SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended August 31, 2004               
|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)                               

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

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

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

The number of shares outstanding of the Registrant's common stock is 13,523,664 (as of 10/13/04).



---





TRAFFIX, INC.  INDEX TO QUARTERLY REPORT ON FORM 10-Q  FILED WITH THE SECURITIES AND EXCHANGE COMMISSION  QUARTER ENDED AUGUST 31, 2004    ITEMS IN FORM 10-Q

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I     |  | Financial Information                                                                 |  |     
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  | 3   
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 21  
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | None
|Item 4.    |  | Controls and Procedures                                                               |  | 47  
|Part II    |  | Other Information                                                                     |  |     
|Item 1.    |  | Legal Proceedings                                                                     |  | 48  
|Item 2.    |  | Unregistered Sales of Equity 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                                                                     |  | 50  
|Item 6.    |  | Exhibits                                                                              |  | 50  
|Signatures |  | 52                                                                                   

2

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

|                                                                                                                         |                                                                                                                                       | August 31,
2004                            |            | November 30,
2003
|------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | -----------------
|
|Assets                                                                                                                   |                                                                                                                                       |                                            |            |                  
|Current assets:                                                                                                          |                                                                                                                                       |                                            |            |                  
|                                                                                                                         | Cash and cash equivalents                                                                                                             |                                            | $          | 5,250,104        
|                                                                                                                         | Marketable securities                                                                                                                 |                                            |            | 30,955,255       
|                                                                                                                         | Accounts receivable, trade, net of allowance for doubtful accounts of $1,685,385 at August 31, 2004 and $872,605 at November 30, 2003 |                                            |            | 5,349,171        
|                                                                                                                         | Deferred income taxes                                                                                                                 |                                            |            | 1,667,429        
|                                                                                                                         | Prepaid expenses and other current assets                                                                                             |                                            |            | 401,765          
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total current assets                       |            |                  
|Property and equipment, at cost, net of accumulated depreciation                                                         |                                                                                                                                       |                                            | 2,317,213  |                  
|Goodwill                                                                                                                 |                                                                                                                                       |                                            | 5,997,979  |                  
|Other intangibles, net                                                                                                   |                                                                                                                                       |                                            | 1,471,656  |                  
|Deferred income taxes                                                                                                    |                                                                                                                                       |                                            | 66,212     |                  
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total assets                               |            | $                
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|Liabilities                                                                                                              |                                                                                                                                       |                                            |            |                  
|Current liabilities:                                                                                                     |                                                                                                                                       |                                            |            |                  
|                                                                                                                         | Accounts payable                                                                                                                      |                                            | $          | 4,125,843        
|                                                                                                                         | Accrued expenses                                                                                                                      |                                            |            | 2,994,094        
|                                                                                                                         | Reserve for customer chargebacks                                                                                                      |                                            |            | 679,602          
|                                                                                                                         | Due to related parties                                                                                                                |                                            |            | 383,998          
|                                                                                                                         | Income taxes payable                                                                                                                  |                                            |            | 487,871          
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total current liabilities                  |            |                  
|Deferred income taxes                                                                                                    |                                                                                                                                       |                                            | 207,820    |                  
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total liabilities                          |            |                  
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|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 13,523,664 shares and 12,882,992 shares, respectively |                                                                                                                                       |                                            | 13,523     |                  
|Common stock issuable$.001 par value; -0- and 39,174 shares, respectively                                               |                                                                                                                                       |                                            |           |                  
|Additional paid-in capital                                                                                               |                                                                                                                                       |                                            | 41,569,200 |                  
|Retained earnings                                                                                                        |                                                                                                                                       |                                            | 2,033,420  |                  
|Accumulated other comprehensive income                                                                                   |                                                                                                                                       |                                            | 981,413    |                  
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total shareholders' equity                 |            |                  
|                                                                                                                         |                                                                                                                                       |                                            |            |                  
|                                                                                                                         |                                                                                                                                       | Total liabilities and shareholders' equity |            | $                
|                                                                                                                         |                                                                                                                                       |                                            |            |                  

The
acompanying notes are an integral part of these financial statements

3

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF (LOSS) INCOME        (UNAUDITED)

|                                          |                                           | Three Months Ended                                        |            | Nine Months Ended |          
|----------------------------------------- | ----------------------------------------- | --------------------------------------------------------- | ---------- | ----------------- | ---------
|
|Net revenue                               |                                           | $                                                         | 10,208,548 |                   | $        
|Cost of sales                             |                                           |                                                           | 6,335,395  |                   |          
|                                          |                                           |                                                           |            |                   |          
|                                          |                                           | GROSS PROFIT                                              |            |                   | 3,873,153
|Selling expenses                          |                                           |                                                           | 565,222    |                   |          
|General and administrative expenses       |                                           |                                                           | 3,483,341  |                   |          
|Bad debt expense                          |                                           |                                                           | 420,041    |                   |          
|                                          |                                           |                                                           |            |                   |          
|                                          |                                           | (LOSS) INCOME FROM OPERATIONS                             |            |                   | (595,451 
|Other income (expense):                   |                                           |                                                           |            |                   |          
|                                          | Interest income and dividends             |                                                           |            | 137,572           |          
|                                          | Realized gains on marketable securities   |                                                           |            | 9,478             |          
|                                          | Realized gain on sale of subsidiary       |                                                           |            | 195,000           |          
|                                          | Other non-operating income (expense)      |                                                           |            | (1,577            | )        
|                                          | Minority interest in income of subsidiary |                                                           |            |                  |          
|                                          |                                           |                                                           |            |                   |          
|                                          |                                           | (LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES |            |                   | (254,978 
|(Benefit) provision for income taxes      |                                           |                                                           | (130,657   | )                 |          
|                                          |                                           |                                                           |            |                   |          
|                                          |                                           | NET (LOSS) INCOME                                         |            | $                 | (124,321 
|                                          |                                           |                                                           |            |                   |          
|Basic (loss) income per share (Note 3):   |                                           |                                                           |            |                   |          
|                                          | Net (loss) income                         |                                                           | $          | (0.01             | )        
|                                          |                                           |                                                           |            |                   |          
|                                          | Weighted average shares outstanding       |                                                           |            | 13,492,677        |          
|                                          |                                           |                                                           |            |                   |          
|Diluted (loss) income per share (Note 3): |                                           |                                                           |            |                   |          
|                                          | Net (loss) income                         |                                                           | $          | (0.01             | )        
|                                          |                                           |                                                           |            |                   |          
|                                          | Weighted average shares outstanding       |                                                           |            | 13,492,677        |          
|                                          |                                           |                                                           |            |                   |          
|                                          | Cash dividends per common share           |                                                           | $          | 0.08              |          
|                                          |                                           |                                                           |            |                   |          

The
acompanying notes are an integral part of these financial statements

4

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (UNAUDITED)

|                                      |                                                                                          | Nine Months Ended                                                                      |                                          
|------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities: |                                                                                          |                                                                                        |                                          
|                                      | Net income (loss)                                                                        |                                                                                        | $                                        
|                                      | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                                        |                                          
|                                      |                                                                                          | Depreciation and amortization                                                          |                                          
|                                      |                                                                                          | Reserve for customer chargebacks                                                       |                                          
|                                      |                                                                                          | Provision for uncollectible accounts                                                   |                                          
|                                      |                                                                                          | Deferred income taxes                                                                  |                                          
|                                      |                                                                                          | Net gains on sale of marketable securities                                             |                                          
|                                      |                                                                                          | Gain on sale of subsidiary                                                             |                                          
|                                      |                                                                                          | Minority interest                                                                      |                                          
|                                      |                                                                                          | Changes in assets and liabilities of business, net of assets and liabilities acquired: |                                          
|                                      |                                                                                          |                                                                                        | Accounts receivable                      
|                                      |                                                                                          |                                                                                        | Prepaid expenses and other current assets
|                                      |                                                                                          |                                                                                        | Accounts payable                         
|                                      |                                                                                          |                                                                                        | Income taxes payable                     
|                                      |                                                                                          |                                                                                        | Due (from)/to related parties            
|                                      |                                                                                          |                                                                                        | Other, principally accrued expenses      
|                                      |                                                                                          |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        | Net cash provided by operating activities
|                                      |                                                                                          |                                                                                        |                                          
|Cash flows from investing activities: |                                                                                          |                                                                                        |                                          
|                                      | Purchases of securities                                                                  |                                                                                        |                                          
|                                      | Proceeds from sales of securities                                                        |                                                                                        |                                          
|                                      | Proceeds from the sale of a subsidiary                                                   |                                                                                        |                                          
|                                      | Payment for asset acquisition, net of cash received                                      |                                                                                        |                                          
|                                      | Cash payment for intangble assetlicense agreement                                       |                                                                                        |                                          
|                                      | Capital expenditures                                                                     |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        | Net cash used in investing activities    
|                                      |                                                                                          |                                                                                        |                                          
|Cash flows from financing activities: |                                                                                          |                                                                                        |                                          
|                                      | Dividends paid                                                                           |                                                                                        |                                          
|                                      | Purchases of common stock                                                                |                                                                                        |                                          
|                                      | Proceeds from stock options exercised                                                    |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        | Net cash used in financing activities    
|                                      |                                                                                          |                                                                                        |                                          
|                                      | Effect of exchange rate changes on cash and cash equivalents                             |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        |                                          
|                                      | Net decrease in cash and cash equivalents                                                |                                                                                        |                                          
|                                      | Cash and cash equivalents, beginning of period                                           |                                                                                        |                                          
|                                      |                                                                                          |                                                                                        |                                          
|                                      | Cash and cash equivalents, end of period                                                 |                                                                                        | $                                        
|                                      |                                                                                          |                                                                                        |                                          

See
Notes 2 and 7 for a summary of noncash investing activities.

The
accompanying notes are an integral part of these financial statements

5

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        FOR THE NINE MONTHS ENDED AUGUST 31, 2004        (UNAUDITED)

|                                                                |                             | Common Stock |  |   |        |  |   |          |   | Accumulated
Other
Comprehensive
Income(Loss) |            |  |  
|--------------------------------------------------------------- | --------------------------- | ------------ |  | - | ------ |  | - | -------- | - | -------------------------------------------- | ---------- |  | -
|
|
|Balance, November 30, 2003                                      |                             | 12,882,992   |  | $ | 12,882 |  | $ | 242,879  |   | $                                            | 37,916,110 |  | $
|Net income for the nine months ended August 31, 2004            |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Unrealized gains on available-for-sale securities               |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Foreign Currency Translation adjustment                         |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                                |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                                | Comprehensive income (loss) |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                                |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Dividends declared                                              |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Stock option exercises                                          |                             | 367,557      |  |   | 368    |  |   |          |   |                                              | 1,627,745  |  |  
|Tax benefit from exercise of stock options                      |                             |              |  |   |        |  |   |          |   |                                              | 277,136    |  |  
|Common stock issued in connection with current year acquisition |                             | 233,941      |  |   | 234    |  |   |          |   |                                              | 1,505,369  |  |  
|Common stock issued in connection with prior year acquisition   |                             | 39,174       |  |   | 39     |  |   | (242,879 | ) |                                              | 242,840    |  |  
|                                                                |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Balance, August 31, 2004                                        |                             | 13,523,664   |  | $ | 13,523 |  | $ | (0       | ) | $                                            | 41,569,200 |  | $
|                                                                |                             |              |  |   |        |  |   |          |   |                                              |            |  |  

The accompanying notes are an integral part of these financial statements

6

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TRAFFIX, INC. AND SUBSIDIARIES        NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1.     GENERAL

The accompanying consolidated financial statements are unaudited; however, in the opinion of management, these financial statements are presented in conformity
with accounting principles generally accepted in the United States of America. The accompanying unaudited consolidated financial statements reflect all 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. In the preparation of these financial statements, management is
required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the interim periods reported. Actual results could differ from those estimates. Principally, estimates are used in accounting for bad debts (recaptures), data
qualification allowances and sales allowances, depreciation and amortization, income taxes and contingencies. Management's estimates and assumptions are continually reviewed against actual results
with the effects of any revisions being reflected in the results of operations at that time. 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, 2003. The results of operations for the three and nine-month periods ended August 31, 2004 are not necessarily
indicative of the results to be expected for the subsequent quarter or the full fiscal year ending November 30, 2004. Certain prior year amounts in the unaudited consolidated financial
statements have been reclassified to conform with the current year presentation.

During
the nine months ended August 31, 2004 and 2003, options for 367,557 shares and 25,600 shares of the Company's common stock, respectively, were exercised by its employees.
Tax benefits of $277,136 and $10,155 in the nine months ended August 31, 2004 and 2003, respectively, resulting from the exercise of these options, were recorded as an increase to additional
paid-in capital and a reduction of income taxes currently payable.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN No.46). In December 2003, the FASB modified FIN No. 46 to make certain technical corrections and address certain issues regarding its
implementation. FIN No. 46 establishes revised guidance, by providing a new framework for identifying variable interest entities and revised guidance on determining when a registrant should
include an identified variable interest rate entity, or entities, in its consolidated financial statements. The Company adopted FIN No. 46 in Fiscal 2004. The adoption of this standard did not
have a material impact on the Company's consolidated results of operations, financial position or cash flows.

2.     SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

The Company currently earns the most significant portion of its 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 basic categories: (1) delivery of consumer traffic to the websites and telemarketing call centers of its

7

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Corporate
Customers (e.g., click-thrus from banners on the Company's websites), (2) Search Engine Marketing services as generated by the Company's recent asset acquisition of
SendTraffic.com, Inc., (3) delivery of consumer data to Corporate Customers with respect to the consumers who have registered for Corporate Customers' products or services (e.g., a
consumer who registered via the registration page of one of the Company's websites to receive on-line promotions from Corporate Customers), (4) delivery of pre-qualified
consumer data to Corporate Customers as a result of consumers' responses to targeted questions and surveys (e.g., receiving free gifts for your children), (5) delivery of a sale or completed
application for a Corporate Customer's product or service (e.g., a consumer who responds to a Traffix email promotion on behalf of a Corporate Customer by completing an on-line application
for a credit card or subscribing for a cellular phone service), (6) generating revenue from any of the foregoing categories by placing Corporate Customers' offers on the media of third parties
with whom the Company has a marketing relationship on a revenue share basis, (7) sales of inexpensive gift items directly to consumers, (8) rentals and sales of copies of specific
segments of the Company's databases to Corporate Customers for their proprietary marketing and database enhancements, and (9) sales of memberships to the Company's online dating service,
iMatchUp.com.

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

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

Revenue
from the Company's LEC Billed Product and Service segment consists of Local Exchange Carrier ("LEC") billed Internet based products. Such products include an Internet Service
Provider ("ISP") product, an email service product, and during the nine months ended August 31, 2004, the Company introduced "Click-Help", a LEC Billed service that offers 24/7
assistance to home-computer users for their computer problems. The revenue from all such services is recognized net of an estimated provision for refunds, credits and adjustments
subsequently granted to customers ("customer chargebacks"). Customer chargebacks are reflected as a contra-revenue account within the Company's statement of operations. Since the provision for
customer chargebacks is established prior to the periods in which chargebacks are actually expended, the Company's revenues are adjusted in later periods if the Company's incurred chargebacks vary
from the amounts previously estimated.

