 28,
2002, the Company collected approximately $114,403, after
related costs and income tax expense of $185,597, from a
Section 16-b violation brought against a former
non-management insider shareholder.

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TRAFFIX, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(Unaudited)




|   |        
|-- | -------
|1. | General

The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, the unaudited consolidated financial
statements do not include certain information and note
disclosures normally required by generally accepted accounting
principles. The accompanying unaudited consolidated financial
statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and
operating results for the interim periods presented. The
accompanying unaudited consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto, together with managements
discussion and analysis of financial condition and results of
operations, contained in the Companys Annual Report on
Form 10-K for the fiscal year ended November 30, 2001.
The results of operations for the three months ended
February 28, 2002 are not necessarily indicative of the
results to be expected for the subsequent quarters or the entire
fiscal year ending November 30, 2002. Certain prior year
amounts in the unaudited consolidated financial statements have
been reclassified in accordance with generally accepted
accounting principles to conform with the current year
presentation.

2. Significant Accounting
Policies

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 seven 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
websites), (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 registration page of one of the
Companys websites 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 subscribes for a cellular phone service), (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, (6) sales of inexpensive costume jewelry and other
gift items directly to consumers, and (7) 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 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

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


SAB 101 during the first three months of the
fiscal year ended November 30, 2001; such adoption did not
materially impact financial position or results of operations at
that time.

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. The
Companys current business, as conducted in its E-commerce
segment, in certain cases also requires the provision of a
premium. These E-commerce segment premiums are estimated and
accrued, based upon historical, and current experience. Such
E-commerce premium costs are classified as a component of
marketing expense and included in the cost of sales, at the time
the associated revenues are recognized. Any variance in the
initial accrual as compared to the actual experience is taken
into operations in the period that the variance is determinable.

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 if the Companys incurred chargebacks varied
from the amounts previously estimated. The Companys LEC
Billed Product and Service segment was inactive during the three
months ended February 28, 2002.

The Companys majority owned subsidiary,
Montvale Management LLC (Montvale), employs both
on-line and off-line marketing channels to solicit from
consumers (under a net branch agreement with qualified financial
institutions) mortgage banking services. Montvale recognizes its
commission upon closing of the loan and final consumer
acceptance.

With respect to capitalization and amortization
of marketing costs, the Companys policy has been to
expense, as a cost of sale, database acquisition costs, and all
other related marketing costs, at the time an obligation or
expense is incurred. Based on the Companys experience in
the prior fiscal year ended November 30, 2001 (Fiscal
2001), with bulk data acquisitions it has been determined
that a basic database generates revenue for a minimum of three
to nine months. Based on this experience, the Company will
capitalize the cost of bulk database acquisitions and will
amortize such acquisitions over varying lives, not to exceed
nine months. During the three months ended February 28,
2002 and 2001, respectively, the Company did not acquire, and
correspondingly did not capitalize any bulk data acquisitions.
The Company expects to purchase databases in bulk and, depending
on the nature of the data content (e.g., whether the database is
basic or has extensive depth of data fields), the Company will
determine the appropriate amortization period at the time of
their acquisition.

Transactions
with Major Customers

During the three months ended February 28,
2002, the Company had five customers in its E-commerce segment,
which in combination accounted for approximately
$7.4 million, or 60% of consolidated net revenues during
the period, respectively, and approximately $7 million, or
73% of consolidated net accounts receivable as of
February 28, 2002. For the three months ended
February 28, 2002, three of the five customers referenced
above had related net revenues that equaled, or exceeded 10% of
the Companys consolidated net revenue for such period.
Regarding the balance of the Companys approximate customer
base of 100 active customers in

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


the quarter, no single customer had net revenues
that equaled, or exceeded, 10% of consolidated net revenues for
the three months ended February 28, 2002.

During the three months ended February 28,
2001 the Company had three customers in its E-commerce segment,
which in combination accounted for approximately 42% of
consolidated net revenues during the period, and approximately
23% of consolidated net accounts receivable as of
February 28, 2001.

3. Earnings Per Share

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

|                               |                                                                                |                    |  |              |  |  |  |            | 
|------------------------------ | ------------------------------------------------------------------------------ | ------------------ |  | ------------ |  |  |  | ---------- | 
|                               |                                                                                |                   
|                               |                                                                                | Three Months Ended
|                               |                                                                                |                   
|                               |                                                                                | February 28,       |  | February 28,
|                               |                                                                                | 2002               |  | 2001        
|                               |                                                                                |                    |  |             
|Denominator:                   |                                                                                |                    |  |              |  |  |  |           
|                               | Denominator for basic earnings per
	share  weighted average shares            |                    |  | 13,452,943   |  |  |  | 14,755,790 | 
|Effect of dilutive securities: |                                                                                |                    |  |              |  |  |  |           
|                               | Stock options                                                                  |                    |  | 1,222,452    |  |  |  |           | 
|                               |                                                                                |                    |  |              |  |  |  |           
|                               | Denominator for diluted earnings per
	share  adjusted weighted average shares |                    |  | 14,675,395   |  |  |  | 14,755,790 | 
|                               |                                                                                |                    |  |              |  |  |  |           

Options to purchase 400,000 and 2,339,729 shares
of common stock for the three months ended February 28,
2002 and 2001, respectively, were outstanding but were not
included in the computation of diluted earnings per share
because their effect would be anti-dilutive.

4. Comprehensive Income (Loss)

Unrealized gains and losses on the Companys
marketable securities are reported in comprehensive income
(loss) and accumulated other comprehensive income (loss).
Comprehensive income (loss) is defined as the change
in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. Excluding net income the Companys primary
source of comprehensive income (loss) would ordinarily
include the after tax net unrealized gains and (losses) on
available-for-sale securities, and the equity adjustment from
foreign currency translation. At November 30, 2001, full
valuation allowances were taken against the estimated deferred
tax assets attributable to the realized losses recorded in the
fiscal year ended November 30, 2001, which losses
approximated $4.7 million, based on the absence of other
appreciated capital gain property. Therefore, no tax effects are
provided on current year unrealized gains and losses. The
components of comprehensive income (loss) are presented
below:

|                                                                                                                    |  |                    |           |              |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ------------ |  | - | ---------- | -
|                                                                                                                    |  |                   
|                                                                                                                    |  | Three Months Ended
|                                                                                                                    |  |                   
|                                                                                                                    |  | February 28,       |           | February 28,
|                                                                                                                    |  | 2002               |           | 2001        
|                                                                                                                    |  |                    |           |             
|Net income (loss)                                                                                                   |  | $                  | 1,403,417 |              |  | $ | (3,770,859 | )
|Other comprehensive income (loss), net of tax:                                                                      |  |                    |           |              |  |   |            |  
|Foreign currency translation adjustments                                                                            |  |                    | 269       |              |  |   |           |  
|Unrealized (loss) gain from available-for-sale
	securities, arising during the period, net of income taxes of
	$-0- |  |                    | (17,986   | )            |  |   | 163,797    |  
|Less: reclassification adjustment for loss
	realized in net income                                                  |  |                    |          |              |  |   | 4,190,207  |  
|                                                                                                                    |  |                    |           |              |  |   |            |  
|Comprehensive income                                                                                                |  | $                  | 1,385,700 |              |  | $ | 583,145    |  
|                                                                                                                    |  |                    |           |              |  |   |            |  

7



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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


5. Advertising and Marketing
Costs

Currently, the material portion of the
Companys advertising and marketing costs are comprised of
(1) costs associated with the transmission of e-mail
advertisements, (2) costs associated with the purchase of
on-line customer 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 data, and (3) at the
time the promotional and creative services are provided,
respectively, and are included as a component of cost of sales.

In certain cases where the Company makes payment
for consumer data, on-line media or prepays for commercial email
delivery, in advance of the receipt or provision of such items,
the Company expenses such pre-payments ratably over the shorter
of the contract period or to the extent of actual fulfillment.