Revenues
from the Company's off-line marketing services segment included the revenue earned by Montvale Management, LLC ("Montvale") which, prior to March 7, 2003, was
a majority-owned subsidiary of the Company. Montvale was sold to the other member thereof on March 7, 2003. See Note 7, "Sale of Majority Owned Subsidiary". Such revenues represented
approximately $2.4 million, or 9%, of the Company's consolidated net revenues for the nine-month periods ended August 31, 2003. Such revenue resulted from Montvale's
commission earned for the provision of net branch services to a mortgage banking institution. Under such arrangement, Montvale managed the branch offices and loan origination business of a single
third party licensed mortgage banker.

The
Company's policy is to expense, as a cost of sale, all marketing costs, including the costs incurred to generate consumer traffic and registrations on our websites (customer profile
purchases), at the time the related cost of sale obligation or expense is incurred.

8

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Accounts receivable and allowance for doubtful accounts

Accounts receivable consist of trade accounts receivable from the Company's Corporate Customer base, with extension of credit varying between 30 to
90 days, with the majority at 30 days, and as such, do not bear interest. Corporate Customers with credit balances, generally resulting from prepayments, are classified as deferred
revenue, and included in the Company's "Accrued expenses" account caption in its balance sheets. The Company's Corporate Customer base is comprised of domestic entities with diverse demographics.

Additionally,
accounts receivable from Local Exchange Carriers (such as for the LEC segment) and credit card companies (such as for the on-line dating service) are due to the
Company.

Accounts Receivable by major category consist of the following at August 31, 2004 and 2003:

August 31,
2004

August 31,
2003AccountsReceivable from:Corporate Clients

$
4,087,197

$
2,989,290Consumers via Credit Card Merchant arrangements, Third Party Billing companies and Local Exchange Carriers (LECs)


1,261,974


1,475,410Total Accounts Receivable

$
5,349,171

$
4,464,700


The
allowance for doubtful accounts is based on management's evaluation of the collectibility of receivables after giving consideration to current delinquency data, historical loss
experience and general economic conditions, both at the Company level and sector/industry level. The Company's accounts receivable balances are continually reviewed by management and, when situations
dictate, provisions for losses are recorded. Additional allowances might be required if the original estimates for loss prove to be inadequate. Changes in the estimated collectibility of trade
receivables are recorded in the results of operations for the period in which the estimate is revised. Deferred taxes are adjusted for the timing difference resulting from the deduction of bad debts
for reporting and tax purposes. Receivables that are deemed uncollectible are charged against the allowance for doubtful accounts.

Following
are the changes in the allowance for doubtful accounts for the nine months ending August 31, 2004 and 2003:

Beginning
Balance

Additions to allowance

Increase from purchased subsidiary

Write-offs net of recoveries

Ending Balance2004

$
872,605

447,739

503,491

(138,450
)
$
1,685,3852003

$
326,127

607,208



(20,020
)
$
913,315


Accounts receivable and allowance for contractually specified data qualifications

The Company's accounts receivable, as described above, is reported net of an allowance for contractually specified data qualification allowances. Such data
qualification allowances are reflected as a reduction to accounts receivable, and as a contra-revenue account in arriving at the Company's reported net revenue. Contractually specified data
qualifications allowances are determined pursuant to the terms of the Company's marketing agreements with its corporate customers. These allowances include reductions to the gross amount of records
shipped to, accepted by, and invoiced to the Company's corporate customers. Examples of data qualifications include: (1) minimum age restrictions, (2) country of residence restrictions,
(3) pre-existing customers, and (4) duplications of names within

9

---



the
same file. The Company's methodology in determining the allowance for data qualifications is based on the Company's historical experience regarding data qualifications with existing corporate
clients, and the application of such experience to similar products in the case of new corporate clients whose marketing agreements call for data qualification allowances.

Transactions with Major Customers and other Revenue Concentrations

During the three and nine-month periods ended August 31, 2004, we had one customer in our E-commerce segment accounting for
approximately $0.9 million and $2.9 million, or 8.5% and 11.0% of consolidated net revenue, respectively. Approximately $0.2 million, or 3.8% of consolidated net accounts
receivable, was attributable to such major customer as of August 31, 2004. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 7.1% of
consolidated net revenues for the three and nine-month periods ended August 31, 2004. During the three-month period ended August 31, 2003, we had one customer in our
E-commerce segment accounting for approximately $1.0 million, or 12% of consolidated net revenues during such period. Regarding the balance of our customer base, no single customer
had net revenues that equaled or exceeded 9% of consolidated net revenues for the three and nine-month periods ended August 31, 2003.

In
the nine months ended August 31, 2004, 24.0% of the Company's revenue was derived from its proprietary products: 17.7% from iMatchUp.com, the Company's online dating sites, and
6.3% from its LEC segment's proprietary products.

Stock-based Compensation

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

|                                                                                                                  |  | Three Months Ended |          | Nine Months Ended |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- | -
|
|Net (loss) income:                                                                                                |  |                    |          |                   |  
|As reported                                                                                                       |  | $                  | (124,321 | )                 | $
|Less: Total stock-based compensation expense determined under fair value based method, net of related tax effects |  |                    | (82,934  | )                 |  
|                                                                                                                  |  |                    |          |                   |  
|Pro forma                                                                                                         |  | $                  | (207,255 | )                 | $
|Basic net (loss) income per share:                                                                                |  |                    |          |                   |  
|As reported                                                                                                       |  | $                  | (0.01    | )                 | $
|Pro forma                                                                                                         |  | $                  | (0.02    | )                 | $
|Diluted net (loss) income per share:                                                                              |  |                    |          |                   |  
|As reported                                                                                                       |  | $                  | (0.01    | )                 | $
|Pro forma                                                                                                         |  | $                  | (0.02    | )                 | $

10

---



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

Non-cash Investing and Financing Activities

Non-cash investing and financing activities are excluded from the consolidated statement of cash flows. For the nine months ended August 31,
2004, non-cash activities included the following items:

Investing Activities:

Asset Acquisition

Details of Acqusition (Also see notes 7 and 8)

SendTraffic.comFair Value of assets acquired

$
6,681,363Liabilities assumed


(1,503,797
)Stock issued (net of accrued registration costs of $22,500)


(1,505,603
)Cash paid

$
3,671,963Less: cash acquired


(196,812
)Net cash paid for acquisition

$
3,475,151


In
the Company's Asset Acquisition Agreement for the acquisition of the assets of Send Traffic, Send Traffic warranted that certain financial information contained in its unaudited
June 30, 2004 balance sheet was accurate, and if such financial information ultimately proved post-closing to have been inaccurate, Send Traffic would return to the Company any
shortfall. In order to ensure compliance with such warranty, the Company retained in escrow $250,000 of the purchase price. The Company is continuing in discussions with the principals of Send Traffic
regarding the final determination of the June 30, 2004 balance sheet. Management believes that the culmination of such discussions will result in the retention by the Company of the $250,000
maintained thereby in escrow, as well as a return of additional cash and/or stock delivered as part of the purchase price at closing. The value of this return of previously expended consideration, if
any, will serve to reduce the Goodwill recorded at July 1, 2004. The escrowed amount has been included in the Company's unrestricted cash and cash equivalent accounts.

License Acquisition

On March 24, 2004, the company entered into a license agreement with LiveOnTheNet.com Inc. The agreement allows the Company to market to consumers
under its own brand name (Click Help), a software program, which enables home PC users to access customer service operators who provide real-time support for questions related to their
personal computers.

The
total cost of the software license was $200,000, payable in eleven monthly installments of $15,000, due on the first of the month, commencing April 1, 2004. As of
August 31, 2004, the Company had made $110,000 in payments on the license agreement, which included a $35,000 down payment and five of the monthly installments. The $90,000 unpaid balance due
under the license is included in accrued expenses and accounted for as a non-cash investing activity for cash flow purposes.

The
license is being amortized on the straight-line basis over a five year period.

11

---



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 |            | Nine Months Ended
|------------------------------ | --------------------------------------------------------------------------- | ------------------ | ---------- | -----------------
|
|Denominator:                   |                                                                             |                    |            |                  
|                               | Denominator for basic earnings per share-weighted average shares            |                    | 13,492,677 |                  
|Effect of dilutive securities: |                                                                             |                    |            |                  
|                               | Stock options                                                               |                    |           |                  
|                               |                                                                             |                    |            |                  
|                               | Denominator for diluted earnings per share-adjusted weighted average shares |                    | 13,492,677 |                  
|                               |                                                                             |                    |            |                  

Options
to purchase 2,462,917 and 1,769,998 shares of common stock for the three months ended August 31, 2004 and 2003, respectively, and 676,017 and 3,015,494 for the nine months
ended August 31, 2004 and 2003, 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)

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

|                                                                                                           |  | Three Months Ended |          | Nine Months Ended |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ----------------- | -
|
|Net (loss)income                                                                                           |  | $                  | (124,321 | )                 | $
|Other comprehensive income (loss), net of tax:                                                             |  |                    |          |                   |  
|Foreign currency translation adjustment                                                                    |  |                    | 112,029  |                   |  
|Unrealized loss from available-for-sale securities, arising during the period, net of income taxes of $-0- |  |                    | 16,019   |                   |  
|                                                                                                           |  |                    |          |                   |  
|Comprehensive income(loss)                                                                                 |  | $                  | 3,727    |                   | $
|                                                                                                           |  |                    |          |                   |  

5.     Advertising and Marketing

The Company's advertising and marketing costs, incurred in the advertising and marketing of the Company's, and its clients', products, services and promotional
offers, have historically been comprised of (1) costs associated with the transmission of email marketing messages, both from internal sources and external third-party vendors, (2) costs
associated with the purchase of on-line consumer data (including registered users to the Company's websites), (3) costs associated with the fulfillment obligations relating to
premiums offered in conjunction with the Company's promotions, and (4) email and website program promotional and creative development costs. During the quarter ended August 31, 2004,
pursuant to the asset acquisition of SendTraffic.com,Inc., the Company recorded the costs of its search engine marketing activities in its advertising and marketing cost accounts. All such costs are
charged to operations (1) at the time of the email transmission, (2) upon receipt of the qualified consumer data, (3) at the time the promotional and creative services are
provided, and/or (4) at the time the search engine marketing media purchases are incurred, respectively, and are included as a component of cost of sales.

12

---



Total
advertising and marketing costs included in cost of sales for the three months ended August 31, 2004 and 2003 were approximately $5,472,000 and $3,207,000, respectively, and
for the nine months ended August 31, 2004 and 2003, were approximately $13,164,000 and $8,773,000, respectively.

6.     Segment Information

Segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating
decision maker(s) in deciding how to allocate resources and in assessing performance. Disclosure is also required about products and services, geographic areas and major customers. The Company's
segments operate principally in the United States with a presence in Canada; the Canadian presence contributed an immaterial amount to consolidated net revenues and consolidated net income. The
Company's three principle operating segments are: (a) E-commerce, (b) Off-line Marketing Services, and (c) LEC Billed Products and Services. The balance of
the Company's operations, immaterial individually
and in the aggregate, are included as part of Corporate. 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 adjusted EBITDA, which is defined as net income excluding (i) special charges,
(ii) interest expense, (iii) interest and dividend income, (iv) net gains (losses) on the sale of marketable securities, (v) permanent impairment charges to
long-lived assets, (vi) other nonoperating income, (vii) minority interest (income)loss, (viii) depreciation, (ix) amortization and (x) 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. The following tables set forth the Company's financial results, by management's performance criteria, by operating
segment. All revenues are from nonintersegment sources, and, therefore no intersegment elimination applies.

Segment DataNet Revenue

|                                 |                     | Three Months Ended |           | Nine Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | -----------------
|
|E-commerce                       |                     | $                  | 9,750,567 |                  
|Off-line Marketing Services      |                     |                    |          |                  
|LEC Billed Products and Services |                     |                    | 457,981   |                  
|                                 |                     |                    |           |                  
|                                 | Consolidated totals |                    | $         | 10,208,548       
|                                 |                     |                    |           |                  

Segment DataGross Profit

|                                 |                     | Three Months Ended |           | Nine Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | -----------------
|
|E-commerce                       |                     | $                  | 4,188,063 |                  
|Off-line Marketing Services      |                     |                    |          |                  
|LEC Billed Products and Services |                     |                    | (314,910  | )                
|                                 |                     |                    |           |                  
|                                 | Consolidated totals |                    | $         | 3,873,153        
|                                 |                     |                    |           |                  

13

---



Segment DataAdjusted EBITDA*

|                                 |                     | Three Months Ended |           | Nine Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | -----------------
|
|E-commerce                       |                     | $                  | 1,184,475 |                  
|Off-line Marketing Services      |                     |                    |          |                  
|LEC Billed Products and Services |                     |                    | (426,860  | )                
|                                 |                     |                    |           |                  
|                                 | Consolidated totals |                    | $         | 757,615          
|                                 |                     |                    |           |                  

---

Segment DataDepreciation and Amortization

|                                 |                     | Three Months Ended |         | Nine Months Ended
|-------------------------------- | ------------------- | ------------------ | ------- | -----------------
|
|E-commerce                       |                     | $                  | 263,383 |                  
|Off-line Marketing Services      |                     |                    |        |                  
|LEC Billed Products and Services |                     |                    |        |                  
|                                 |                     |                    |         |                  
|                                 | Consolidated totals |                    | $       | 263,383          
|                                 |                     |                    |         |                  

14

---



Segment DataReconciliation of Reportable segment's Adjusted EBITDA to consolidated income (loss) before taxes

|                                                                                       |                                           | Three Months Ended                    |          | Nine Months Ended |           
|-------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------- | -------- | ----------------- | ----------
|
|Adjusted EBITDAby segment                                                             |                                           |                                       |          |                   |           
|                                                                                       | E-commerce                                |                                       | $        | 1,184,475         |           
|                                                                                       | Off-line Marketing Services               |                                       |          |                  |           
|                                                                                       | LEC Billed Products and Services          |                                       |          | (426,860          | )         
|                                                                                       |                                           |                                       |          |                   |           
|                                                                                       |                                           | Total Adjusted EBIDTA                 |          |                   | 757,615   
|                                                                                       |                                           |                                       |          |                   |           
|Items effecting Adjusted EBITDA in arriving at consolidated (loss) income before taxes |                                           |                                       |          |                   |           
|                                                                                       | Corporate (expense)                       |                                       |          | (1,089,683        | )         
|                                                                                       | Depreciation and amortization (expense)   |                                       |          | (263,383          | )         
|                                                                                       | Interest income and dividends             |                                       |          | 137,572           |           
|                                                                                       | Realized gains on marketable securities   |                                       |          | 9,478             |           
|                                                                                       | Realized gain on sale of subsidiary       |                                       |          | 195,000           |           
|                                                                                       | Other non-operating income(expense)       |                                       |          | (1,577            | )         
|                                                                                       | Minority interest in income of subsidiary |                                       |          |                  |           
|                                                                                       |                                           |                                       |          |                   |           
|                                                                                       |                                           | Total items effecting
Adjusted EBITDA |          |                   | (1,012,593
|                                                                                       |                                           |                                       |          |                   |           
|Consolidated (loss) income before taxes                                                |                                           | $                                     | (254,978 | )                 | $         
|                                                                                       |                                           |                                       |          |                   |           

7.     Asset Acquisitions and Asset Dispositions

Acquisition

On June 30, 2004, the Company, through its wholly owned subsidiary, New Send Inc., acquired substantially all of the assets and certain liabilities
of SendTraffic.com, Inc. and the Traffic Group, LLC ("SendTraffic"). SendTraffic is an Internet search engine marketing company, which provides full service search engine marketing solutions to
numerous clients through its working relationships with major search engines, including Google, MSN, Overture and Ask Jeeves.