Total advertising and marketing costs, included
in the cost of sales, for the three months ended
February 28, 2002 and 2001 were approximately $3,289,000
and $902,000, respectively.

Included in prepaid expenses and other current
assets at February 28, 2002 and November 30, 2001,
were approximately $258,000 and $324,000, respectively, relating
to the unamortized portion of prepayments related to marketing
arrangements.

6. Marketable Securities and Long Term
Investments, at Cost

During the current quarter ended
February 28, 2002 the Company did not have any material
events regarding its marketable securities or long term, cost
based investments.

During the prior fiscal years three months
ended February 28, 2001, the Company recognized losses
(through a permanent impairment charge) of $4,190,207 on certain
of its available-forsale marketable securities. The
underlying securities historical carrying values were reduced to
their related closing prices at February 28, 2001, giving
effect to the prior years permanent impairment charge. The
Company had continually evaluated the carrying value of such
investments, and in terms of risk at the individual company
level coupled with risk at the market level, the Companys
prior year evaluation indicated that the decline in the related
securities was other-than-temporary. As a result of
this analysis, the Company adjusted the cost basis
of these securities, effective February 28, 2001, to the
closing prices on that date and realized the corresponding loss
during the three month period ended February 28, 2001. This
loss is included in the Companys other income (expense),
Permanent impairment charges for the three months
ended February 28, 2001.

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 continued review of such investment, and the
investments consistent 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 three months ended February 28,
2001 amounted to $500,051, and is included as a component of
other income (expense) Permanent impairment charges
for the three months ended February 28, 2001.

7. Segment Information

Historically, the Companys reportable
operating segments are aligned into three fundamental areas:
(1) Internet Commerce billed directly to the Companys
marketing partners and corporate customers, as well as consumers
(E-commerce), (2) Off-line 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

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


services-inactive during the three months ended
February 28, 2002). The balance of the Companys
operations, immaterial individually 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 non-monetary cost basis exchanges,
(vii) other non-operating 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
non-intersegment sources; therefore no intersegment elimination
applies.

Segment
Data  Net Revenue

|                            |                                        |                     |   |              |            |  |   |           |           | 
|--------------------------- | -------------------------------------- | ------------------- | - | ------------ | ---------- |  | - | --------- | --------- | 
|                            |                                        | February 28,        |   | February 28,
|                            |                                        | 2002                |   | 2001        
|                            |                                        |                     |   |             
|For the three months ended: |                                        |                     |   |              |            |  |   |          
|                            | E-commerce                             |                     | $ | 11,634,450   |            |  | $ | 4,120,566 |          
|                            | Off-line Customer Acquisition Services |                     |   | 736,447      |            |  |   |          |          
|                            | LEC Billed Products and Services       |                     |   |             |            |  |   | 804,988   |          
|                            |                                        |                     |   |              |            |  |   |          
|                            |                                        | Consolidated totals |   | $            | 12,370,897 |  |   | $         | 4,925,554 | 
|                            |                                        |                     |   |              |            |  |   |          

Segment
Data  Gross Profit

|                            |                                        |                     |   |              |           |  |   |           |           | 
|--------------------------- | -------------------------------------- | ------------------- | - | ------------ | --------- |  | - | --------- | --------- | 
|                            |                                        | February 28,        |   | February 28,
|                            |                                        | 2002                |   | 2001        
|                            |                                        |                     |   |             
|For the three months ended: |                                        |                     |   |              |           |  |   |          
|                            | E-commerce                             |                     | $ | 8,321,061    |           |  | $ | 3,123,746 |          
|                            | Off-line Customer Acquisition Services |                     |   | 671,225      |           |  |   | (13,127   | )        
|                            | LEC Billed Products and Services       |                     |   |              |           |  |   | 747,909   |          
|                            |                                        |                     |   |              |           |  |   |          
|                            |                                        | Consolidated totals |   | $            | 8,992,286 |  |   | $         | 3,858,528 | 
|                            |                                        |                     |   |              |           |  |   |          

Segment
Data  EBITDA

|                            |                                        |                     |   |              |           |  |   |           |         | 
|--------------------------- | -------------------------------------- | ------------------- | - | ------------ | --------- |  | - | --------- | ------- | 
|                            |                                        | February 28,        |   | February 28,
|                            |                                        | 2002                |   | 2001        
|                            |                                        |                     |   |             
|For the three months ended: |                                        |                     |   |              |           |  |   |          
|                            | E-commerce                             |                     | $ | 3,199,525    |           |  | $ | 1,238,631 |        
|                            | Off-line Customer Acquisition Services |                     |   | 37,370       |           |  |   | (135,068  | )      
|                            | LEC Billed Products and Services       |                     |   |             |           |  |   | 666,786   |        
|                            | Corporate and other                    |                     |   | (1,087,407   | )         |  |   | (816,158  | )      
|                            |                                        |                     |   |              |           |  |   |          
|                            |                                        | Consolidated totals |   | $            | 2,149,488 |  |   | $         | 954,191 | 
|                            |                                        |                     |   |              |           |  |   |          

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


Segment
Data  Depreciation and Amortization

|                            |                                        |                     |   |              |         |  |   |        |        | 
|--------------------------- | -------------------------------------- | ------------------- | - | ------------ | ------- |  | - | ------ | ------ | 
|                            |                                        | February 28,        |   | February 28,
|                            |                                        | 2002                |   | 2001        
|                            |                                        |                     |   |             
|For the three months ended: |                                        |                     |   |              |         |  |   |       
|                            | E-commerce                             |                     | $ | 164,684      |         |  | $ | 6,434  |       
|                            | Off-line Customer Acquisition Services |                     |   | 4,503        |         |  |   |       |       
|                            | LEC Billed Products and Services       |                     |   |             |         |  |   |       |       
|                            | Corporate and other                    |                     |   | 64,508       |         |  |   | 55,359 |       
|                            |                                        |                     |   |              |         |  |   |       
|                            |                                        | Consolidated totals |   | $            | 233,695 |  |   | $      | 61,793 | 
|                            |                                        |                     |   |              |         |  |   |       

8. Asset Acquisitions

In December 2001, the Company acquired the assets
of the following two entities for a total cost of $1,676,682:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | InfiKnowledge, a software development and
	Internet services firm based in New Brunswick, Canada, with the
	key assets purchased including an email delivery system, a suite
	of over 50 on-line games, as well as a team of highly skilled,
	interactive game developers whom the Company believes possess
	the capabilities to enhance, develop and add support to its
	on-line marketing business and provide economies for the
	Companys email delivery platform.
|
| |  | ThanksMuch, a Woodmere, New York based company
	that specializes in the on-line sale of costume jewelry and
	other small gift items. The Company anticipates that the assets
	acquired, coupled with the management team who will continue to
	run the business, will be utilized to provide an opportunity for
	increased revenue, gross profits and cash flows in future fiscal
	periods.                                                                           

The total purchase price components are set forth
below: (a) cash of $897,500, of which $697,500 was paid
simultaneous with the respective asset acquisition closings in
December 2001; and $200,000 of which is payable on
December 6, 2002, which is included as a component of the
Companys accrued expenses as at February 28, 2002,
and relates to the cash portion of the InfiKnowledge assets
purchased; and (b) 117,521 shares of the Companys
common stock, valued at $6.20 per share, which accounted for the
additional consideration in the InfiKnowledge asset acquisition.
Of the total share consideration, 39,174 of such shares were
issued at closing, and 78,347 shares remain issuable, with
39,174 shares to be issued on December 6, 2002 and
39,173 shares to be issued on December 6, 2003. The
issuable shares were considered as outstanding common shares in
the computation of both basic and diluted weighted shares
outstanding for the period December 6, 2001 to
February 28, 2002. Goodwill and other intangible assets
recognized in the transactions amounted to $1,477,000, of which
approximately 90%, or $1.3 million, is expected to be
deductible for income tax purposes. The goodwill and other
intangibles were assigned to the E-commerce segment. The
purchase price allocation has yet to be finalized pending the
review of certain items regarding identifiable intangibles and
goodwill. It is estimated that this review will be completed in
the Companys quarter ending May 31, 2002 and such
final allocation is anticipated to have an immaterial impact, if
any, on amortization expense.