The
acquisition was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standard No. 141, "Business Combinations". As such,
the Company recorded the net assets of SendTraffic at their estimated fair market value. SendTraffic's operating results, for the period July 1, 2004 to August 31, 2004, are included in
the consolidated results of operations of the Company for the three and nine month periods ended August 31, 2004.

The
purchase price was approximately $5.53 million and was comprised of $3.75 million in cash and $1.78 million (or 233,941 shares) of the Company's common stock. As
discussed above in Note 2 under the heading "Non-cash investing and Financing Activities", the Company is in discussions with the principals of SendTraffic regarding the final
determination of the June 30, 2004 SendTraffic balance sheet. Management believes that the culmination of such discussions will result in the return of a portion of the cash and stock delivered
as purchase price at closing. The value of this return of previously expended consideration, if any, will serve to reduce the goodwill recorded at July 1, 2004. Based on a preliminary
valuation, the reported purchase price includes $4,938,000 of goodwill and $471,000 of identifiable intangibles.

Under
Statement of Accounting Standards No.142, "Goodwill & Intangible Assets", goodwill is not amortized. Instead, the amount of goodwill is reviewed for impairment on an annual
basis. The identifiable intangibles consist of employment contracts and internally developed software, which will be amortized on a straight-line basis over estimated useful lives of 5 and
3 years, respectively.

15

---



Dispositions

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

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

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

16

---



8.     Goodwill and Identifiable Intangibles Assets

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

|                                        |                                   | As of Aug. 31, 2004                 |           | As of November 30, 2003
|--------------------------------------- | --------------------------------- | ----------------------------------- | --------- | -----------------------
|
|Amortizable intangible assets:          |                                   |                                     |           |                        
|GroupLotto identifiable intangibles:    |                                   |                                     |           |                        
|                                        | GroupLotto Site Brand Recognition |                                     | $         | 722,922                
|                                        | GroupLotto Database               |                                     |           | 433,754                
|                                        | Intellectual Property Assets      |                                     |           | 289,169                
|                                        | Marketing Right License Fee       |                                     |           | 500,000                
|Infiknowledge identifiable intangibles: |                                   |                                     |           |                        
|                                        | Internet Game Suite               |                                     |           | 231,419                
|                                        | Intellectual Property Assets      |                                     |           | 173,564                
|                                        | Market Position Acquired          |                                     |           | 192,849                
|Thanksmuch identifiable intangibles:    |                                   |                                     |           |                        
|                                        | Profiled customer data            |                                     |           | 50,000                 
|                                        | Restrictive Covenants             |                                     |           | 10,000                 
|SendTraffic identifiable intangibles:   |                                   |                                     |           |                        
|                                        | Employment Contracts              |                                     |           | 246,000                
|                                        | Marketing Dashboard               |                                     |           | 225,000                
|                                        |                                   |                                     |           |                        
|                                        |                                   | Total amortizable intangible assets |           | $                      
|                                        |                                   |                                     |           |                        
|Unamortized intangible assets:          |                                   |                                     |           |                        
|GoodwillInfiknowledge                  |                                   | $                                   | 770,329   |                        
|GoodwillSendTraffic                    |                                   |                                     | 4,937,914 |                        
|GoodwillThanksmuch                     |                                   |                                     | 289,736   |                        
|                                        |                                   |                                     |           |                        
|                                        |                                   | Total Goodwill                      |           | $                      
|                                        |                                   |                                     |           |                        

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

The
Internet and E-commerce industries, within which the Company conducts the majority of its business and has extensive experience, are dynamic and constantly evolving
business
arenas. Based on its experience in these industries, the Company evaluated the nature of each of the components of the identifiable intangible assets and determined that three and
five-year useful lives, with corresponding straight-line amortization, are the most accurate available means of estimating such assets' finite lives. In future fiscal periods,
if facts or circumstances arise that indicate the useful lives assigned to such assets was, in fact, inaccurate, the Company will make the appropriate adjustments at that time.

Goodwill
is not amortized but is tested for impairment in the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate an impairment has occurred.
Management's estimation of implied fair value of goodwill is compared to its carrying value in the assessment and determination of impairment, if any.

17

---



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

|                                                    |                                   | 2004 |         | 2005    |   | 2006    |         | 2007 |         | 2008  
|--------------------------------------------------- | --------------------------------- | ---- | ------- | ------- | - | ------- | ------- | ---- | ------- | ------
|GroupLotto Identifiable intangible amortization:    |                                   |      |         |         |   |         |         |      |         |       
|                                                    | GroupLotto Site Brand Recognition |      | $       | 144,595 |   | $       | 144,595 |      | $       | 92,114
|                                                    | GroupLotto Database               |      |         | 86,757  |   |         | 86,757  |      |         | 55,268
|                                                    | Intellectual Property Assets      |      |         | 57,838  |   |         | 57,838  |      |         | 36,846
|                                                    | Marketing Right License Fee       |      |         | 15,000  |   |         | 20,000  |      |         | 20,000
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Total Group's amortization                          |                                   | $    | 304,190 |         | $ | 309,190 |         | $    | 204,228 |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Infiknowledge Identifiable intangible amortization: |                                   |      |         |         |   |         |         |      |         |       
|                                                    | Cost allocated                    |      |         |         |   |         |         |      |         |       
|                                                    | Internet Game Suite               |      | $       | 43,154  |   | $       | 43,154  |      | $       | 43,154
|                                                    | Intellectual Property Assets      |      |         | 32,365  |   |         | 32,365  |      |         | 32,365
|                                                    | Market Position Acquired          |      |         | 35,962  |   |         | 35,962  |      |         | 35,962
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Total Group's amortization                          |                                   | $    | 111,481 |         | $ | 111,481 |         | $    | 111,481 |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|ThanksMuch Identifiable intangible amortization:    |                                   |      |         |         |   |         |         |      |         |       
|                                                    | Profiled customer data            |      | $       | 16,667  |   | $       | 5,694   |      | $       |      
|                                                    | Restrictive Covenants             |      |         | 2,000   |   |         | 2,000   |      |         | 1,122 
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Total Group's amortization                          |                                   | $    | 18,667  |         | $ | 7,694   |         | $    | 1,122   |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|SendTraffic identifiable intangible amortization:   |                                   |      |         |         |   |         |         |      |         |       
|                                                    | Employment Contracts              |      | $       | 24,600  |   | $       | 49,200  |      | $       | 49,200
|                                                    | Marketing Dashboard               |      |         | 37,500  |   |         | 75,000  |      |         | 75,000
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|                                                    |                                   | $    | 62,100  |         | $ | 124,200 |         | $    | 124,200 |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Summary                                             |                                   |      |         |         |   |         |         |      |         |       
|GroupLotto Identifable intangibles:                 |                                   | $    | 304,190 |         | $ | 309,190 |         | $    | 204,228 |       
|Infiknowledge Identifable intangibles:              |                                   |      | 111,481 |         |   | 111,481 |         |      | 111,481 |       
|ThanksMuch Identifable intangibles:                 |                                   |      | 18,667  |         |   | 7,694   |         |      | 1,122   |       
|SendTraffic identifiable intangibles:               |                                   |      | 62,100  |         |   | 124,200 |         |      | 124,200 |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       
|Total identifiable intangible amortization          |                                   | $    | 496,438 |         | $ | 552,565 |         | $    | 441,031 |       
|                                                    |                                   |      |         |         |   |         |         |      |         |       

9.     Litigation

We are subject to legal proceedings, lawsuits and other claims, brought by: (1) consumers of our products and services; (2) our clients;
(3) consumers of our clients' products and services; and (4) others bringing claims that arise in the normal course of our business. Legal proceedings are subject to numerous
uncertainties rendering the prediction of their outcome difficult. As a result of such uncertainty, we are unable to estimate the ultimate outcome of any of the subsequently mentioned claims, and,
accordingly, no provision for loss has been recorded. We believe that individually, and in the aggregate, the ultimate settlement of the subsequently mentioned claims should not have a material
adverse effect on our consolidated financial position, results of operations or cash flows.

Mavies WinglerOn or about May 9, 2001, Mavies Wingler commenced an action against Group Lotto, Inc. ("GLI"),
one of our wholly owned subsidiaries, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims to have picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States District Court, Southern District of West

18

---



Virginia,
and is entitledWingler v. Grouplotto, Inc., Docket Number 2:01CV518. At the end of 2002,
Ms. Wingler's attorney withdrew, and she is now representing herself. We and GLI have a contract of indemnification with SCA Promotions, Inc. to be indemnified for prizes paid out to
qualified winners. GLI winners are required to produce the Group Lotto Entry Notification form ("GLEN") within a specified period of time after matching a drawing's winning numbers in order to qualify
for receipt of the appropriate prize winnings.

In
March 2004, the Court granted our motion for summary judgment dismissing the complaint. In August 2004, that judgment was affirmed on appeal, and reargument of the
appeal was denied by the Circuit Court in September 2004.

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

Qwest
Communications, Inc. notified us of an indemnification claim relating to a class action filed against Qwest in Minnesota,Bindner v. LCI
International Telecom Corp. et al., District Court of Minnesota, County of Sibley, Case No. C0-00-242. In that action, plaintiffs claim that from
September 1998 to July 1999, they were misled when they were solicited to change their long distance carrier to Qwest. They assert that they were not told that they would have to stay at
certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We introduced the promotion ("Fly Free America") to Qwest, and were retained by Qwest to
operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement terminating our contract and settling the amount due us (the "May 2000 Agreement"). The
May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any loss it may sustain by reason of this class action. We maintain that we have no liability in the
matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false advertising claims. The court has certified the class and Qwest is defending the action. The class
and defendants, without consulting us, reached a tentative settlement of the action which would provide for Qwest to pay $600,000 to $700,000 in cash to the named plaintiffs and plaintiffs' counsel
and up to $1.5 million in additional cash depending on the number of claimants who file a proof of claim. A fairness hearing on the settlement was scheduled for October 11, 2004.
At the fairness hearing, the tentative settlement agreement was approved by the court, the court stated that there was no finding of any liability against Qwest and, we understand, the court reserved
judgment on the issue of plaintiffs' counsels' fees.

In
November 2002, we commenced an arbitration against Qwest to recover certain amounts due us pursuant to the May 2000 Agreement. In December 2002, Qwest filed
counterclaims in the arbitration relating to the Fly Free America program. Qwest asserts that we must indemnify Qwest for, among other things, fines and penalties amounting to approximately
$1.5 million which Qwest claims it paid in connection with a number of consent decrees it entered into with various state attorneys general, an unspecified amount of attorneys' fees, and any
and all expenses, penalties or other amounts Qwest

19

---



becomes
liable for in connection with the class action. Qwest also seeks reimbursement of approximately $3.1 million it paid us pursuant to the May 2000 Agreement. A panel of arbitrators
was appointed in December 2003 and a preliminary conference was held in January 2004. After the conference, a schedule was established for substantive motions and for hearings in
June 2004. The arbitrators also provided for exchanges of information in the arbitration subject to Qwest's right to seek to prevent such exchanges. Qwest moved to prevent exchanges of
information and this application was granted. Qwest moved for summary judgment with respect to its indemnification counterclaim. That motion was denied. We believe that there is no merit to Qwest's
counterclaims and intend vigorously to defend against them, as well as to pursue our claim. The arbitration hearing is currently scheduled for October 25, 2004, but it is anticipated that the
hearing will be adjourned until February 2005.

Columbia House/Rydel

In or about August 2002, Columbia House, one of our clients, notified us of an indemnification claim relating to a class action filed against Columbia
House, among others, in Illinois,Rydel v. Comtrad Industries, Inc. et al., Circuit Court of Cook County, Illinois, No. 02 CH 13269. In
that action, plaintiff
claims to have received unsolicited commercial e-mail from, among others, Columbia House, in violation of Illinois law, and asserts two basic claims against Columbia House, one for
violation of Illinois' Consumers Fraud Statute, the second for violation of Illinois' Electronic Mail Act. Columbia House advised us that it believes that the email in question was not approved by
Columbia House when it was sent, and asserted a claim for indemnification against us pursuant to our contract. We and Columbia House agreed to defer resolution of the indemnification claim (and
reserved each of our respective rights). Columbia House is defending against the class action. Its motion to dismiss was granted as to the Consumer Fraud claim, but denied as to the Electronic Mail
Act claim. The plaintiff has appealed the partial dismissal.

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

Missouri Civil Investigative Demand

On September 26, 2003, we were served with a Civil Investigative Demand by the Missouri Attorney General's Office requesting certain documents and
inquiring into our Company's merchandising practices in connection with games of chance available for entry at grouplotto.com. We have responded to the document and information requests and await a
response from the Missouri Attorney General's Office. Since there has been no further communications from the Missouri Attorney General after our submission, counsel has advised us that they deem this
matter closed.

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

10.   Subsequent Events

On October 14, 2004, our Board of Directors declared a dividend from our retained earnings of $0.08 per share on the outstanding shares of our common stock
for the quarter ended August 31, 2004. Such dividend is payable on or about November 10, 2004 to holders of record of such shares at the close of business on November 1, 2004. We
can give you no assurance that our Board will declare any dividends in future fiscal periods. Any further declarations will depend upon our performance, the level of our then current and retained
earnings, if any, available capital and projected capital requirements
necessary for operations, and other pertinent factors. You should not rely on any prior approvals of our Board as an indicator of its intent to approve the declaration of any dividends in the future.

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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 contains forward-looking statements
and information relating to the Company that are based on the current beliefs, expectations and estimations 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", "continue", and "expect" variations
of such words and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Such statements are not guarantees of future performance, but 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. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Overview

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

In
addition to our third-party client-based revenue, we generate revenue directly from consumers from our own products and services. In Fiscal 2003, we expanded our line of
direct-to-consumer products and services to include Internet based services, such as iMatchUp.com, our on-line dating service, as well as TXNet/WorldWebAccess, our
ISP and email products, and in the three months ended May 31, 2004, we introduced Click-Help, our on-line technical assistance product for the home PC user, which
together comprise our LEC Billed Products segment. These "direct-to-consumer" generated products and services accounted for approximately $2.2 million and
$6.4 million, or 21% and 24%, respectively, of our revenue during the three and nine-month periods ended August 31, 2004, compared to $1.9 million and
$3.9 million, or 23% and 15% for the three and nine-month periods ended August 31, 2003.

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

Background

From our inception in 1993 (under the name "Quintel Entertainment, Inc.") through 1999, we generated the bulk of our revenue from direct marketing using
the traditional media of television, postal mail and telemarketing. In 2000, we repositioned our direct marketing business to the on-line media of the Web. Applying the direct marketing
disciplines honed from our years of operating in the

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"off-line"
media arena, we have been able to provide enhanced response-based results in a cost-efficient and scaleable manner via on-line marketing. In addition, as
a result of our direct marketing background, we have been able to design on-line marketing programs to cost-effectively generate traffic and leads for traditional direct
marketing media channels, such as inbound and outbound telemarketing and direct mail.