9. Subsequent events

On April 5, 2002, the Company received the
final installment related to the arbitration award granted to
the Company during the fiscal year ended November 30, 2001
in the Talk.com proceedings. This final installment, with
interest, was approximately $2.5 million in the aggregate.

10



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##### Table of Contents



TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


10. Litigation

1. 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 were held between February 25, 2002 and
March 1, 2002, and the proceedings are expected to be
completed by the end of April, 2002. A decision by the
arbitrator is expected 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.

2. 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. The
Company does not believe that there is any merit to
Ms. Garens claims as they relate to the Company, has
denied the claims in its answer to the complaint, and intends
vigorously to defend against the claims.

3. 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
discovery stage. 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.

4. Daniel Rodgers  In
March, 2002, Daniel Rodgers commenced an action against the
Company in Supreme Court of the State of New York, Rockland
County. The complaint alleges that the Company disseminated
false and misleading advertisements through email advertisements
and through the website of its subsidiary, GroupLotto.com.
Mr. Rodgers purports to represent a class consisting of
those who, during the period January 1, 2001 and
March 5, 2002, provided their name, address, email address
and other biographical information in response to the email
advertisements or in response to the Grouplotto web page. The
Complaint purports to allege claims of common law fraud,
deceptive acts and practices, and false and misleading
advertising under New York law. The Complaint seeks injunctive
relief, unspecified monetary damages, and attorneys fees.
The Company has not yet filed an answer to the Complaint, but
believes that there is no merit to the claims and intends
vigorously to defend against them.

11



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##### Table of Contents






Item 2.  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-Q, 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.

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 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 scalable 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.

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

12



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##### Table of Contents



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 approximately 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.

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

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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.


The Companys expansion in, and dependence
on, its on-line direct marketing efforts, coupled with the
continued unproven reliability and profitability, and potential
seasonality, of the E-commerce marketplace, should be considered
when referring to the Companys current three month
results, as well as its prior historical results, in evaluating
the potential for the Companys future operations, cash
flows, and financial position.

Basis of Presentation

Certain amounts for the prior period that are
presented in the accompanying unaudited consolidated financial
statements, and referred to in the discussions below, have been
reclassified 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 three months ended February 28,
2002 and 2001, 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 three months ended February 28, 2002 and the
fiscal year ended November 30, 2001, when compared to the
prior comparable periods, and currently represents the core of
our business operations. Revenue in the E-commerce segment is
generated primarily from marketing 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.

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.

Results of Operations

The following is a discussion of the financial
condition and results of operations of the Company for the
three-month periods ended February 28, 2002 and
February 28, 2001, respectively. It should be read in
conjunction with the Companys Form 10-K as filed for
the year ended November 30, 2001, the Notes thereto and
other financial information included elsewhere in this report.

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Three Months Ended February 28, 2002 and
February 28, 2001

The Companys net revenues, on a segmental
basis, and with disclosure of the components of the individual
segments, for each of the three month periods ended
February 28, 2002 and February 28, 2001, are detailed
in the following tables:

Segment
Data  Net revenues, by segment component

|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|-------------------------------------------------- |  | ------------------ | ---------- | -------- |  | -------- | --------- | --- |  | - | --------- | - |  |  | ---- | -
|                                                   |  |                    |            |          |  |         
|                                                   |  | Three Months Ended |            |          |  |         
|                                                   |  | February 28,       |            | Change   |  | Change  
|                                                   |  |                    |            | Inc(Dec) |  | Inc(Dec)
|                                                   |  | 2002               |            | 2001     |  | $$$      |           | %%%
|                                                   |  |                    |            |          |  |          |           |    
|E-commerce components                              |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|GroupLotto and other web sites                     |  | $                  | 2,437,033  |          |  | $        | 1,087,544 |     |  | $ | 1,349,489 |   |  |  | 124  | %
|Net branch commission fees                         |  |                    | 129,961    |          |  |          |          |     |  |   | 129,961   |   |  |  | 100  | %
|Email marketing programs                           |  |                    | 7,913,984  |          |  |          | 2,659,123 |     |  |   | 5,254,861 |   |  |  | 198  | %
|Data sales and rentals                             |  |                    | 734,476    |          |  |          | 373,899   |     |  |   | 360,577   |   |  |  | 96   | %
|Sales of jewelry and gifts                         |  |                    | 198,678    |          |  |          |          |     |  |   | 198,678   |   |  |  | 100  | %
|Internet game development and other                |  |                    | 220,318    |          |  |          |          |     |  |   | 220,318   |   |  |  | 100  | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Total E-commerce                                   |  |                    | 11,634,450 |          |  |          | 4,120,566 |     |  |   | 7,513,884 |   |  |  | 182  | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Off-line Customer Acquisition Services
	components |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Net branch commission fees                         |  |                    | 736,447    |          |  |          |          |     |  |   | 736,447   |   |  |  | 100  | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Total Off-line Customer Acquisition Services       |  |                    | 736,447    |          |  |          |          |     |  |   | 736,447   |   |  |  | 100  | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|LEC Billed Products and Services
	components       |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|900 Entertainment Service royalties              |  |                    |           |          |  |          | 486,406   |     |  |   | (486,406  | ) |  |  | -100 | %
|Enhanced Services, principally voice mail          |  |                    |           |          |  |          | 318,582   |     |  |   | (318,582  | ) |  |  | -100 | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Total LEC Billed Products and Services             |  |                    |           |          |  |          | 804,988   |     |  |   | (804,988  | ) |  |  | -100 | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  
|Consolidated Net Revenues                          |  | $                  | 12,370,897 |          |  | $        | 4,925,554 |     |  | $ | 7,445,343 |   |  |  | 151  | %
|                                                   |  |                    |            |          |  |          |           |     |  |   |           |   |  |  |      |  

Net Revenue increased $7,445,343, or 151%, to
$12,370,897 for the three months ended February 28, 2002
from $4,925,554 in the comparable prior year period. The primary
component of the increase was attributable to an approximate
$7.5 million increase in the Companys E-commerce
segment combined with an increase of $736,447 from the
Companys Off-line Customer Acquisition services segment.
These increases were partially offset by a decrease of $804,988
in the Companys LEC Billed Product and Services legacy
segment. 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 the substantial
part of the Companys revenue in future fiscal periods.

The growth in the Companys E-commerce
segment was primarily attributable to approximately
$7.9 million in revenue generated from the segments
email marketing program sub-set. This represented a
$5.2 million increase over the prior years
$2.7 million in revenue generated from such segments
sub-set. This substantial increase of approximately 198% over
the prior years comparable period was primarily the result
of the Companys acquisition of significant volumes of
permission-based email records, extension of the quantity and
quality of third party (client) offers being emailed to the
databases and greater efficiencies in the Companys email
delivery programs. In the prior years comparable period,
the Company had been in the early stages of developing and
carrying out its online strategy. The sub-set of email marketing
program revenue represented approximately 64% of the
Companys consolidated net revenue for the three months
ended February 28, 2002. Any change in the Internet
operating landscape that materially hinders the Companys
current ability and/or cost to deliver commercial email messages
to the consumer records in its databases, and the consumer
records in the databases of its affiliates, could potentially
cause a material impact in future fiscal period net revenue
growth and gross margin, and therefore, our profitability and
cash flows could be adversely affected.

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The Companys E-commerce segments web
site sub-set realized an increase in revenues of approximately
$1.3 million, or 124%, when comparing the three months
ended February 28, 2002 ($2.4 million) with the three
months ended February 28, 2001 ($1.1 million). This
increase is the result of the Companys shift from low
priced click through revenue to higher revenue
generating registration, lead generation and on-line customer
acquisition based revenue. The Company generates a significant
portion of its site traffic from email marketing. A change in
the Internet operating landscape that materially hinders the
Companys current ability and/or cost to deliver email
messages to the consumer records in its databases, and the
consumer records in the databases of its affiliates, could
potentially cause a material impact in future fiscal period net
revenue growth and gross margin, and therefore, our
profitability and cash flows could be adversely affected.

Additional increases in the Companys
consolidated revenues were attributable to new sub-sets added to
the E-commerce segment during the three months ended
February 28, 2002 when compared to the three months ended
February 28, 2001. The combined revenue resulting from the
new sub-sets amounted to $689,216 and is detailed as follows:
(a) $129,961 of such increase related to the Companys
majority owned subsidiary, Montvale Management LLC, that
provides services under a net branch agreement with licensed
mortgage banking and brokerage companies in the acquisition of
candidates for new mortgages and the refinancing of existing
debt, which subsidiary also conducts the same services off-line
and is the sole component of the Companys Off-line
Customer Acquisition Services segment revenue of $736,447;
(b) $198,678 of such increase relates to the on-line sales
of jewelry and gifts by the Companys new subsidiary,
ThanksMuch, Inc., which was formed with the assets acquired from
a closely held private company on December 14, 2001, all as
more fully described in Note 8 to the financial statements;
(c) $120,318 of such increase relates to the Internet game
development revenues generated by the Companys new
subsidiary, InfiKnowledge ULC, which was formed with the assets
acquired from a closely held private Canadian company on
December 6, 2001, all as more fully described in
Note 8 to the financial statements; and (d) the
balance of such increase, or $100,000, was attributable to a web
marketing, design and development contract executed and
completed by the Company during the three months ended
February 28, 2002.

The increases in revenues from the Companys
E-commerce segment and Off-line Customer Acquisition Services
segment were partially offset by a decrease of $804,988 in
revenues from the Companys LEC Billed Products and
Services segment. A portion of the decrease, or $486,406,
resulted from the expiration in the three months ended
February 28, 2001 of certain agreements pursuant to which
the Company had been paid a royalty fee (with virtually no
corresponding costs) to refrain from conducting, marketing,
advertising or promoting certain LEC Billed Products and
Services. The three months ended February 28, 2002, did not
include any revenue related to these services and the Company
does not anticipate re-entering that market. The balance of the
decrease in LEC Billed Product and Service segment revenue, or
$318,582, resulted from the Companys elimination of
billing voice mail services under its contract with the service
bureau known as Federal Transtel, Inc. (FTT) in
October 2001. FTT has since filed for protection under the
United States Bankruptcy Code.

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

The Companys cost of revenues during the
three months ended February 28, 2002 and February 28,
2001 were comprised of (1) direct and indirect marketing
costs associated with the procurement and retention of consumers
for its databases, including direct response email marketing
costs, data purchases, promotional costs and premium fulfillment
costs, and (2) the related contingent-based prize
indemnification expense, billing fees, collection fees, and
customer service costs.

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##### Table of Contents



The Companys cost of sales, on a segmental
basis, and with disclosure of the components of the individual
segments, for each of the three month periods ended
February 28, 2002 and February 28, 2001 are set forth
below:

Consolidated
Cost of Sales, by Segment, by Component

|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |      |     |  
|--------------------------------------------- | ---------------------------------------- | -------------------------- | --------- | ------------ | --------- | -------- | ------- | -------- | --------- | - | --------- | --------- | --------- |  | ---- | ---- | --- | -
|                                              |                                          |                            |           |              |           |         
|                                              |                                          | For the Three Months Ended |           |              |           |         
|                                              |                                          |                            |           | Change       |           | Change  
|                                              |                                          | February 28,               |           | February 28, |           | Inc(Dec) |         | Inc(Dec)
|                                              |                                          | 2002                       |           | 2001         |           | $$$      |         | %%%     
|                                              |                                          |                            |           |              |           |          |         |         
|E-commerce                                    |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Advertising, promotion and fulfillment
	costs |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Email marketing and related delivery costs    |                                          | $                          | 1,445,811 |              |           | $        | 427,162 |          |           | $ | 1,018,649 |           |           |  | 238  | %   
|Data purchases and premium costs              |                                          |                            | 1,763,063 |              |           |          | 442,413 |          |           |   | 1,320,650 |           |           |  | 299  | %   
|Promotional and creative development costs    |                                          |                            | 14,660    |              |           |          | 19,750  |          |           |   | (5,090    | )         |           |  | -26  | %   
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|                                              | Total E-commerce  Advertising           |                            | $         | 3,223,534    |           |          | $       | 889,325  |           |   | $         | 2,334,209 |           |  |      | 262  | %  
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Service Bureau fees                           |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Contingent based prize indemnification costs  |                                          | $                          | 89,855    |              |           | $        | 107,495 |          |           | $ | (17,640   | )         |           |  | -16  | %   
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|                                              | Total E-commerce Cost of Sales           |                            | $         | 3,313,389    |           |          | $       | 996,820  |           |   | $         | 2,316,569 |           |  |      | 232  | %  
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Off-line Customer Acquisition
	Services       |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Advertising, promotion and fulfillment
	costs |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Telemarketing, direct mail and related costs  |                                          | $                          | 65,222    |              |           | $        | 5,563   |          |           | $ | 59,659    |           |           |  | 1072 | %   
|Premium fulfillment costs                     |                                          |                            |          |              |           |          | 7,564   |          |           |   | (7,564    | )         |           |  | 100 | %   
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|                                              | Total Off-line Acquisition Cost of Sales |                            | $         | 65,222       |           |          | $       | 13,127   |           |   | $         | 52,095    |           |  |      | 397  | %  
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|LEC Billed Products and Services              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Service Bureau fees                           |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|Billing and collection fees                   |                                          | $                          |          |              |           | $        | 57,079  |          |           | $ | (57,079   | )         |           |  | -100 | %   
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|                                              | Total LEC Billed Cost of Sales           |                            | $         |             |           |          | $       | 57,079   |           |   | $         | (57,079   | )         |  |      | -100 | %  
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     
|                                              |                                          | Total Cost of Sales        |           | $            | 3,378,611 |          |         | $        | 1,067,026 |   |           | $         | 2,311,585 |  |      |      | 217 | %
|                                              |                                          |                            |           |              |           |          |         |          |           |   |           |           |           |  |      |     

Cost of sales on a consolidated basis increased
$2,311,585, or 217%, to $3,378,611 for the three months ended
February 28, 2002 from $1,067,026 in the comparable prior
year period.

On a segmental level, the Companys
E-commerce segment cost of sales increased approximately
$2.3 million, or 232%, to $3.3 million during the
three months ended February 28, 2002, when compared to
$996,820 incurred in the prior years comparable period.
The Companys continuing strategy of increased focus on
generating revenues from direct marketing campaigns delivered
on-line was the primary factor contributing to this increase.
The Company realized marketing costs for email delivery of
$1,445,811 in the current fiscal quarter ended February 28,
2002, representing an increase of $1,018,649, or 238%, when
compared to $427,162 in email delivery costs incurred in the
prior years comparable period. In December 2001, the
Company acquired the assets of a Canadian-based technology
company (InfiKnowledge). The Company anticipates that the
integration of the acquired assets, technology and human
resources into its operations and email delivery platform will
reduce the unitary costs of its email promotions and serve to
preserve and/or improve operating margins. As previously
mentioned, any change in the Internet operating landscape that
materially hinders the Companys current ability to deliver
email messages to the consumer records used in its email
marketing programs could potentially cause the Company to fail
to realize the anticipated cost savings attributable to the
assets acquired from InfiKnowledge.