On-Line Marketing

We own and operate a number of on-line properties, such as our free on-line sweepstakes group of sites (sponsored by our sweepstakes
management subsidiary, PrizeDistributors, Inc.) including Prizeamerica.com and GroupLotto.com; our consumer credit site, AtlasCreditGroup.com; our automobile information and lead generation
site, AtlasAutomotiveGroup.com; our legal music download site, EZTracks.com; and our premier
on-line dating service, iMatchup.com. We also operate a number of interactive games and promotions such as Direct Deposit Promotions and Prizecade.com. We generate traffic to our websites
from cross marketing, marketing to our database and marketing on the media of third parties. Our Web properties and our marketing activities are designed to generate real-time
response-based marketing results for our corporate clients, as well as for our own product and service offers. When visiting our on-line properties, consumers are given the opportunity to
purchase, sign-up for, ask to be contacted regarding, or simply indicate an interest in, hundreds of offers for various products and services. Specifically, through these interactive Web
properties we generate a variety of transactional results ranging from (a) Web traffic, (b) inbound telemarketing calls, (c) outbound telemarketing leads,
(d) demographically/psychographically profiled lists of consumers, (e) highly-targeted customized response-based leads, (f) completed applications for products, and
(g) sales of products and services.

Websites.Our PrizeDistributors, Inc. sponsored group of websites offers consumers the opportunity to win multiple
game promotions of up to $1 million daily in our free, on-line sweepstakes. The sweepstakes grand prizes are indemnified by an independent, third-party agency. In order to play,
each consumer must provide complete and accurate registration information and agree to receive ("opt-in") marketing messages from us and our marketing partners (write-ins are
accepted). The interactive media on this group of websites include registration pages, banner advertisements and survey questions, the purpose of which is to generate web traffic, leads and sales.
Revenue is generated at this group of websites from our own products and our corporate clients who pay for such traffic, leads and sales. We generate the bulk of our consumer traffic to this group of
websites through proprietary and third party permission-based email marketing programs, banner advertisements and other online media.

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

Email Marketing.Each program that we market for our clients can be implemented not only through the websites, interactive
games and "pop-ups" discussed above, but also, and often, through email marketing. We currently market to a vast database, which includes consumer data that is either owned by us or is
managed by us under our revenue share arrangements.

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

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

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

TRAFFIX'S PRODUCTS AND SERVICES AND NEW SUBSIDIARY

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

We
introduced several new business units during the year ended November 30, 2003, including an on-line dating program ("iMatchup.com") and Internet-based service
products such as ISP and email accounts that are LEC Billed ("TxNET" and "WorldWideAccess"). These new business units are designed as monthly recurring billing programs, such as memberships to our
iMatchUp.com dating sites. Additionally, during the three months ended May 31, 2004, the Company introduced Click-Help, which offers 24/7 technical assistance to the home PC user
under a recurring monthly billing plan.

During
the three-month periods ended August 31, 2004 and 2003, the combination of all of these newly introduced services generated approximately $2.2 million and
$1.9 million, respectively, or approximately 21% and 23%,respectively, of consolidated net revenue. During the nine month periods ended
August 31, 2004 and 2003, the combination of all of these newly introduced services generated approximately $6.4 million and $3.8 million, respectively, or approximately 24% and
15%, respectively, of consolidated net revenue.

Our
expansion in, and dependence on, our on-line direct marketing efforts, coupled with the potential for state and/or federal legislation limiting our ability to contact
consumers on-line (see "Government Regulation") should all be considered when referring to our current quarterly results, as well as prior years' historical results, in evaluating the
potential for our future operations, cash flows, and financial position.

On
June 30, 2004, we acquired the assets of a New York based search engine marketing company, SendTraffic.com, Inc. SendTraffic provides full service search engine
marketing solutions to numerous clients in a variety of industries. SendTraffic develops search engine campaigns that enable its clients to

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maximize
their marketing budget, grow their revenue cost-effectively, and monitor the results of their search engine marketing activities on a real-time basis. SendTraffic has
five years of search engine marketing experience, having worked extensively with the major search engines and portals, including Google, MSN, Overture, FindWhat, Yahoo, AOL, Ask Jeeves and LookSmart.
We use SendTraffic to generate search engine traffic to the many websites and marketing programs we own or operate.

GOVERNMENT REGULATION

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

Federal
legislation was signed into law, effective January 1, 2004, pre-empting, in large part, state e-mail marketing legislation. The
CAN-SPAM Act of 2003 requires that certain "opt-out" procedures, including, but not limited to, a functioning return e-mail address (and a time limit of ten
(10) days to comply with all opt-out requests sent by consumers), be included in commercial e-mail marketing. The CAN-SPAM Act prohibits the sending of
e-mail containing false, deceptive or misleading subject lines, routing information, headers and/or return address information. The CAN-SPAM Act does not permit consumers to
file suit against e-mail marketers for violation of such Act. We believe that this may benefit us, as individuals will be more limited in their ability to file frivolous suits against us,
as they have in the past. The Federal Trade Commission ("FTC") is empowered by the CAN-SPAM Act to enact regulations, within the next four (4) to twenty-four
(24) months, that would implement certain provisions of the CAN-SPAM Act, such as standardized subject line labeling and a "bounty" system to compensate consumers for being the
first to report a spammer. If the regulations promulgated by the FTC specifically limit our ability to market our offers, we could potentially realize a material adverse impact in future fiscal period
net revenue growth, and, therefore, profitability and cash flows could be adversely affected.

TRANSACTIONS WITH MAJOR CUSTOMERS

Transactions with major customers and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources,
(2) in our discussion of Critical Accounting Policy and Accounting Estimate Discussion (immediately following (1) previously mentioned) and (3) under the heading "Transactions
with Major Customers" in Note 2 to the Consolidated Financial Statements included herein.

SEGMENT INFORMATION

During the three and nine-month periods ended August 31, 2004 and 2003, we generated revenue from the following segments:
E-Commerce, Off-line Marketing (the subsidiary responsible for this activity was sold on March 7, 2003) and LEC Billed Products. The E-Commerce segment
currently represents the core of our business operations. Revenue in the E-commerce segment is generated primarily from marketing of third-party products and services on our websites and
through email. The Off-Line Marketing services segment had consisted of revenue generated by us through off-line direct marketing channels. The LEC Billed Products segment
consists of our proprietary LEC billed products, marketed under the brands Click-Help, TXNet ISP and WorldWebAccess, Inc. These products were introduced during Fiscal 2003 and 2004.

Segment
information is set forth in Note 6 to the Consolidated Financial Statements referred to in the Financial Statements and Supplementary Data section included herein.

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RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and nine-month periods ended August 31, 2004 and 2003. It should be
read in conjunction with our Form 10-K as filed for the year ended November 30, 2003, the notes thereto and other financial information included elsewhere in this report.

THREE MONTHS ENDED AUGUST 31, 2004 AND AUGUST 31, 2003

Our
net revenues, on a segmental basis, and with disclosure of the components of the individual segments, for each of the three-month periods ended August 31, 2004 and
August 31, 2003, are detailed in the following tables:

SEGMENT DATANET REVENUES, BY SEGMENT, BY COMPONENT

|                                            |  | Three Months Ended |            |  |   |           | 
|------------------------------------------- |  | ------------------ | ---------- |  | - | --------- | 
|
|E-Commerce components                       |  |                    |            |  |   |           | 
|iMatchUp.com dating sites                   |  | $                  | 1,704,276  |  | $ | 1,396,019 | 
|GroupLotto.com and other web sites          |  |                    | 4,564,961  |  |   | 3,595,080 | 
|Search Engine Marketing revenue             |  |                    | 862,585    |  |   |          | 
|Email marketing programs                    |  |                    | 1,822,097  |  |   | 2,066,636 | 
|Data sales and rentals                      |  |                    | 451,545    |  |   | 348,772   | 
|Sales of jewelry and gifts                  |  |                    | 45,952     |  |   | 269,030   | 
|Internet game development and other         |  |                    | 299,151    |  |   | 296,660   | 
|                                            |  |                    |            |  |   |           | 
|Total E-commerce                            |  |                    | 9,750,567  |  |   | 7,972,197 | 
|                                            |  |                    |            |  |   |           | 
|LEC Billed Products and Services components |  |                    |            |  |   |           | 
|Click-Help, WWA and TXNet LEC Products      |  |                    | 457,981    |  |   | 531,070   | 
|                                            |  |                    |            |  |   |           | 
|Total LEC Billed Products and Services      |  |                    | 457,981    |  |   | 531,070   | 
|                                            |  |                    |            |  |   |           | 
|Total Consolidated Net Revenue              |  | $                  | 10,208,548 |  | $ | 8,503,267 | 
|                                            |  |                    |            |  |   |           | 

Net
Revenue increased approximately $1.7 million, or 20%, to $10.2 million for the three months ended August 31, 2004 from $8.5 million in the comparable
prior year period. The primary factor contributing to the increase in consolidated net revenue was related to a net increase of approximately $1.8 million in revenues earned by our
E-commerce segment. This E-commerce segment increase is attributable to two factors: (1) a net increase in revenue of approximately $0.8 million, from revenue
earned by our core revenue-generating base; and (2) revenue earned from our July 1, 2004 acquisition of the assets of a search engine marketing business, SendTraffic.com, Inc.,
with such revenues accounting for $0.9 million, or 8.5% of quarterly revenue.

The
increase in revenue from our core operations resulted primarily from our ability to generate increased traffic to our websites, which yielded a 27%, or $1.0 million increase
in revenue from our GroupLotto and other websites when compared to the prior year's comparable quarter. Additionally, revenue increased from: (1) memberships in our iMatchUp.com dating sites by
$0.3 million, or 22%, when compared to the prior year's comparable quarter; and (2) our sales and rentals of data by $0.1 million, or 29% when compared to the prior year's
comparable quarter.

Offsetting
the foregoing revenue increases within our E-commerce segment were declines in revenue from our email marketing programs (approximately 12%, or
$0.2 million) and online sales of jewelry and gift items (approximately 83%, or $0.2 million). We believe that a primary cause of the

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email
marketing revenue decline resulted from the ISP's that have increased their filtering of commercial email, regardless of whether the email is permission-based.

Our
cost of sales during the three months ended August 31, 2004 and August 31, 2003 were comprised of (1) direct and indirect marketing costs associated with the
acquisition and retention of consumers for our marketing programs, including direct response email marketing costs, website registrations, customer profiles, other customer acquisition costs (such as
outbound telemarketing), promotional and creative costs, and premium fulfillment costs, and (2) the related contingent-based sweepstakes indemnification expense, billing and collection fees and
customer service costs.

Our
cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the three-month periods ended August 31, 2004 and
August 31, 2003, are set forth below:

CONSOLIDATED COST OF SALES, BY SEGMENT, BY COMPONENT

|                                                                                      |                                | Three Months Ended |           |           |   |           |          
|------------------------------------------------------------------------------------- | ------------------------------ | ------------------ | --------- | --------- | - | --------- | ---------
|
|E-commerce                                                                            |                                |                    |           |           |   |           |          
|Advertising, promotion and fulfillment costs                                          |                                |                    |           |           |   |           |          
|Email marketing and related delivery costs                                            |                                | $                  | 1,112,735 |           | $ | 906,210   |          
|Website registrations, customer profiles and other related customer acquisition costs |                                |                    | 3,545,093 |           |   | 2,220,991 |          
|Promotional, creative and other costs                                                 |                                |                    | 86,859    |           |   | 80,145    |          
|Search Engine Marketing Costs of Revenue                                              |                                |                    | 727,042   |           |   |          |          
|                                                                                      |                                |                    |           |           |   |           |          
|                                                                                      | Total E-commerce Advertising   |                    | $         | 5,471,729 |   | $         | 3,207,346
|                                                                                      |                                |                    |           |           |   |           |          
|Service Bureau fees                                                                   |                                |                    |           |           |   |           |          
|Contingent based prize indemnification costs                                          |                                | $                  | 90,775    |           | $ | 192,970   |          
|                                                                                      |                                |                    |           |           |   |           |          
|                                                                                      | Total E-commerce Cost of Sales |                    | $         | 5,562,504 |   | $         | 3,400,316
|                                                                                      |                                |                    |           |           |   |           |          
|LEC Billed Products and Services                                                      |                                |                    |           |           |   |           |          
|Service Bureau fees                                                                   |                                |                    |           |           |   |           |          
|Service provision, billing and collection fees                                        |                                | $                  | 772,891   |           | $ | 258,047   |          
|                                                                                      |                                |                    |           |           |   |           |          
|                                                                                      | Total LEC Billed Cost of Sales |                    | $         | 772,891   |   | $         | 258,047  
|                                                                                      |                                |                    |           |           |   |           |          
|                                                                                      | Consolidated Cost of Sales     |                    | $         | 6,335,395 |   | $         | 3,658,363
|                                                                                      |                                |                    |           |           |   |           |          

Cost
of sales on a consolidated basis increased $2.7 million, or 73%, to $6.3 million for the three months ended August 31, 2004 from $3.7 million in the
comparable prior year period.

The
primary factor contributing to the increase in consolidated costs of sales was related to a net increase of approximately $2.2 million in costs incurred by our
E-commerce segment in the generation of its increased revenues. This E-commerce segment cost increase is attributable to two factors: (1) a net increase in costs of
approximately $1.4 million from our core revenue-generating activities; and (2) the inclusion of the cost of revenue generation from our July 1, 2004 acquisition of SendTraffic,
with such cost of revenues accounting for $0.7 million, or 11.5% of quarterly consolidated cost of sales.

The
E-commerce segment increase in the cost of sales from our core revenue generating activities resulted from: (1) approximately $1.3 million in costs incurred
for website registrations, customer profiles and other costs of online customer acquisitions, all necessary to support our increased E-commerce revenue generation, as discussed above;
(2) an increase in email marketing costs (which includes certain operating costs necessary to handle the email operations business of our Infiknowledge

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subsidiary)
to: (a) promote the segment's revenue generating opportunities; and (b) to cause potential customers to visit the Company's websites, and once there to register, and become
customer profiles available to be marketed in current and future fiscal periods; and (3) a decrease in contingent prize indemnification costs of approximately $0.1 million, attributable
to a reduction in the size of the sweepstakes prizes, and the related impact on indemnification pricing. Also, see "Consolidated Gross Profit, by Segment" for a discussion of anticipated future
revenue recognition as a result of current period costs incurred.

Other
increases in cost of sales related to our LEC Billed Product segment, which amounted to approximately $0.5 million, or an increase of 200%, when compared to the prior year's
comparable period. In addition, in the quarter, the Company incurred a significant increase in marketing expenditures due to the further test marketing of using outbound telemarketing for customer
acquisition for this segment. Such marketing expenditures amounted to approximately $0.3 million in the third quarter of Fiscal 2004. Management believes this marketing has established
recurring billed customers that will generate revenues unencumbered by additional marketing costs in future fiscal quarters. The Company currently does not intend to continue using outbound
telemarketing for this business line in future periods, but does intend to apply the results of this test marketing to market other products and services through this outbound telemarketing channel.
In addition, the Company experienced an increase in costs of sales in the quarter due to higher levels of customer service costs on our existing LEC Billed Products customer base.