The Company realized costs for data purchases
necessary to build and maintain its marketing databases of
approximately $1.4 million and approximately $350,000 for
premium costs related to redemption obligations for certain of
its email marketing programs. These costs represent an increase
of approximately $1.3 million, or 299%, over data purchase
costs of $442,413 during the three months ended
February 28, 2001.

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##### Table of Contents



In the prior fiscal years comparable period
the Company had immaterial costs relative to redemption
obligations.


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. The costs attributable to the provision of such
indemnification coverage decreased approximately $17,000, or
16%, when compared with the three months ended February 28,
2001. The reason for this decrease was due to a slight decrease
in the games played at the GroupLotto.com site.

The Companys Off-line Customer Acquisition
segment cost of sales increased $52,095, or 397%, to $65,222,
when compared to $13,127 during the three months ended
February 28, 2001. The increase was attributable to the
Companys majority-owned-subsidiary (Montvale Management
LLC) which was inactive during the three months ended
February 28, 2001.

The balance of the decrease in cost of goods sold
relates to the LEC Billed Product and Service segment and
amounted to a reduction of $57,079. This reduction resulted from
the Companys elimination of billing voice mail services
under its contract with the service bureau known as Federal
Transtel, Inc. (FTT) in October 2001. FTT has since
filed for protection under the United States Bankruptcy Code.

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 three
month periods ended February 28, 2002 and 2001 are set
forth below:



| |                                       
| | --------------------------------------
| | Consolidated Gross Profit, by
	Segment

|                                       |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|-------------------------------------- |  | ------------------ | --------- | ------------ |  | -------- | --------- | -------- |  | - | --------- | - |  |  | ---- | -
|                                       |  |                    |           |              |  |         
|                                       |  | For the Periods:   |           |              |  |         
|                                       |  | Three Months Ended |           |              |  |         
|                                       |  |                    |           | Change       |  | Change  
|                                       |  | February 28,       |           | February 28, |  | Inc(Dec) |           | Inc(Dec)
|                                       |  | 2002               |           | 2001         |  | $$$      |           | %%%     
|                                       |  |                    |           |              |  |          |           |         
|E-commerce                             |  | $                  | 8,321,061 |              |  | $        | 3,123,746 |          |  | $ | 5,197,315 |   |  |  | 166  | %
|Off-line Customer Acquisition services |  |                    | 671,225   |              |  |          | (13,127   | )        |  |   | 684,352   |   |  |  | 5213 | %
|LEC Billed products and services       |  |                    |          |              |  |          | 747,909   |          |  |   | (747,909  | ) |  |  | -100 | %
|                                       |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|Consolidated Totals                    |  | $                  | 8,992,286 |              |  | $        | 3,858,528 |          |  | $ | 5,133,758 |   |  |  | 133  | %
|                                       |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  



| |                                                   
| | --------------------------------------------------
| | Consolidated Gross Profit Percentages, by
	Segment

|                                       |  |                    |      |              |  |            |      |          |  |  |       |   |  |  |        |  
|-------------------------------------- |  | ------------------ | ---- | ------------ |  | ---------- | ---- | -------- |  |  | ----- | - |  |  | ------ | -
|                                       |  |                    |      |              |  |           
|                                       |  | For the Periods:   |      |              |  |           
|                                       |  | Three Months Ended |      | Absolute     |  | Relative  
|                                       |  |                    |      | Percentage   |  | Percentage
|                                       |  | February 28,       |      | February 28, |  | Change     |      | Change  
|                                       |  | 2002               |      | 2001         |  | Inc(Dec)   |      | Inc(Dec)
|                                       |  |                    |      |              |  |            |      |         
|E-commerce                             |  |                    | 71.5 | %            |  |            | 75.8 | %        |  |  | -4.3  | % |  |  | -5.7   | %
|Off-line Customer Acquisition services |  |                    | 91.1 | %            |  |            | 0.0  | %        |  |  | 91.1  | % |  |  | 100.0  | %
|LEC Billed products and services       |  |                    | 0.0  | %            |  |            | 92.9 | %        |  |  | -92.9 | % |  |  | -100.0 | %
|                                       |  |                    |      |              |  |            |      |          |  |  |       |   |  |  |        |  
|Consolidated Gross Profit Percentage   |  |                    | 72.7 | %            |  |            | 78.3 | %        |  |  | -5.6  | % |  |  | -7.2   | %
|                                       |  |                    |      |              |  |            |      |          |  |  |       |   |  |  |        |  

Consolidated Gross Profit Percentage (Gross
Margin) as a percentage of net revenue was 72.7% during
the three months ended February 28, 2002, compared to 78.3%
in the prior years comparable fiscal period, representing
an absolute percentage point decrease of 5.6%, or a 7.2% decline
on a relative basis.

On a segmental basis, the Companys
E-commerce segment accounted for the majority of the decrease in
margin when compared to the comparable prior fiscal period. The
4.3% absolute percentage point decrease resulted from the
Companys increased costs associated with data purchases,
which are fully expensed at the time of receipt. The Company
anticipates that this expensing policy could provide a margin
improvement benefit in future fiscal periods through the
continued marketing to such acquired data. An additional factor
contributing to the slight decline in the gross margin
percentage is attributable to the costs of fulfillment
obligations related to the Companys email marketing
program conducted for a prominent long distance

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service provider. Such costs approximated
$350,000 in the quarter ended February 28, 2002. During the
prior years comparable period the Company did not have an
email program that generated significant fulfillment costs.
Changes in the gross margins generated from the Companys
Off-line Customer Acquisition Services segment and LEC Product
and Services segment primarily offset each other in terms of
dollars and percentages. See the previous discussions of net
revenues and cost of sales for a detailed discussion of such
segments.


The Companys Selling Expenses and General
and Administrative Expenses for each of the three months ended
February 28, 2002 and February 28, 2001 are presented,
on a segmental basis, and with the components of the individual
segments, in the tables set forth below:

|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |     |     |  
|--------------------------------------- | ---------------------------------- | ------------------- | --------- | ------------ | --------- | -------- | ------- | -------- | ------- | - | --------- | --------- | --------- |  | ---- | --- | --- | -
|                                        |                                    |                     |           |              |           |         
|                                        |                                    | For the Periods:    |           |              |           |         
|                                        |                                    | Three Months Ended  |           |              |           |         
|                                        |                                    |                     |           | Change       |           | Change  
|                                        |                                    | February 28,        |           | February 28, |           | Inc(Dec) |         | Inc(Dec)
|                                        |                                    | 2002                |           | 2001         |           | $$$      |         | %%%     
|                                        |                                    |                     |           |              |           |          |         |         
|E-commerce                              |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|Fee share commissions                   |                                    | $                   | 1,749,196 |              |           | $        | 157,649 |          |         | $ | 1,591,547 |           |           |  | 1010 | %  
|Other commissions                       |                                    |                     | 480,882   |              |           |          |        |          |         |   | 480,882   |           |           |  | 100  | %  
|Selling salaries and related expenses   |                                    |                     | 406,499   |              |           |          | 321,986 |          |         |   | 84,513    |           |           |  | 26   | %  
|Occupancy and equipment costs           |                                    |                     | 7,200     |              |           |          | 6,800   |          |         |   | 400       |           |           |  | 6    | %  
|Travel and entertainment                |                                    |                     | 107,242   |              |           |          | 29,449  |          |         |   | 77,793    |           |           |  | 264  | %  
|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|                                        | Total Selling  E-commerce segment |                     | $         | 2,751,019    |           |          | $       | 515,884  |         |   | $         | 2,235,135 |           |  |      | 433 | %  
|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|Off-line Customer Acquisition
	Services |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|Fee share commissions                   |                                    | $                   |          |              |           | $        |        |          |         | $ |          |           |           |  | 0    | %  
|Other commissions                       |                                    |                     |          |              |           |          |        |          |         |   |          |           |           |  | 0    | %  
|Selling salaries and related expenses   |                                    |                     | 388,785   |              |           |          |        |          |         |   | 388,785   |           |           |  | 100  | %  
|Occupancy and equipment costs           |                                    |                     | 22,029    |              |           |          |        |          |         |   | 22,029    |           |           |  | 100  | %  
|Travel and entertainment                |                                    |                     | 6,735     |              |           |          |        |          |         |   | 6,735     |           |           |  | 100  | %  
|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|                                        | Total Selling  Off-line segment   |                     | $         | 417,549      |           |          | $       |         |         |   | $         | 417,549   |           |  |      | 100 | %  
|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    
|                                        |                                    | Consolidated Totals |           | $            | 3,168,568 |          |         | $        | 515,884 |   |           | $         | 2,652,684 |  |      |     | 514 | %
|                                        |                                    |                     |           |              |           |          |         |          |         |   |           |           |           |  |      |    