Our
gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the three-month periods ended August 31, 2004 and
2003, are set forth below:

Consolidated Gross Profit, by Segment

|                                 |  | For the
Three Months Ended |           |   |   |           | 
|-------------------------------- |  | -------------------------- | --------- | - | - | --------- | 
|
|E-commerce                       |  | $                          | 4,188,063 |   | $ | 4,571,881 | 
|LEC Billed products and services |  |                            | (314,910  | ) |   | 273,023   | 
|                                 |  |                            |           |   |   |           | 
|CONSOLIDATED TOTALS              |  | $                          | 3,873,153 |   | $ | 4,844,904 | 
|                                 |  |                            |           |   |   |           | 

Consolidated Gross Profit Percentages, by Segment

|                                     |  | For the
Three Months Ended |    |      |   |        |   
|------------------------------------ |  | -------------------------- | -- | ---- | - | ------ | --
|
|
|E-commerce                           |  | 43.0                       | %  | 57.3 | % | (14.3  | )%
|LEC Billed products and services     |  | (68.8                      | )% | 51.4 | % | (120.2 | )%
|                                     |  |                            |    |      |   |        |   
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 37.9                       | %  | 57.0 | % | (19.1  | )%
|                                     |  |                            |    |      |   |        |   

Consolidated
Gross Profit ("Gross Margin") as a percentage of net revenue was 37.9% during the three months ended August 31, 2004, compared to 57.0% in the prior year's comparable
period, representing an absolute percentage point decrease of 19.1%, or a 33.4% decrease on a relative basis.

The
decline in gross profit is primarily attributable to four factors: (1) increased website registration, customer profile and other third party online customer acquisition costs
for our websites

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recognized
in our core business; (2) the continued marketing of new customers in the LEC Billed Products segment, coupled with negative chargeback variances realized in the LEC Billed Products
segment in three months ended August 31, 2004; (3) the Company's shift in reaction to regulatory changes whereby we migrated a portion of our marketing efforts from higher margin email
revenue to lower margin site based revenue; and (4) the gross profit contribution from the SendTraffic.com, Inc. asset acquisition during the period July 1, 2004 (acquisition
date) to August 31, 2004, which was approximately 16% (after consolidation and inter-company profit eliminations), and was significantly less than our core business historically recognized
gross profit. Additionally, the impact on gross profit from our iMatchUp.com dating sites results from the expensing of the costs of customer acquisition during the period we acquire and pay for the
free iMatchUp.com membership account, while the recognition of the revenue is dependent upon whether or not the free account converts to a paying membership. The period that a free account may convert
to a billable account ranges from one week after acquisition, to as long as twenty, or more, months after acquisition, based on available historical experience. Therefore, predicated on stabilized
acquisition costs in future fiscal periods, we expect that the future conversions of free membership acquisitions to billable members, coupled with the revenue deferred for three-month,
six-month and annual memberships at August 31, 2004, as well as the anticipated renewal revenues from such acquired customers, should allow us to report improved gross profit
margins in our E-commerce segment in future fiscal quarters.

Our
Selling Expenses for each of the three months ended August 31, 2004 and August 31, 2003 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 |         |  |   |           | 
|------------------------------------- |  | ----------------------------------- | ------- |  | - | --------- | 
|
|E-commerce                            |  |                                     |         |  |   |           | 
|Fee share commissions                 |  | $                                   | 360,478 |  | $ | 1,066,163 | 
|Selling salaries and related expenses |  |                                     | 165,857 |  |   | 390,451   | 
|Travel and entertainment              |  |                                     | 38,887  |  |   | 23,577    | 
|                                      |  |                                     |         |  |   |           | 
|TOTAL SellingE-commerce segment      |  | $                                   | 565,222 |  | $ | 1,480,191 | 
|                                      |  |                                     |         |  |   |           | 
|Consolidated Totals                   |  | $                                   | 565,222 |  | $ | 1,480,191 | 
|                                      |  |                                     |         |  |   |           | 

Selling
expenses, on a consolidated basis, decreased approximately $0.9 million, or 62%, from $1.5 million during the three months ended August 31, 2003 to
$0.6 million during the three months ended August 31, 2004. The decrease resulted from (a) an approximate $0.7 million decrease in fee share commissions and correlates to
our reduced use of third-party databases in our email marketing
programs (which decrease relates to the alternative use of capital for increased data acquisition and marketing media costs as discussed in the "Cost of Goods Sold" section, above), and
(b) approximately $0.2 million relates to decreases in salaries and related costs resulting from cost-cutting reductions to our sales force undertaken in the quarterly
periods subsequent to August 31, 2003.

Our
general and administrative expenses ("G&A") are principally comprised of (i) compensation costs and related expenses for executive, finance, information technology and
operation systems, and general administration personnel, (ii) professional fees (which include legal; audit, accounting and tax; Sarbanes-Oxley compliance costs; public relations; database
management and consulting; and public company related printing costs), (iii) insurance costs, (iv) occupancy and other equipment rental costs,

28

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(v) site
development, maintenance and modification costs related to our various active segments, and (vi) all other general and miscellaneous corporate expense items.

Our
General and Administrative Expenses for the three months ended August 31, 2004 and August 31, 2003 are presented, on a segmental basis, and with the components of the
individual segments, in the tables set forth below:

Consolidated General and Administrative Expenses, by segment, by component

|                                                |  | Three Months Ended |           |  |   |           | 
|----------------------------------------------- |  | ------------------ | --------- |  | - | --------- | 
|
|E-commerce                                      |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  | 1,059,121 |  | $ | 1,055,881 | 
|Professional fees                               |  |                    | 144,834   |  |   | 283,941   | 
|Insurance costs                                 |  |                    | 146,603   |  |   | 124,480   | 
|Occupancy and equipment costs                   |  |                    | 77,466    |  |   | 85,387    | 
|Site development, maintenance and modifications |  |                    | 343,066   |  |   | 440,507   | 
|Search Engine Marketing Overhead                |  |                    | 240,672   |  |   |          | 
|All other G&A expenses                          |  |                    | 269,946   |  |   | 224,228   | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&AE-commerce segment                    |  | $                  | 2,281,708 |  | $ | 2,214,424 | 
|                                                |  |                    |           |  |   |           | 
|LEC Billed Products and Services                |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  | 56,563    |  | $ | 90,610    | 
|Insurance costs                                 |  |                    | 34,035    |  |   | 10,682    | 
|Occupancy and equipment costs                   |  |                    | 13,509    |  |   | 7,328     | 
|All other G&A expenses                          |  |                    | 7,844     |  |   | 19,242    | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&ALEC segment                           |  | $                  | 111,950   |  | $ | 127,862   | 
|                                                |  |                    |           |  |   |           | 
|Corporate                                       |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  | 512,743   |  | $ | 226,158   | 
|Professional fees                               |  |                    | 306,314   |  |   | 104,622   | 
|Insurance costs                                 |  |                    | 121,577   |  |   | 135,838   | 
|All other G&A expenses                          |  |                    | 149,049   |  |   | 137,837   | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&ACorporate                             |  | $                  | 1,089,683 |  | $ | 604,455   | 
|                                                |  |                    |           |  |   |           | 
|Consolidated Totals                             |  | $                  | 3,483,341 |  | $ | 2,946,741 | 
|                                                |  |                    |           |  |   |           | 

General
and Administrative expenses ("G&A") on a consolidated basis increased approximately $0.5 million, or 18%, when comparing G&A of $3.5 million for the three months
ended August 31, 2004 to G&A of $2.9 million incurred during the three months ended August 31, 2003. The net increase was
attributable to an increase in E-commerce segment ($0.1 million) and Corporate ($0.4 million). The significant increase in E-commerce expenses was attributable to
the operating overhead incurred from the July 1, 2004 acquisition of SendTraffic (specifically, for the period July 1, 2004 to August 31, 2004, the SendTraffic overhead included
compensation costs and related expenses of approximately $224,000; site development, maintenance and modification costs of approximately $13,200, other G&A of approximately $4,000; and amortization
expense of approximately $20,000). The foregoing overhead increases were offset by reduced professional fees related to the Company's core business. Corporate overhead's increase is attributable to
increased compensation costs and increased professional fees, primarily resulting from the costs associated with the Sarbanes-Oxley compliance.

29

---



Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of
actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $342,000 in legal fees
(exclusive of disbursements) from FKIWSBR during the three months ended August 31, 2004. We incurred approximately $95,000 in legal fees (exclusive of disbursements) from FKIWSBR during the
three months ended August 31, 2003.

ConsolidatedBad Debt Expense, by Segment

Three Months EndedAugust 31,
2004

August 31,
2003

CHANGE
INC(DEC)
$$$

CHANGE
INC(DEC)
%%%E-commerce

$
420,041

$
117,382

$
302,659

258
%Consolidated Totals

$
420,041

$
117,382

$
302,659

258
%


Bad
Debt expense increased approximately $0.3, or 258%, from bad debt expense of $117,382 in the three months ended August 31, 2003 to bad debt expense of $420,041 in the three
months ended August 31, 2004. The current quarter's bad debt expense is attributable to one specific customer who accounted for approximately $390,000 (for which the Company is pursuing legal
remedies), coupled with an approximate $30,000 increase in our reserve for other smaller accounts. Our allowance for bad debts results from our assessment of the risk of collection embedded in our
customer base as described below.

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 adjustments to bad debt provisions/(recaptures) to reflect the related receivables' carrying amount to amounts that estimate
their probable realizable value. Provisions for bad debts are also recorded resulting from the review of other factors, including (a) length of time the receivables are past due, and
(b) historical experience and other factors obtained during collection efforts. If circumstances related to specific customers change, our estimates for bad debt provision/(recaptures) could be
further increased or decreased in future fiscal periods.

30

---



OTHER INCOME (EXPENSE)

The components of our "Other income (expense)" for the three months ended August 31, 2004 and August 31, 2003 are set forth below:

Three Months EndedAugust 31,
2004

August 31,
2003

change
inc(dec)
$$$

change
inc(dec)
%%%Other income (expense):Interest income and dividends


137,572


111,723

$
25,849

23
%Realized gains on sale of marketable securities


9,478





9,478

100
%Realized gain on sale of subsidiary


195,000


90,000


105,000

117
%Other non-operating income:Other miscellaneous income(expense)


3,683


(14,845
)

18,528

(125
)%Foreign Currency Exchange Rate Fees and interest


(5,260
)

(3,234
)

(2,026
)
63
%Total Consolidated Other Income (Expense)

$
340,473

$
183,644


156,829

85
%


Consolidated
Other Income (Expense) increased approximately $157,000, from approximately $184,000 for the three months ended August 31, 2003, to approximately $340,000 for the
three months ended August 31, 2004.

The
material factors contributing to the net increase as set forth in the above table are as follows:





Quarterly income taxes are calculated in accordance with the interim financial reporting requirements as set forth in the Accounting Principal Board's Opinion 28.
Such Opinion considers interim quarterly periods as an integral part of the annual period, with interim quarterly tax periods reflecting the estimated annual effective tax rate. We believe that we
have adequately provided for tax-related matters. We are subject to examination by taxing authorities in various jurisdictions. Matters raised upon audit may involve substantial amounts
and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse effect upon our consolidated financial statements.

The
three months ended August 31, 2004 reflects a tax benefit of approximately $131,000 on a pre-tax loss of approximately $255,000. This effective tax rate generated
a tax benefit of 51% of pre-tax income, which differs from our historically recognized effective tax rate of approximately 39%. A portion of the effective tax rate variance is attributable
to tax benefits recognized during the three months ended August 31, 2004, from the use of approximately $0.2 million in previously devalued capital loss carryover deferred tax assets.
Such devalued capital loss deferred tax assets were utilized in the three months ended August 31, 2004 to offset the tax expense on the current period's capital gain income of approximately
$0.2 million.

31

---



NINE MONTHS ENDED AUGUST 31, 2004 AND AUGUST 31, 2003

Our
net revenues, on a segmental basis, and with disclosure of the components of the individual segments, for each of the nine-month periods ended August 31, 2004 and
August 31, 2003, are detailed in the following tables:

SEGMENT DATANET REVENUES, BY SEGMENT, BY COMPONENT

|                                            |  | Nine Months Ended |            |  |   |            | 
|------------------------------------------- |  | ----------------- | ---------- |  | - | ---------- | 
|
|E-Commerce components                       |  |                   |            |  |   |            | 
|iMatchUp.com dating sites                   |  | $                 | 4,704,169  |  | $ | 2,539,047  | 
|GroupLotto.com and other web sites          |  |                   | 12,502,700 |  |   | 8,774,943  | 
|Net branch commission fees                  |  |                   |           |  |   | 355,981    | 
|Search Engine Marketing revenue             |  |                   | 862,585    |  |   |           | 
|Email marketing programs                    |  |                   | 4,841,729  |  |   | 6,597,581  | 
|Data sales and rentals                      |  |                   | 1,143,201  |  |   | 1,715,364  | 
|Sales of jewelry and gifts                  |  |                   | 243,512    |  |   | 771,637    | 
|Internet game development and other         |  |                   | 561,877    |  |   | 959,291    | 
|                                            |  |                   |            |  |   |            | 
|Total E-commerce                            |  |                   | 24,859,773 |  |   | 21,713,844 | 
|                                            |  |                   |            |  |   |            | 
|Off-line Marketing Service components       |  |                   |            |  |   |            | 
|Net branch commission fees                  |  |                   |           |  |   | 2,017,225  | 
|                                            |  |                   |            |  |   |            | 
|Total Off-line Marketing Service            |  |                   |           |  |   | 2,017,225  | 
|                                            |  |                   |            |  |   |            | 
|LEC Billed Products and Services components |  |                   |            |  |   |            | 
|Click-Help, WWA and TXNet LEC Products      |  |                   | 1,658,924  |  |   | 1,312,031  | 
|                                            |  |                   |            |  |   |            | 
|Total LEC Billed Products and Services      |  |                   | 1,658,924  |  |   | 1,312,031  | 
|                                            |  |                   |            |  |   |            | 
|Total Consolidated Net Revenue              |  | $                 | 26,518,697 |  | $ | 25,043,100 | 
|                                            |  |                   |            |  |   |            | 

Net
Revenue increased approximately $1.5 million, or 6%, to $26.5 million for the nine months ended August 31, 2004, from $25.0 million in the comparable
prior year period. E-commerce segment revenue had a net increase of approximately $2.3 million on a comparative basis with the prior year's comparable period, with the total
increase in E-commerce revenue of $3.1 million including $0.9 million in revenue earned from our July 1, 2004 acquisition of the assets of a search engine marketing
business, SendTraffic. Net revenue in our LEC Billed Product segment increased $0.3 million, to $1.7 million, resulting from increased marketing and enrollment into our various LEC
products when compared to approximately $1.3 million in revenue for the prior year's comparable period. Offsetting the foregoing revenue increases was a decline in net revenue that resulted
from the sale of our majority-owned subsidiary (Montvale Management, LLC) during the quarter ended May 31, 2003. Such subsidiary accounted for approximately $2.0 million, or 8% of our
Off-line Marketing Service segment revenue during the nine months ended August 31, 2003. Our E-commerce segment's net revenue included approximately $0.4 million
in online revenue earned by Montvale in Fiscal 2003. In total, Montvale accounted for $2.4 million, or 9.5%, of revenue during the nine-month period ended August 31, 2003.

Our
cost of sales during the nine months ended August 31, 2004 and August 31, 2003 were comprised of (1) direct and indirect marketing costs associated with the
acquisition and retention of consumers for our marketing programs, including direct response email marketing costs, website registrations, customer profiles, other customer acquisition costs (such as
outbound telemarketing),

32

---



promotional
and creative costs, and premium fulfillment costs, and (2) the related contingent-based sweepstakes indemnification expense, billing and collection fees and customer service costs.

Our
cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the nine-month periods ended August 31, 2004 and
August 31, 2003 are set forth below:

Consolidated Cost of Sales, by Segment, by Component

|                                               |                                        | Nine Months Ended |           |            |   |           |          
|---------------------------------------------- | -------------------------------------- | ----------------- | --------- | ---------- | - | --------- | ---------
|
|E-commerce                                     |                                        |                   |           |            |   |           |          
|Advertising, promotion and fulfillment costs   |                                        |                   |           |            |   |           |          
|Email marketing and related delivery costs     |                                        | $                 | 2,974,381 |            | $ | 3,606,802 |          
|Data and profile purchases, and premium costs  |                                        |                   | 9,252,713 |            |   | 4,619,059 |          
|Promotional, creative and other costs          |                                        |                   | 210,293   |            |   | 285,765   |          
|Search Engine Marketing Costs of Revenue       |                                        |                   | 727,042   |            |   |          |          
|                                               |                                        |                   |           |            |   |           |          
|                                               | Total E-commerce Advertising           |                   | $         | 13,164,429 |   | $         | 8,511,626
|                                               |                                        |                   |           |            |   |           |          
|Service Bureau fees                            |                                        |                   |           |            |   |           |          
|Contingent based prize indemnification costs   |                                        | $                 | 237,091   |            | $ | 371,730   |          
|                                               |                                        |                   |           |            |   |           |          
|                                               | Total E-commerce Cost of Sales         |                   | $         | 13,401,520 |   | $         | 8,883,356
|                                               |                                        |                   |           |            |   |           |          
|Off-line Marketing Services                    |                                        |                   |           |            |   |           |          
|Advertising, promotion and fulfillment costs   |                                        |                   |           |            |   |           |          
|Telemarketing, direct mail and related costs   |                                        | $                 |          |            | $ | 261,786   |          
|                                               |                                        |                   |           |            |   |           |          
|                                               | Total Off-line Marketing Cost of Sales |                   | $         |           |   | $         | 261,786  
|                                               |                                        |                   |           |            |   |           |          
|LEC Billed Products and Services               |                                        |                   |           |            |   |           |          
|Service Bureau fees                            |                                        |                   |           |            |   |           |          
|Service provision, billing and collection fees |                                        | $                 | 1,876,843 |            | $ | 718,498   |          
|                                               |                                        |                   |           |            |   |           |          
|                                               | Total LEC Billed Cost of Sales         |                   | $         | 1,876,843  |   | $         | 718,498  
|                                               |                                        |                   |           |            |   |           |          
|                                               | Consolidated Cost of Sales             |                   | $         | 15,278,363 |   | $         | 9,863,640
|                                               |                                        |                   |           |            |   |           |          

Cost
of sales on a consolidated basis increased $5.4 million, or 55%, to $15.3 million for the nine months ended August 31, 2004 from $9.9 million in the
comparable prior year period.

The
primary factor contributing to the increase in consolidated cost of sales was related to a net increase of approximately $4.5 million in costs incurred by our
E-commerce segment in the generation of its increased revenues. This E-commerce segment cost increase is attributable to two factors: (1) a net increase in costs of
approximately $3.8 million from our core revenue-generating activities; and (2) the inclusion of the cost of revenue generation from our July 1, 2004 acquisition of SendTraffic,
with such cost of revenue accounting for $0.7 million, or 5.0% of consolidated cost of sales during the nine months ended August 31, 2004.

The
E-commerce segment net increase in the cost of sales from our core revenue generating activities resulted from: an increase of approximately $4.6 million in costs
incurred for website registrations, customer profiles and other costs of online customer acquisitions, all necessary to support our increased E-commerce revenue generation, as discussed
above; offset by (1) a decrease in email marketing costs of approximately $0.6 million, related to our decreased use of third party email vendors in the promotion of our email revenue
generating opportunities pursuant to declines in margin resulting from the ISP's increasing their filtering of commercial email messages, regardless of whether the email is permission-based; and
(2) a decrease in contingent prize indemnification costs of

33

---



approximately
$0.1 million, attributable to a reduction in the size of the sweepstakes prizes, and the related impact on indemnification pricing. Also, see "Consolidated Gross Profit, by
Segment" for a discussion of anticipated future revenue recognition as a result of current period costs incurred.

Other
increases in cost of sales related to our LEC Billed Product segment, which amounted to approximately $1.1 million, or an increase of 161%, when compared to the prior year's
comparable period. During the nine months ended August 31, 2004, the Company incurred a significant increase in marketing expenditures due to the test marketing of using outbound telemarketing
for customer acquisition for this segment. Such marketing expenditures amounted to approximately $0.7 million during the nine months ended August 31, 2004. Management believes that this
marketing has established recurring billed customers that will generate revenues unencumbered by additional marketing costs in future fiscal quarters. The Company currently does not intend to continue
using outbound telemarketing for this business line in future periods, but does intend to apply the results of this test marketing to market other products and services through this outbound
telemarketing channel. In addition, the Company experienced an increase in costs of sales due to higher levels of customer service costs on our existing LEC Billed Products customer base.

Our
gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the nine-month periods ended August 31,
2004 and 2003, are set forth below:

CONSOLIDATED GROSS PROFIT, BY SEGMENT

|                                 |  | Nine Months Ended |            |   |   |            | 
|-------------------------------- |  | ----------------- | ---------- | - | - | ---------- | 
|
|E-commerce                       |  | $                 | 11,458,253 |   | $ | 12,830,488 | 
|Off-line Marketing services      |  |                   |           |   |   | 1,755,439  | 
|LEC Billed products and services |  |                   | (217,919   | ) |   | 593,533    | 
|                                 |  |                   |            |   |   |            | 
|CONSOLIDATED TOTALS              |  | $                 | 11,240,334 |   | $ | 15,179,460 | 
|                                 |  |                   |            |   |   |            | 

CONSOLIDATED GROSS PROFIT PERCENTAGES, BY SEGMENT

|                                     |  | Nine Months Ended |    |      |   |       |   
|------------------------------------ |  | ----------------- | -- | ---- | - | ----- | --
|
|
|E-commerce                           |  | 46.1              | %  | 59.1 | % | (13.0 | )%
|Off-line Marketing services          |  | 0.0               | %  | 87.0 | % | (87.0 | )%
|LEC Billed products and services     |  | (13.1             | )% | 45.2 | % | (58.3 | )%
|                                     |  |                   |    |      |   |       |   
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 42.4              | %  | 60.6 | % | (18.2 | )%
|                                     |  |                   |    |      |   |       |   

Consolidated
Gross Profit ("Gross Margin") as a percentage of net revenue was 42.4% during the nine months ended August 31, 2004, compared to 60.6% in the prior year's comparable
period, representing an absolute percentage point decrease of 18.2%, or a 30.1% decrease on a relative basis.

The
decline in gross profit is primarily attributable to four factors: (1) increased website registration, customer profile and other third party online customer acquisition costs
for our websites recognized in our core business; (2) the continued marketing of new customers in the LEC Billed Products segment, coupled with increased chargeback experience realized in the
LEC Billed Products segment in nine months ended August 31, 2004; (3) the Company's shift in reaction to regulatory changes whereby we migrated a portion of our marketing efforts from
higher margin email revenue to lower margin site based revenue; and (4) the gross profit contribution from the SendTraffic.com, Inc.

34

---



asset
acquisition during the period July 1, 2004 (acquisition date) to August 31, 2004, which was approximately 16% (after consolidation and inter-company profit eliminations), and was
significantly less than our core business historically recognized gross profit. Additionally, the impact on gross profit from our iMatchUp.com dating sites results from the expensing of the costs of
customer acquisition during the period we acquire and expense the free iMatchUp.com membership account, while the recognition of the revenue is dependent upon whether or not the free account converts
to a paying membership. The period that a free account may convert to a billable account ranges from one week after acquisition, to as long as twenty, or more, months after acquisition, based on
available historical experience. Therefore, predicated on stabilized acquisition costs in future fiscal periods, we expect that the future conversions of free membership acquisitions to billable
members, coupled with the revenue deferred for three-month, six-month and annual memberships at August 31, 2004, as well as the anticipated renewal revenues from such acquired
customers, should allow us to report improved gross profit margins in our E-commerce segment in future fiscal quarters.

Our
Selling Expenses for each of the nine months ended August 31, 2004 and August 31, 2003 are presented, on a segmental basis, and with the components of the individual
segments, in the tables set forth below:

Segment DataConsolidated Selling Expenses, by Segment, by Component

|                                      |  | Nine Months Ended |           |  |   |           | 
|------------------------------------- |  | ----------------- | --------- |  | - | --------- | 
|
|E-commerce                            |  |                   |           |  |   |           | 
|Fee share commissions                 |  | $                 | 868,694   |  | $ | 3,457,055 | 
|                                      |  |                   |           |  |   |           | 
|Selling salaries and related expenses |  |                   | 553,549   |  |   | 1,162,379 | 
|                                      |  |                   |          |  |   |          | 
|Travel and entertainment              |  |                   | 106,067   |  |   | 111,564   | 
|                                      |  |                   |           |  |   |           | 
|TOTAL SellingE-commerce segment      |  | $                 | 1,528,310 |  | $ | 4,730,998 | 
|                                      |  |                   |           |  |   |           | 
|Off-line Marketing Services           |  |                   |           |  |   |           | 
|Fee share commissions                 |  | $                 |          |  | $ |          | 
|Other commissions                     |  |                   |          |  |   |          | 
|Selling salaries and related expenses |  |                   |          |  |   | 796,014   | 
|Occupancy and equipment costs         |  |                   |          |  |   | 45,623    | 
|Travel and entertainment              |  |                   |          |  |   | 5,005     | 
|                                      |  |                   |           |  |   |           | 
|TOTAL SellingOff-line segment        |  | $                 |          |  | $ | 846,642   | 
|                                      |  |                   |           |  |   |           | 
|Consolidated Totals                   |  | $                 | 1,528,310 |  | $ | 5,577,640 | 
|                                      |  |                   |           |  |   |           | 

Selling
expenses, on a consolidated basis, decreased approximately $4.0 million, or 73%, from $5.5 million during the nine months ended August 31, 2003 to
$1.5 million during the nine months ended August 31, 2004. The decrease was primarily related to an approximate $3.2 million reduction in E-commerce segment selling
expenses, of which (a) approximately $2.6 million relates to a decrease in fee share commissions and correlates to our reduced use of third-party databases in the promotion of our email
services (which decrease relates to the alternative use of capital for website registration, customer profile and other online customer acquisition costs as discussed in the "Cost of Goods Sold"
section, above), and (b) approximately $0.6 million relates to decreases in salaries and related costs resulting from cost-cutting reductions to our sales force undertaken in
the third and fourth quarters of Fiscal 2003.

35

---



Additionally, a portion of the decrease, or $0.8 million, resulted from the sale of our majority-owned subsidiary, Montvale Management, LLC, in March 2003.

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

Our
General and Administrative Expenses for the nine months ended August 31, 2004 and August 31, 2003 are presented, on a segmental basis, and with the components of the
individual segments, in the tables set forth below:

|                                                |  | Nine Months Ended |           |  |   |            | 
|----------------------------------------------- |  | ----------------- | --------- |  | - | ---------- | 
|
|E-commerce                                      |  |                   |           |  |   |            | 
|Compensation costs and related expenses         |  | $                 | 2,925,928 |  | $ | 3,126,773  | 
|Professional fees                               |  |                   | 661,271   |  |   | 1,043,277  | 
|Insurance costs                                 |  |                   | 425,244   |  |   | 382,761    | 
|Occupancy and equipment costs                   |  |                   | 200,814   |  |   | 244,269    | 
|Site development, maintenance and modifications |  |                   | 1,039,555 |  |   | 1,247,365  | 
|Search Engine Marketing Overhead                |  |                   | 240,672   |  |   |           | 
|All other G&A expenses                          |  |                   | 753,682   |  |   | 996,480    | 
|                                                |  |                   |           |  |   |            | 
|TOTAL G&AE-commerce segment                    |  | $                 | 6,247,166 |  | $ | 7,040,925  | 
|                                                |  |                   |           |  |   |            | 
|Off-line Marketing Services                     |  |                   |           |  |   |            | 
|Compensation costs and related expenses         |  | $                 |          |  | $ |           | 
|Professional fees                               |  |                   |          |  |   | 21,229     | 
|All other G&A expenses                          |  |                   |          |  |   | 691,351    | 
|                                                |  |                   |           |  |   |            | 
|TOTAL G&AOff-line segment                      |  | $                 |          |  | $ | 712,580    | 
|                                                |  |                   |           |  |   |            | 
|LEC Billed Products and Services                |  |                   |           |  |   |            | 
|Compensation costs and related expenses         |  | $                 | 169,687   |  | $ | 268,325    | 
|Professional fees                               |  |                   | 70,809    |  |   | 32,847     | 
|Insurance costs                                 |  |                   | 41,195    |  |   | 20,962     | 
|All other G&A expenses                          |  |                   | 21,996    |  |   | 85,513     | 
|                                                |  |                   |           |  |   |            | 
|TOTAL G&ALEC segment                           |  | $                 | 303,687   |  | $ | 407,647    | 
|                                                |  |                   |           |  |   |            | 
|Corporate                                       |  |                   |           |  |   |            | 
|Compensation costs and related expenses         |  | $                 | 1,513,970 |  | $ | 1,586,426  | 
|Professional fees                               |  |                   | 637,282   |  |   | 524,065    | 
|Insurance costs                                 |  |                   | 370,755   |  |   | 410,608    | 
|All other G&A expenses                          |  |                   | 417,918   |  |   | 449,231    | 
|                                                |  |                   |           |  |   |            | 
|TOTAL G&ACorporate                             |  | $                 | 2,939,925 |  | $ | 2,970,330  | 
|                                                |  |                   |           |  |   |            | 
|Consolidated Totals                             |  | $                 | 9,490,778 |  | $ | 11,131,482 | 
|                                                |  |                   |           |  |   |            | 

General
and Administrative expenses ("G&A") on a consolidated basis decreased approximately $1.6 million, or 15%, when comparing G&A of $11.1 million for the nine months
ended August 31,

36

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2003
to G&A of $9.5 million incurred during the nine months ended August 31, 2004. The significant portion of the net decrease was attributable to decreases in our:
(a) Off-line Marketing Service segment ($0.7 million) pursuant to our disposition of our majority-owned subsidiary (Montvale Management, LLC) in March 2003; and
(b) E-commerce segment ($0.8 million), relating to reductions in: (i) compensation costs pursuant to cost cutting reductions to our workforce undertaken in the third
and fourth quarters of Fiscal 2003, (ii) professional fees reflecting reduced requirements for litigation defense, and (iii) other expenses primarily reflecting the benefit of general
cost reduction efforts undertaken in the third and fourth quarters of Fiscal 2003. Additionally, the nine-month period ended August 31, 2004, included approximately $261,000 of
overhead related to SendTraffic, which was acquired on July 1, 2004. Specifically, for the period July 1, 2004 to August 31, 2004, the SendTraffic overhead included compensation
costs and related expenses of approximately $224,000; site development, maintenance and modification costs of approximately $13,200, other G&A of approximately $4,000; and amortization expense of
approximately $20,000.