Selling expenses on a consolidated basis
increased approximately $2.7 million, or 514%, from
$515,884 during the three months ended February 28, 2001 to
$3,168,568 during the three months ended February 28, 2002.
The increase was primarily attributable to the Companys
E-commerce segment, with an increase of approximately
$2.2 million, and increases of $417,549 in selling expenses
in the Companys 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 $1.6 million; and (b) increased
selling-based compensation and other related selling costs
($84,513 and $559,075, respectively) arising from the expansion
of the Companys E-commerce segments sales force and
selling activities.

Regarding the increase in fee share commissions,
during the fiscal year ended November 30, 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 often obtains the
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

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these agreements generally provide that the Third
Party has the right to (i) approve the creative materials
for each promotion, (ii) approve the timing of each
promotions mailing, (iii) terminate the contract on
short notice, and (iv) reject any promotion for any reason.
Each agreement also restricts the Third Party from doing
business with the client other than through the Company for the
period of time covered by the agreement, and sets forth the
terms of the Third Partys compensation. Payments are
performance based only and are either fixed fees paid for each
customer or lead generated for the Client, or a revenue share
that is a percentage of the revenue generated (after deduction
for certain direct costs) by the Company for marketing a
particular product or service to a Third Partys database.
The Company utilizes Universal Resource Locater identifier links
(URLs) when promotions are mailed to a Third Party
database. It is the 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 increased
$417,549, or 100%, when compared to the prior years
comparable period. The Company expects that in the balance of
the fiscal year ended November 30, 2002 it will realize an
increase in this segments selling expenses based on the
anticipated 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.

The Companys general and administrative
expenses (G&A) are principally comprised of
(i) compensation costs and related expenses for executive,
finance, information systems and general administration
personnel; (ii) professional fees (which include legal, audit,
accounting, tax, public relations, database management and
consulting, and public company related printing costs);
(iii) insurance costs; (iv) occupancy and other
equipment rental costs; (v) site development, maintenance
and modification costs related to the Companys E-commerce
segment; and (vi) all other general and miscellaneous
corporate expense items.

Consolidated
General and Administrative Expenses, by segment, by
component

|                                                |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|----------------------------------------------- |  | ------------------ | --------- | ------------ |  | -------- | --------- | -------- |  | - | -------- | - |  |  | ---- | -
|                                                |  |                    |           |              |  |         
|                                                |  | For the Periods:   |           |              |  |         
|                                                |  | Three Months Ended |           |              |  |         
|                                                |  |                    |           | Change       |  | Change  
|                                                |  | February 28,       |           | February 28, |  | Inc(Dec) |           | Inc(Dec)
|                                                |  | 2002               |           | 2001         |  | $$$      |           | %%%     
|                                                |  |                    |           |              |  |          |           |         
|E-commerce                                      |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                  | 1,115,395 |              |  | $        | 408,715   |          |  | $ | 706,680  |   |  |  | 173  | %
|Professional fees                               |  |                    | 358,062   |              |  |          | 122,119   |          |  |   | 235,943  |   |  |  | 193  | %
|Insurance costs                                 |  |                    | 112,143   |              |  |          | 55,064    |          |  |   | 57,079   |   |  |  | 104  | %
|Occupancy and equipment costs                   |  |                    | 72,920    |              |  |          | 57,458    |          |  |   | 15,462   |   |  |  | 27   | %
|Site development, maintenance and modifications |  |                    | 220,046   |              |  |          | 616,158   |          |  |   | (396,112 | ) |  |  | -64  | %
|All other SG&A expenses                         |  |                    | 327,301   |              |  |          | 116,151   |          |  |   | 211,150  |   |  |  | 182  | %
|                                                |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL G&A  E-commerce segment                  |  | $                  | 2,205,867 |              |  | $        | 1,375,665 |          |  | $ | 830,202  |   |  |  | 60   | %
|                                                |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|Off-line Customer Acquisition
	Services         |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                  |          |              |  | $        | 39,767    |          |  | $ | (39,767  | ) |  |  | -100 | %
|Professional fees                               |  |                    | 3,120     |              |  |          |          |          |  |   | 3,120    |   |  |  | 100  | %
|Insurance costs                                 |  |                    | 1,095     |              |  |          | 61,864    |          |  |   | (60,769  | ) |  |  | -98  | %
|Occupancy and equipment costs                   |  |                    |          |              |  |          | 6,632     |          |  |   | (6,632   | ) |  |  | -100 | %
|All other SG&A expenses                         |  |                    | 216,594   |              |  |          | 13,678    |          |  |   | 202,916  |   |  |  | 1484 | %
|                                                |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL G&A  Off-line segment                    |  | $                  | 220,809   |              |  | $        | 121,941   |          |  | $ | 98,868   |   |  |  | 81   | %
|                                                |  |                    |           |              |  |          |           |          |  |   |          |   |  |  |      |  

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|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|--------------------------------------- |  | ------------------ | --------- | ------------ |  | -------- | --------- | -------- |  | - | --------- | - |  |  | ---- | -
|                                        |  |                    |           |              |  |         
|                                        |  | For the Periods:   |           |              |  |         
|                                        |  | Three Months Ended |           |              |  |         
|                                        |  |                    |           | Change       |  | Change  
|                                        |  | February 28,       |           | February 28, |  | Inc(Dec) |           | Inc(Dec)
|                                        |  | 2002               |           | 2001         |  | $$$      |           | %%%     
|                                        |  |                    |           |              |  |          |           |         
|LEC Billed Products and Services        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses |  | $                  |          |              |  | $        | 39,624    |          |  | $ | (39,624   | ) |  |  | -100 | %
|Insurance costs                         |  |                    |          |              |  |          | 30,932    |          |  |   | (30,932   | ) |  |  | -100 | %
|Occupancy and equipment costs           |  |                    |          |              |  |          | 6,632     |          |  |   | (6,632    | ) |  |  | -100 | %
|All other SG&A expenses                 |  |                    |          |              |  |          | 3,935     |          |  |   | (3,935    | ) |  |  | -100 | %
|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL G&A  LEC segment                 |  | $                  |          |              |  | $        | 81,123    |          |  | $ | (81,123   | ) |  |  | -100 | %
|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|Corporate and other                     |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses |  | $                  | 579,845   |              |  | $        | 559,935   |          |  | $ | 19,910    |   |  |  | 4    | %
|Professional fees                       |  |                    | 272,667   |              |  |          | 196,426   |          |  |   | 76,241    |   |  |  | 39   | %
|Insurance costs                         |  |                    | 114,359   |              |  |          | 845       |          |  |   | 113,514   |   |  |  | 100  | %
|All other SG&A expenses                 |  |                    | 185,044   |              |  |          | 114,311   |          |  |   | 70,733    |   |  |  | 62   | %
|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL G&A  Corporate and other         |  | $                  | 1,151,915 |              |  | $        | 871,517   |          |  | $ | 280,398   |   |  |  | 32   | %
|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  
|Consolidated Totals                     |  | $                  | 3,578,591 |              |  | $        | 2,450,246 |          |  | $ | 1,128,345 |   |  |  | 46   | %
|                                        |  |                    |           |              |  |          |           |          |  |   |           |   |  |  |      |  

General and Administrative expenses
(G&A) on a consolidated basis increased
approximately $1.1 million, or 46%, when comparing G&A
of $2,450,246 from the three months ended February 28, 2001
to G&A of $3,578,591 incurred during the three months ended
February 28, 2002. The net increase was attributable to
(a) the Companys E-commerce segment (approximately
$830,000, or 74% of total increase), with such increase related
to increased compensation costs, professional fees and other
G&A, offset by a decline in maintenance costs associated
with the Companys web sites, all required to support the
182% increase in revenues generated by such segment during the
three months ended February 28, 2002; (b) increases
attributable to the Companys Off-line Customer Acquisition
Services (approximately $99,000, or 9% of total increase), with
such increase related to G&A necessary to support the
segments growth in revenues from $0 in fiscal 2001s
first quarter to approximately $736,000 during the three months
ended February 28, 2002; and (c) an increase in other
corporate overhead (approximately $280,000, or 25%, of total
increase) not specifically identifiable to the Companys
operating segments, with such cost increase including
(i) directors and officers liability insurance,
(ii) professional fees incurred in the defense of actions
arising from legacy operations, and (iii) other
nonallocable G&A aggregating approximately $71,000. These
overhead increases were slightly offset by an approximate
$81,000 decrease in overhead attributable to the Companys
currently inactive LEC Billed Product and Services segment.

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Other Income (Expense)

The Companys components of Other
income (expense) for the three months ended years ended
February 28, 2002 and 2001 are set forth below:

Consolidated
Other Income (Expense)

|                                                     |                                                    |                    |         |              |  |          |            |          |  |   |           |         |   |  |      |      |  
|---------------------------------------------------- | -------------------------------------------------- | ------------------ | ------- | ------------ |  | -------- | ---------- | -------- |  | - | --------- | ------- | - |  | ---- | ---- | -
|                                                     |                                                    |                    |         |              |  |         
|                                                     |                                                    | For the Periods:   |         |              |  |         
|                                                     |                                                    | Three Months Ended |         |              |  |         
|                                                     |                                                    |                    |         | Change       |  | Change  
|                                                     |                                                    | February 28,       |         | February 28, |  | Inc(Dec) |            | Inc(Dec)
|                                                     |                                                    | 2002               |         | 2001         |  | $$$      |            | %%%     
|                                                     |                                                    |                    |         |              |  |          |            |         
|Other income (expense):                              |                                                    |                    |         |              |  |          |            |          |  |   |           |         |   |  |      |     
|Interest expense                                     |                                                    | $                  | (10,502 | )            |  | $        |           |          |  | $ | (10,502   | )       |   |  | 100  | %   
|Interest income and dividends                        |                                                    |                    | 210,213 |              |  |          | 649,952    |          |  |   | (439,739  | )       |   |  | -68  | %   
|Net (losses) gains on sale of marketable
	securities |                                                    |                    | 62,593  |              |  |          |           |          |  |   | 62,593    |         |   |  | 100  | %   
|Permanent impairment charges                         |                                                    |                    |        |              |  |          | (4,690,258 | )        |  |   | 4,690,258 |         |   |  | -100 | %   
|Other non-operating income:                          |                                                    |                    |         |              |  |          |            |          |  |   |           |         |   |  |      |     
|                                                     | Residual revenues from terminated programs         |                    |         |             |  |          |            | 8,467    |  |   |           | (8,467  | ) |  |      | -100 | %
|                                                     | Other miscellaneous income                         |                    |         | 9,437        |  |          |            |         |  |   |           | 9,437   |   |  |      | 100  | %
|                                                     | Liquidation proceeds on prior year impairment loss |                    |         | 125,000      |  |          |            |         |  |   |           | 125,000 |   |  |      | 100  | %
|Minority interest (income) loss                      |                                                    |                    | (26,647 | )            |  |          |           |          |  |   | (26,647   | )       |   |  | -100 | %   
|                                                     |                                                    |                    |         |              |  |          |            |          |  |   |           |         |   |  |      |     
|Total Consolidated Other Income (Expense)            |                                                    | $                  | 370,094 |              |  | $        | (4,031,839 | )        |  | $ | 4,401,933 |         |   |  | -109 | %   
|                                                     |                                                    |                    |         |              |  |          |            |          |  |   |           |         |   |  |      |     

Consolidated Other Income (Expense) increased
approximately $4.4 million, from approximately
($4.0 million) in net expense for the three months ended
February 28, 2001 to approximately $370,000 of income for
the three months ended February 28, 2002.

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

(a) A decrease in interest and dividend
income of approximately $439,739 resulting from significant
decreases in the interest rates available on short-term
commercial paper during the three months ended February 28,
2002, 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), with both events occurring
after February 28, 2001, and prior to December 1, 2001;

(b) An increase in gains realized through
sales of marketable securities approximating $63,000 during the
three months ended February 28, 2002. The quarter ended
February 28, 2001 did not include sales of marketable
securities.

(c) During the three months ended
February 28, 2002, the Company did not incur losses from
asset impairments. During the three months ended
February 28, 2001 the Company realized losses, through a
permanent impairment, of approximately $4.1 million on
marketable securities resulting from significant declines in the
values of such marketable equity securities held in the
Companys investment portfolio. These losses were deemed to
be other than temporary. Additionally, during the three months
ended February 28, 2001, the Company realized a permanent
impairment of $500,051 on a long-term investment that
subsequently discontinued its operations in the third quarter of
Fiscal 2001. As of February 28, 2002, the Company
significantly reduced its exposure to market fluctuations in its
investment portfolio by limiting the contents of such portfolio
to approximately $22.1 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 $936,000 in high risk
investments, consisting of common stock equities and real estate
investment trust equities; and

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(d) An increase of $125,000 attributable to
liquidation proceeds received from a prior year long-term
investment that was entirely written off through an impairment
charge in the fiscal 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
$882,470 for the three months ended February 28, 2002 on
pre-tax income of approximately $2,285,887. This equates to an
effective tax rate of approximately 38.6%. This effective tax
rate is less than the Companys historically recognized tax
rate due to the realization in the quarter of previously
devalued deferred tax assets related to capital losses, coupled
with the effect of interim period tax allocation. In the prior
comparable period, the Company had recorded income tax expense
of $631,418 on a pre-tax loss of approximately ($3,139,441).
This effective tax rate relationship is the result of the
Company taking a full valuation allowance during the three
months ended February 28, 2002 against the future tax
benefits attributable to the loss carryovers arising from
permanent impairment charges of $4,690,258 incurred during such
period. This deferred tax asset valuation allowance has been
recorded during the first quarter of 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
impairment charges.

Liquidity and Capital Resources

The Companys financial and liquidity
position remained strong as exhibited by the Companys
cash, cash equivalents, short-term marketable securities and
marketable equity securities of approximately $35.5 million
at February 28, 2002. Cash, cash equivalents, short-term
marketable securities and equity securities were approximately
$38.1 million at November 30, 2001. This decline of
approximately $2.6 million was the result of the
Companys investment in working capital during the three
months ended February 28, 2002, with the significant
components of the investment being an increase in accounts
receivable of approximately $2.2 million and a net decrease
in current liabilities of approximately $1.6 million,
coupled with asset acquisition payments of approximately
$548,000 (net of cash acquired of approximately $149,000) and
capital expenditures of approximately $490,000, offset by net
cash flows approximating $2.9 million.

On a comparative basis, the Companys
working capital improved between November 30, 2001 and
February 28, 2002, by approximately $866,000.