Feder,
Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of
actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $638,000 in legal fees
(exclusive of disbursements) from FKIWSBR during the nine months ended August 31, 2004. We incurred approximately $596,000 in legal fees (exclusive of disbursements) from FKIWSBR during the
nine months ended August 31, 2003.

ConsolidatedBad Debt Expense, by Segment

|                    |  | Nine Months Ended |         |  |   |         | 
|------------------- |  | ----------------- | ------- |  | - | ------- | 
|
|E-commerce          |  | $                 | 307,928 |  | $ | 607,430 | 
|                    |  |                   |         |  |   |         | 
|Consolidated Totals |  | $                 | 307,928 |  | $ | 607,430 | 
|                    |  |                   |         |  |   |         | 

Bad
Debt expense decreased approximately $0.3, or 49%, to bad debt expense of $0.3 million in the nine months ended August 31, 2004, as compared to bad debt expense of
$0.6 million in the nine months ended August 31, 2003. The nine-months period ended August 31, 2004 bad debt expense is attributable to one specific customer who
accounted for approximately $390,000 of bad debt, coupled with an approximate $83,000 decrease in our reserve for smaller accounts. The nine-months period ended August 31, 2003 bad
debt expense was attributable to one specific customer who accounted for approximately $622,000 of bad debt, coupled with an approximate $15,000 decrease in our general reserve. Our allowance for bad
debts results from our assessment of the risk of collection embedded in our customer base as described below.

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 adjustments to bad debt provisions/(recaptures) to reflect the related receivables' carrying amount to amounts that estimate
their probable realizable value. Provisions for bad debts are also recorded resulting from the review of other factors, including (a) length of time the receivables are past due, and
(b) historical experience and other factors obtained during collection efforts. If circumstances related to specific customers change, our estimates for bad debt provision/(recaptures) could be
further increased or decreased in future fiscal periods.

37

---



OTHER INCOME (EXPENSE)

The components of our "Other income (expense)" for the nine months ended August 31, 2004 and August 31, 2003 are set forth below:

|                                                |                                                  | Nine Months Ended |           |         |   |           |        
|----------------------------------------------- | ------------------------------------------------ | ----------------- | --------- | ------- | - | --------- | -------
|
|Other income (expense):                         |                                                  |                   |           |         |   |           |        
|Interest income and dividends                   |                                                  | $                 | 360,293   |         | $ | 377,779   |        
|Realized gains on sale of marketable securities |                                                  |                   | 32,148    |         |   | 4,068     |        
|Realized gain on sale of subsidiary             |                                                  |                   | 589,900   |         |   | 1,165,000 |        
|Other non-operating income:                     |                                                  |                   |           |         |   |           |        
|                                                | Other miscellaneous income(expense)              |                   |           | 13,604  |   |           | (61,283
|                                                | Vendor settlement on prior year marketing fee    |                   |           | 350,000 |   |           |       
|                                                | Foreign Currency Exchange Rate Fees and interest |                   |           | (12,685 | ) |           | (18,425
|                                                | Interest and penaltiesFlorida tax settlement    |                   |           | (47,790 | ) |           |       
|                                                | Reduction of prior year's LEC reserve            |                   |           | 34,181  |   |           |       
|Minority interest (income) loss                 |                                                  |                   |          |         |   | (137,567  | )      
|                                                |                                                  |                   |           |         |   |           |        
|Total Consolidated Other Income (Expense)       |                                                  | $                 | 1,319,651 |         | $ | 1,329,572 |        
|                                                |                                                  |                   |           |         |   |           |        

Consolidated
Other Income (Expense) decreased approximately $10,000, when comparing the nine months ended August 31, 2003, to nine months ended August 31, 2004.

The
material offsetting factors contributing to the net decrease, in their order of magnitude, as set forth in the above table, are as follows:



PROVISION FOR INCOME TAXES

Quarterly income taxes are calculated in accordance with the Interim Financial Reporting requirements as set forth in the Accounting Principal Board's Opinion 28.
Such Opinion considers interim quarterly periods as an integral part of the annual period, with interim quarterly tax periods

38

---



reflecting
the estimated annual effective tax rate. We believe that we have adequately provided for tax-related matters. We are subject to examination by taxing authorities in various
jurisdictions. Matters raised upon audit may involve substantial amounts and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse
effect upon our consolidated financial statements.

The
nine months ended August 31, 2004 reflects a tax expense of approximately $340,000 on pre-tax income of $1,232,969. This effective tax rate of 27% differs from our
historically recognized effective tax rate of approximately 39%. We recognized tax benefits from the use of
approximately $0.6 million in previously devalued capital loss carryover deferred tax assets. Such prior year devalued capital loss deferred tax assets were utilized in the nine months ended
August 31, 2004 to offset the tax expense on the current period's capital gain income of approximately $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2004, aggregate working capital declined to $34.9 million compared to aggregate working capital of $38.2 million as of
November 30, 2003. We had available cash, cash equivalents and readily available marketable debt securities of $34.4 million as of August 31, 2004, compared to available cash,
cash equivalents and readily available marketable debt securities of $36.7 million as of November 30, 2003. The equity component of our marketable securities was $1.8 million at
August 31, 2004, compared to $1.6 million at November 30, 2003.

Cash
provided by operating activities was approximately $2.4 million for the nine months ended August 31, 2004, compared to approximately $0.6 million in cash
provided by operating activities in the nine months ended August 31, 2003, representing an approximate $1.8 million increase in cash provided by operating activities. The primary factor
giving rise to the increase in cash provided by operating activities relates to net income of $0.9 million earned during the nine months ended August 31, 2004, when compared to a net
loss of $0.5 million incurred during the prior year's comparable period.

Cash
used in investing activities was approximately $5.5 million during the nine months ended August 31, 2004, compared to $14.0 million used in financing activities
during the prior year's comparable quarter. The primary use of cash in investing activities in the nine months ended August 31, 2004, related to net cash of approximately $3.5 million
expended in the SendTraffic asset acquisition on July 1, 2004. Additionally, cash was expended in the acquisition of short-term marketable debt securities purchased for us by our
professional money managers amounting to approximately $2.5 million, and approximately $205,000 paid for capital expenditures and an intangible license asset, with both being offset by the
collection of approximately $0.6 million on installments from the prior year's sale of one of our subsidiaries. The prior year's comparable period used cash of approximately
$14.0 million, approximately $13.9 million of which was used for the acquisition of short-term marketable debt securities purchased for us by our professional money managers;
approximately $1.2 million was provided from proceeds received from the sale of a subsidiary; and approximately $1.3 million was used for capital expenditures payments.

Cash
used for financing activities was approximately $1.6 million for the nine months ended August 31, 2004, compared to $1.0 million used by financing activities
for the nine months ended August 31, 2003. During the nine months ended August 31, 2004 we declared and paid three quarterly dividends, amounting to approximately $3.2 million and
offset such outflows with approximately $1.6 million in proceeds from stock options exercised. During the nine month period ended August 31, 2003, we had used approximately
$1.0 million in payment of our initial dividend declaration, and offset such outflow of cash by inflows of approximately $52,000 in proceeds from stock option exercises.

Our
days-sales-outstanding ("DSO") in accounts receivable at August 31, 2004 was 55 days, compared to 60 days at May 31, 2004, 52 days at
February 29, 2004, 46 days at November 30, 2003, and 49 days at August 31, 2003. The decrease in the current quarter's DSO compared to the second quarter

39

---



of
the current fiscal year relates to the reductions in the LEC segment accounts receivable, when comparing August 31, 2004 ($1.1 million) LEC accounts receivable to May 31, 2004
($1.4 million). The collection cycles attributable to our LEC Billed Products segment activities are longer than that which is recognized in our client billed business. Our DSO may rise above
55 days in future fiscal periods primarily in the event of growth in revenues from the Company's LEC Billed Products segment, and other potential factors not currently identifiable.

The
majority of our customers are extended 30-day credit terms. In limited instances, customer credit is extended to ranges approximating 90 days. Our LEC Billed
Products segment collection cycle is a function of the terms of the billing and collection agreements governing such activity, these collection cycles can exceed 90 days. We continually monitor
customer adherence to their credit terms and constantly strive to improve the effectiveness of our collection efforts with the goal of achieving a DSO in the 40-day range. Future fiscal
periods might not reflect this goal of a 40-day DSO, and might exceed the 55-day DSO recognized in the nine-month period ended August 31, 2004.

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

In
Fiscal 2000, we executed our on-line direct marketing strategy. Our future plans and business strategy may continue to call for our Internet-based E-commerce
segment to be our primary operating focus, with such segment generating the material portion of our revenues for the three and nine-month periods ended August 31, 2004. In Fiscal
2002 and 2003 we expended approximately $1.9 and $1.5 million, respectively, for capital expenditures to support our E-commerce business. In the first nine months of Fiscal 2004,
capital expenditures have declined to less than $100,000 as a result of the prior two- year's of capital expenditures, which yielded excess capacity. The Company believes that its current
infrastructure is adequate to support its E-commerce growth plan, and therefore does not contemplate significant capital expenditure requirements in the near future.

We
may, in future fiscal periods, be required to invest significant amounts of capital into our business. If the Company's operations fail to generate sufficient revenue, we could
realize a material adverse impact on our capital and liquidity resources resulting from expenditures necessary to generate such
revenue, including, but not limited to, expenditures for (a) marketing campaigns, including media costs and other costs of customer acquisition information, (b) product development
costs, (c) site development and maintenance and related technology based costs, (d) potential on-line, and/or off-line, business acquisitions, (e) costs
associated with developing alternative means of email promotion delivery, or (f) other unexpected and/or currently unidentifiable costs.

On
June 30, 2004, we consummated the acquisition of the assets of SendTraffic.com, Inc. ("Send") and its affiliated entity, The Traffic Group, LLC, ("TG"), privately held
search engine marketing companies based in New York. The Company purchased the assets for approximately $5.0 million, comprised of $3.5 million in cash and 233,941 shares of Traffix
common stock. The asset acquisition agreement calls for contingent earn-out payments based on the post closing attainment of certain earnings before interest, taxes, depreciation and
amortization (EBITDA) thresholds during the thirty-six month period following the transaction.

On
April 1, 2004, we announced that we had acquired an exclusive license for an operating platform created by LiveOnTheNet.com, Inc. (LOTN), a privately held company. We
had announced in February 2004 that we had entered into an agreement to acquire all of the assets of LOTN. The asset acquisition plans were discarded in favor of a license agreement resulting
from our final stages of due diligence. The license agreement calls for a total payment of $200,000. A down payment of $50,000 was made at the time of signing the license, and installments of $15,000
were required on the ten monthly

40

---



anniversary
dates following the signing. As of August 31, 2004, four $15,000 installments have been made in accordance with the terms of the license agreement.

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

In
May 2003, we received approximately $299,000, representing our GAAP basis capital account in such majority-owned subsidiary as at November 30, 2002, pursuant to the
terms of the agreement. We also entered into a two-year Media Purchase Agreement whereby we agreed to provide certain media lead generation and related services to the continuing owners of
Montvale for consideration of $40,000 per month over the term of the agreement. As of October 1, 2004, we have collected the requisite fifteen payments, for a total of $600,000.

In
the fiscal year ended November 30, 1999, the adoption of our Internet business plan and strategy prompted us to terminate the marketing of our legacy products and services,
which were active at that time. Accordingly, this legacy activity has contributed, in a significantly decreasing degree, to our cash flows and results of operations for the three-year
fiscal period, December 1, 1999 to November 30, 2002, and did not contribute at all to the operations of Fiscal 2003 and the first nine months of Fiscal 2004. This should be considered
when using our historical results in evaluating future operations, cash flows and financial position. Nevertheless, we will continue to explore opportunities to offer other Off-line
marketing services, and expect to continue the expansion of our activities within our LEC Billed Products segment.

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

Additionally,
as we seek to further extend our reach into the E-commerce and LEC Billed Product arenas, as well as identifying new and other consumer oriented products and
services in the off-line arena, we may use existing cash reserves, enter into long-term financing arrangements, acquire the assets of privately held companies, or employ other
means to finance such diversification, none of which is specifically identifiable or measurable at this time.



We are not aware of any specific factors, outside of those described in the following table, and those "potential factors" described in the "Critical Accounting
Policy and Accounting Estimate Discussion" which is set forth below, that are reasonably likely to cause a material impact, either positive or negative, on our liquidity trends. Additionally, we do
not have off-balance sheet arrangements, other than those described in the following table, and do not engage in trading activities involving non-exchange traded contracts.

41

---



A summary table of future contractual commitments, for future minimum lease payments under non-cancelable operating leases and employment contracts, and other contractually
binding agreements, as of August 31, 2004, are set forth below:

|           |  |   |           |  |   |         |  |   |           |  |   | Total Contractual
Obligations
|---------- |  | - | --------- |  | - | ------- |  | - | --------- |  | - | -----------------------------
|
|
|
|2004       |  | $ | 375,625   |  | $ | 73,530  |  | $ | 1,630,333 |  | $ | 250,646                      
|2005       |  |   | 367,500   |  |   | 30,638  |  |   | 362,850   |  |   | 273,431                      
|2006       |  |   | 260,000   |  |   |        |  |   | 350,000   |  |   | 296,217                      
|2007       |  |   | 45,000    |  |   |         |  |   | 391,667   |  |   | 3,746                        
|Thereafter |  |   | 22,500    |  |   |         |  |   | 762,500   |  |   |                             
|           |  |   |           |  |   |         |  |   |           |  |   |                              
|           |  | $ | 1,070,625 |  | $ | 104,168 |  | $ | 3,497,350 |  | $ | 824,040                      
|           |  |   |           |  |   |         |  |   |           |  |   |                              



Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation
services in defense of actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. FKIWSBR legal services are
billed on an arms length transaction basis. We incurred approximately $638,000 in legal fees (exclusive of disbursements) from FKIWSBR during the nine months ended August 31, 2004. We incurred
approximately $596,000 in legal fees (exclusive of disbursements) from FKIWSBR during the nine months ended August 31, 2003.

TRANSACTIONS WITH MAJOR CUSTOMERS

During the three and nine-month periods ended August 31, 2004, we had one customer in our E-commerce segment accounting for
approximately $0.9 million and $2.9 million, or 8.5% and 11.0% of consolidated net revenue, respectively. Approximately $0.2 million, or 3.8% of consolidated net accounts
receivable, was attributable to such major customer as of August 31, 2004. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 7.1% of
consolidated net revenues for the three and nine-month periods
ended August 31, 2004. During the three-month period ended August 31, 2003, we had one customer in our E-commerce segment accounting for approximately $1.0 million, or
12% of consolidated net revenues during such period. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 9% of consolidated net revenues for the
three and nine-month periods ended August 31, 2003.

In
the nine months ended August 31, 2004, 24.0% of the Company's revenue was derived from its proprietary products: 17.7% from iMatchUp.com, the Company's online dating sites, and
6.3% from its LEC segment's proprietary products.

CRITICAL ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION

We have set forth below what we believe to be the most pervasive accounting policies and estimates that could have a material effect on our Company's results of
operations and cash flows, if general business conditions or individual customer financial circumstances change in an adverse way relative to the policies and estimates used in the attached financial
statements or in any "forward looking" statements contained herewith.

42

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FACTORS THAT COULD EFFECT FUTURE RESULTS

Continuation of trend relative to decreasing revenues and increasing overhead

The following chart and subsequent discussion provide the details of a known trend in revenue deterioration for the trend period June 1, 2002 through
August 31, 2004, and the effect of the potential continuation of such trend. Our quarterly net revenues for the prior nine quarterly periods are set forth in the table below:

Quarterly period ended

net revenue

% change
from previous
quarterAugust 31, 2002

10,664,246

(1.30
)%(1)November 30, 2002

10,203,244

(4.32
)%(1)February 28, 2003

9,117,229

(10.64
)%(1)May 31, 2003

7,422,604

(18.59
)%(1)August 31, 2003

8,503,267

14.56
%November 30, 2003

7,345,752

(13.61
)%February 29, 2004

7,170,294

(2.39
)%May 31, 2004

9,139,855

24.42
%August 31, 2004

10,208,548

11.69
%(2)


---

Quarterly period endedAugust 31, 2002

$
1,876,069November 30, 2002


1,941,270February 28, 2003


2,211,731May 31, 2003 (activity sold in March 2003)


161,475




Quarterly period endedAugust 31, 2003

$
November 30, 2003


February 29, 2004


May 31, 2004


August 31, 2004


862,585


43

---



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

Quarterly period ended

Selling
expense

G&A
expense

Bad Debt
expense

Total
OverheadAugust 31, 2002

3,133,682

3,665,681

48,941

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

2,799,663

4,057,299

106,428

6,963,390
(1)February 28, 2003

2,319,559

4,206,037

336,188

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

1,777,890

3,978,704

153,860

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

1,480,191

2,946,741

117,382

4,544,314November 30, 2003

918,284

2,515,042

(31,080
)
3,402,246February 29, 2004

447,930

2,859,577

(46,457
)
3,261,050May 31, 2004

515,158

3,147,860

(65,656
)
3,597,362August 31, 2004

565,222

3,483,341

420,041

4,468,604
(2)


---

Quarterly period endedAugust 31, 2002

1,150,917November 30, 2002

1,233,823February 28, 2003

1,525,615May 31, 2003 (activity was sold in March 2003)

33,607




Quarterly period endedAugust 31, 2003

$
November 30, 2003


February 29, 2004


May 31, 2004


August 31, 2004


261,000


Should
the trend of quarterly decreases in net revenue, as recognized prior to the quarter ended May 31, 2004, occur in future quarterly fiscal periods, and the corresponding
overhead environment remain stable, or be subject to increases recognized when comparing the three months ended August 31, 2004 with the three months ended May 31, 2004, or be subject to
other increases necessary to generate revenues, our liquidity trends and our capital resources could be adversely affected.

Revenue Recognition, Variable Costs and Bad Debts

We currently earn the most significant portion of our revenue from the E-commerce segment pursuant to marketing agreements with marketing partners and
corporate customers. The provisions of each agreement determine the type and timing of revenue to be recorded. We invoice our customers in accordance with the terms of the underlying agreement.
Revenue is recognized at the time the marketing activity is delivered, or service is provided, net of estimated contractually specified data qualification allowances, when applicable. Such data
qualification allowances may include duplications,

44

---



invalid
addresses, and age restrictions, and are recorded as contra-revenue. Our revenues are adjusted in later fiscal periods if actual allowances vary from amounts previously estimated.
Historically, the variance between actual allowances and previously estimated allowances has been immaterial. If events were to occur that would cause actual allowances (which are recorded as offsets
against gross revenue, as contra-revenues, in arriving at reported net revenue) to vary significantly from those originally estimated and reflected in the financial statements, we could suffer
material deterioration in future fiscal period gross margins, and, therefore, our profitability, cash flows and capital resources could be adversely affected.

Certain
revenue related obligations are recorded at the time revenue is recognized. They include costs payable to other on-line, as well as off-line, media
companies for generating registered users and consumer data for us, database fee sharing costs under third-party database use agreements, email message delivery costs, contingent-based prize
indemnification coverage (i.e., sweepstakes payout indemnification), estimated premium fulfillment costs related to the respective promotion (if applicable) and all other variable costs directly
associated with completing our obligations relative to the revenue being recognized. Our actual premium fulfillment estimates have varied from that which were accrued at the time of recording the
related revenue. This is deemed a change in management's estimate, and we take the additional cost, or benefit, on the accrual adjustment in the fiscal period that the variance is determinable. The
nine months ended August 31, 2003 included a benefit of approximately $507,000 on the adjustment of the premium fulfillment accruals from November 30, 2002.

Should
the Internet operating landscape change resulting in (a) higher costs of acquiring consumer data and registered users for our websites; (b) higher costs of acquiring
data for our marketing partners, compromising such marketing partners' ability to maintain adequate sized databases to allow for continued third-party database use agreements; (c) the
InfiKnowledge asset acquisition failing to maintain a lower cost of our email delivery activities and web development and web hosting service costs as compared to our competitors, or us being required
to depend on third-party emailing service bureaus, to a degree higher, and/or at a cost in excess of our anticipated internally-generated costs, than that currently utilized during the nine months
ended August 31, 2004, or other currently unknown third party influences on our ability to deliver email messages to the records in our databases, or the records in our marketing affiliates'
databases; (d) our contingent-based prize indemnification premiums for indemnification coverage increasing due to an increase in the number of prize winners at the sites, or as a result of the
insurance industry in general, or other currently unknown factors; (e) our accruals for fulfillment obligations arising out of promotions proving to be less than the actual redemptions
processed in subsequent fiscal periods; or (f) unpredictable technology changes or commercial technology applications; then, if any one, or a combination, of the above factors were to
materialize we could suffer material deterioration in future fiscal period revenue growth and gross margins and, therefore, our profitability, cash flows and capital resources could be materially
adversely affected.

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

45

---





Major Customers and Disposition of Majority-owned Subsidiary

During the three and nine-month periods ended August 31, 2004, we had one customer in our E-commerce segment accounting for
approximately $0.9 million and $2.9 million, or 8.5% and 11.0% of consolidated net revenue, respectively. Approximately $0.2 million, or 3.8% of consolidated net accounts
receivable, was attributable to such major customer as of August 31, 2004. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 7.1% of
consolidated net revenues for the three and nine-month periods ended August 31, 2004. During the three-month period ended August 31, 2003, we had one customer in our
E-commerce segment accounting for approximately $1.0 million, or 12% of consolidated net revenues during such period. Regarding the balance of our customer base, no single customer
had net revenues that equaled or exceeded 9% of consolidated net revenues for the three and nine-month periods ended August 31, 2003.

In
the nine months ended August 31, 2004, 24.0% of the Company's revenue was derived from its proprietary products: 17.7% from iMatchUp.com, the Company's online dating sites, and
6.3% from its LEC segment's proprietary products.

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

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

Impairment of Goodwill, Other Intangibles and investment Portfolio Could Impact net Income

We carry goodwill and other identifiable intangibles on our balance sheet arising from current and prior-year acquisitions. We are required to review,
at least annually, such goodwill and other identifiable intangibles for any asset impairment. If the review of the goodwill and other identifiable

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intangibles
related to the subsidiaries organized to acquire such assets determines that such assets are impaired, then we will be required to recognize an impairment charge on such goodwill and other
identifiable intangibles necessary to reduce the carrying value of the assets to their net realizable value. Should events occur that would give rise to such impairment charge, we would recognize
decreased profitability to the extent of such adjustment. Cash flows would not be directly affected by the impairment charge, but cash flows would, most likely, be adversely affected as a result of
the facts and circumstances that created the impairment charge.

Market Fluctuation and Debt Repayment Risk of Marketable Securities Investment Portfolio

We maintain an investment portfolio that is managed by prominent financial institutions. The portfolio includes high-grade corporate commercial paper
and auction rate securities, and common stock equities, all of which are held for varying periods of time, pursuant to maturity dates, market conditions and other factors. The fair value of our
investments in the common stock of publicly traded companies as of August 31, 2004 amounted to approximately $1.8 million. These investments are subject to market price volatility, in
addition to the potential for business failure at the company level. Moreover, due to the economic 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 to fulfill their responsibility of adhering to the repayment of principal upon maturity. Additionally, our cash
flows and interest income could be negatively impacted by Federal Reserve Bank interest rate reductions, if any.

Item 4. CONTROLS AND PROCEDURES

Our
Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report, have concluded that as of that date, our disclosure controls and procedures
were adequate and effective to ensure that information required to be disclosed by us in the reports we file or submit with the Securities and Exchange Commission is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There
were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) and
15d-15 that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

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PART II        OTHER INFORMATION

Item 1.    Legal Proceedings

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

Mavies WinglerOn or about May 9, 2001, Mavies Wingler commenced an action against Group Lotto, Inc. ("GLI"),
one of our wholly owned subsidiaries, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims to have picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States District Court, Southern District of West Virginia, and is entitledWingler v.
Grouplotto, Inc., Docket Number 2:01CV518. At the end of 2002, Ms. Wingler's attorney withdrew, and she is now representing herself. We
and GLI have a contract of indemnification with SCA Promotions, Inc. to be indemnified for prizes paid out to qualified winners. GLI winners are required to produce the Group Lotto Entry
Notification form ("GLEN") within a specified period of time after matching a drawing's winning numbers in order to qualify for receipt of the appropriate prize winnings.

In
March 2004, the Court granted our motion for summary judgment dismissing the complaint. In August 2004, that judgment was affirmed on appeal, and reargument of the
appeal was denied by the Circuit Court in September 2004.

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

Qwest
Communications, Inc. notified us of an indemnification claim relating to a class action filed against Qwest in Minnesota,Bindner v. LCI
International Telecom Corp. et al., District Court of Minnesota, County of Sibley, Case No. C0-00-242. In that action, plaintiffs claim that from
September 1998 to July 1999, they were misled when they were solicited to change their long distance

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carrier
to Qwest. They assert that they were not told that they would have to stay at certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We
introduced the promotion ("Fly Free America") to Qwest, and were retained by Qwest to operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement
terminating our contract and settling the amount due us (the "May 2000 Agreement"). The May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any
loss it may sustain by reason of this class action. We maintain that we have no liability in the matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false
advertising claims. The court has certified the class and Qwest is defending the action. The class and defendants, without consulting us, reached a tentative settlement of the action which would
provide for Qwest to pay $600,000 to $700,000 in cash to the named plaintiffs and plaintiffs' counsel and up to $1.5 million in additional cash depending on the number of claimants who
file a proof of claim. A fairness hearing on the settlement was scheduled for October 11, 2004. At the fairness hearing, the tentative settlement agreement was approved by the court, the
court stated that there was no finding of any liability against Qwest and, we understand, the court reserved judgment on the issue of plaintiffs' counsels' fees.

In
November 2002, we commenced an arbitration against Qwest to recover certain amounts due us pursuant to the May 2000 Agreement. In December 2002, Qwest filed
counterclaims in the arbitration
relating to the Fly Free America program. Qwest asserts that we must indemnify Qwest for, among other things, fines and penalties amounting to approximately $1.5 million which Qwest claims it
paid in connection with a number of consent decrees it entered into with various state attorneys general, an unspecified amount of attorneys' fees, and any and all expenses, penalties or other amounts
Qwest becomes liable for in connection with the class action. Qwest also seeks reimbursement of approximately $3.1 million it paid us pursuant to the May 2000 Agreement. A panel of
arbitrators was appointed in December 2003 and a preliminary conference was held in January 2004. After the conference, a schedule was established for substantive motions and for
hearings in June 2004. The arbitrators also provided for exchanges of information in the arbitration subject to Qwest's right to seek to prevent such exchanges. Qwest moved to prevent exchanges
of information and this application was granted. Qwest moved for summary judgment with respect to its indemnification counterclaim. That motion was denied. We believe that there is no merit to Qwest's
counterclaims and intend vigorously to defend against them, as well as to pursue our claim. The arbitration hearing is currently scheduled for October 25, 2004, but it is anticipated that the
hearing will be adjourned until February 2005.

Columbia House/Rydel

In or about August 2002, Columbia House, one of our clients, notified us of an indemnification claim relating to a class action filed against Columbia
House, among others, in Illinois,Rydel v. Comtrad Industries, Inc. et al., Circuit Court of Cook County, Illinois, No. 02 CH 13269. In
that action, plaintiff claims to have received unsolicited commercial e-mail from, among others, Columbia House, in violation of Illinois law, and asserts two basic claims against Columbia
House, one for violation of Illinois' Consumers Fraud Statute, the second for violation of Illinois' Electronic Mail Act. Columbia House advised us that it believes that the email in question was not
approved by Columbia House when it was sent, and asserted a claim for indemnification against us pursuant to our contract. We and Columbia House agreed to defer resolution of the indemnification claim
(and reserved each of our respective rights). Columbia House is defending against the class action. Its motion to dismiss was granted as to the Consumer Fraud claim, but denied as to the Electronic
Mail Act claim. The plaintiff has appealed the partial dismissal.

In
or about January 2003, we were named as a defendant in theRydelclass action. In an additional count in the complaint, the
plaintiff asserted that we violated the Illinois Consumer Fraud and Deceptive Business Practices Act by providing to a co-defendant a list of consumers who had consented to receive
commercial e-mails when, the complaint alleges, they had not. The complaint

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sought
injunctive relief and unspecified damages. Our motion to dismiss the claim as against us was granted in June 2003, and the plaintiff has filed an appeal. We believe that there is no
merit to the claim, and, in the event the dismissal of the claim is reversed on appeal, we intend to vigorously defend against it.

Missouri Civil Investigative Demand

On September 26, 2003, we were served with a Civil Investigative Demand by the Missouri Attorney General's Office requesting certain documents and
inquiring into our Company's merchandising practices in connection with games of chance available for entry at grouplotto.com. We have responded to the document and information requests and await a
response from the Missouri Attorney General's Office. Since there has been no further communications from the Missouri Attorney General after our submission, counsel has advised us that they deem this
matter closed.

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

Item 5.    Other Information

On October 14, 2004, our Board of Directors declared a dividend from our retained earnings of $0.08 per share on the outstanding shares of our common stock
for the quarter ended August 31, 2004. Such dividend is payable on or about November 10, 2004 to holders of record of such shares at the close of business on November 1, 2004. We
can give you no assurance that our Board will declare any dividends in future fiscal periods. Any further declarations will depend upon our performance, the level of our then current and retained
earnings, if any, available capital and projected capital requirements necessary for operations, and other pertinent factors. You should not rely on any prior approvals of our Board as an indicator of
its intent to approve the declaration of any dividends in the future.

Item 6.    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)                                         
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
|32.1           |  | Section 1350 Certification of Chief Executive Officer*            
|32.2           |  | Section 1350 Certification of Chief Financial Officer*            

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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 us, are intended to
identify forward-looking statements. We believe 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 we will take any action that we may presently be planning. We are
not undertaking to publicly update or revise any forward-looking statement if we obtain 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.
|------------------------- |  | -------------
|Date:    October 15, 2004 |  | By:          
|Date:    October 15, 2004 |  | By:          

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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)                                        
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
|32.1           |  | Section 1350 Certification of Chief Executive Officer*            
|32.2           |  | Section 1350 Certification of Chief Financial Officer*            

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