Trade accounts receivable as a percentage of net
revenues for the three months ended February 28, 2002 was
77.3%. The Companys days-sales-outstanding
(DSO) in accounts receivable for the three month
period ended February 28, 2002 was 70 days, compared
to 47 days in the fourth quarter of Fiscal 2001 and
106 days in the prior years comparable period. The
increase in the DSO for the three months ended February 28,
2002 over the prior years fourth quarter (sequential
comparison) relates to the settlement, revenue recording and
collection of the operating revenue portion of a business
dispute arbitrated in Fiscal 2001.

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
periods might not reflect this goal of a 40-day DSO, and might
exceed the 70-day DSO recognized in the three month period ended
February 28, 2002.

Cash provided by financing activities during the
three months ended February 28, 2002 amounted to $316,279,
and included approximately $202,000 in proceeds generated by the
exercise of the Companys stock options and approximately
$114,000 in proceeds (net of related costs and income taxes)
related to an insider trading action brought against a former
non-management insider. Such insider was required to return his
deemed insider trading gains to the Company.

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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 three months ended
February 28, 2002, the Company expended approximately
$490,000 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
emailing services and other Internet hosting services. The
realization of those proposed cost savings will require capital
expenditures by the newly formed entity. 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. The Company expended
approximately $200,000 in this asset acquisition (net of cash
received of approximately $63,000).

In December 2001, the Company also acquired the
assets of a closely held private company for approximately
$361,000 (net of cash received of approximately $74,000). The
Company does not anticipate that this asset acquisition will
require significant capital expenditures to maintain, or improve
it operations.

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 the note Commitments and Contingent
Liabilities included in the Companys financial
statements included in 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.

Transactions with Major Customers

During the three months ended February 28,
2002, the Company had five customers in its E-commerce segment,
which accounted for approximately $7.4 million, or 60%, in
the aggregate of consolidated net revenues during such period,
and approximately $7 million, or 73%, in the aggregate of
consolidated net accounts receivable as of February 28,
2002. For the three months ended February 28, 2002, three
of these five customers had related net revenues that equaled or
exceeded 10% of the Companys consolidated net revenue for
such period. Regarding the balance of the Companys
approximate customer base of 100 active customers in the
quarter, no single customer had net revenues that equaled or
exceeded 10% of consolidated net revenues for the three months
ended February 28, 2002.

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During the three months ended February 28,
2001 the Company had three customers in its E-commerce segment
which accounted for approximately 42% in the aggregate of
consolidated net revenues during such period, and approximately
23% of consolidated net accounts receivable as of
February 28, 2001.

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 herein.

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 InfiKnowledge 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, or other third party
influence on the Companys ability to deliver email message
to the records in its databases, or the records in it marketing
affiliates databases; (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 subsequent fiscal periods; or
(f) unpredictable

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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 revenue growth and gross margins, therefore, our
profitability and cash flows could be adversely affected to a
material extent.


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 three months ended February 28,
2002, the Company derived approximately $7.4 million, or
60% of its revenues, from five major customers. Three of such
customers each exceeded 10% of net revenues, with the remaining
two each accounting for approximately 5.5% of net revenues (11%
in the aggregate). All five of the customers continued to
conduct business with the Company at the date of this report.
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 revenue growth and 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 three months ended February 28,
2002, the Companys 51% majority-owned subsidiary, Montvale
Management LLC, contributed approximately $866,000, or 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 under a net branch agreement. The subsidiary business
activity increased in Fiscal 2001 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, during the balance of
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, as well as on a consolidated
basis. The revenue allocation among our segments in future
periods will most probably be different than our current revenue
allocation due to several factors, including consumer tastes and
potential regulatory issues that may exist in future periods and
other currently unknown factors that could restrict the
Companys revenue generating cycle or cost structure.
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

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had to react to rapid changes in the business
environment within which it operates. Management responded to
these rapid changes as deemed appropriate at the time of change,
and as dictated by the nature of such changes. Managements
reaction to such changes covered a broad range of business
related adjustments, ranging from product mix repositioning and
staff reductions, to entire business model overhauls. Based on
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 and
prior year acquisitions. If the cash flows generated from the
subsidiaries organized to acquire such assets were to 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, equity securities of real estate
investment trusts (REITs) and common stock equities,
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 the common stock of publicly-traded
companies, which as of February 28, 2002 amounted to
approximately $900,000, are subject to significant market price
volatility, in addition to the potential for business failure at
the company level.

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.

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PART II

OTHER INFORMATION




Item 1.  Legal
Proceedings

1. 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 were held between February 25, 2002 and
March 1, 2002, and the proceedings are expected to be
completed by the end of April, 2002. A decision by the
arbitrator is expected 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.

2. 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. The
Company does not believe that there is any merit to
Ms. Garens claims as they relate to the Company, has
denied the claims in its answer to the complaint, and intends
vigorously to defend against the claims.

3. 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
discovery stage. 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.

4. Daniel Rodgers  In
March, 2002, Daniel Rodgers commenced an action against the
Company in Supreme Court of the State of New York, Rockland
County. The complaint alleges that the Company disseminated
false and misleading advertisements through email advertisements
and through the website of its subsidiary, GroupLotto.com.
Mr. Rodgers purports to represent a class consisting of
those who, during the period January 1, 2001 and
March 5, 2002, provided their name, address, email address
and other biographical information in response to the email
advertisements or in response to the Grouplotto web page. The
Complaint purports to allege claims of common law fraud,
deceptive acts and practices, and false and misleading
advertising under New York law. The Complaint seeks injunctive
relief, unspecified monetary damages, and attorneys fees.
The Company has not yet filed an answer to the Complaint, but
believes that there is no merit to the claims and intends
vigorously to defend against them.

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Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits.

|        |  |                                                              
|------- |  | -------------------------------------------------------------
|Exhibit |  |                                                              
|Number  |  |                                                              
|        |  |                                                              
|3.1.1   |  | Articles of Incorporation of the Company, as
	amended(1)     
|3.1.2   |  | Amendment to the Articles of Incorporation of the
	Company(2)
|3.2     |  | By-Laws of the Company(3)                                    




|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 (the S-1
	Registration Statement), dated September 6, 1995
	(File No. 33-96632), and incorporated herein by reference.

(b) Reports on
Form 8-K.

The Company did not file any reports on
Form 8-K during the first quarter of the fiscal year ending
November 30, 2002.

FORWARD LOOKING INFORMATION

This Quarterly Report on Form 10-Q includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When
used herein, words like intend,
anticipate, believe,
estimate, plan or expect, as
they relate to the Company, are intended to identify
forward-looking statements. The Company believes that the
assumptions and expectations reflected in such forward-looking
statements are reasonable, based on information available to it
on the date of this Quarterly Report, but no assurances can be
given that these assumptions and expectations will prove to have
been correct or that the Company will take any action that it
may presently be planning. The Company is not undertaking to
publicly update or revise any forward-looking statement if it
obtains new information or upon the occurrence of future events
or otherwise.

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |              
| | -------------
| | TRAFFIX, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/JEFFREY L. SCHWARTZ

| |                            
| | ---------------------------
| |                            
| | Jeffrey L. Schwartz        
| | Chairman, President and CEO

Date: April 15, 2002



| |     |                 
| | --- | ----------------
| | By: | /s/DANIEL HARVEY

| |                              
| | -----------------------------
| |                              
| | Daniel Harvey                
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: April 15, 2002

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EXHIBIT INDEX

|        |  |                                                              
|------- |  | -------------------------------------------------------------
|Exhibit |  |                                                              
|Number  |  |                                                              
|        |  |                                                              
|3.1.1   |  | Articles of Incorporation of the Company, as
	amended(1)     
|3.1.2   |  | Amendment to the Articles of Incorporation of the
	Company(2)
|3.2     |  | By-Laws of the Company(3)                                    




|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

31