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 May 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

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

|Delaware(State or other jurisdiction of
incorporation or organization)            |  | 22-3322277(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------- |  | ----------------------------------------------
|One Blue Hill Plaza
Pearl River, New York(Address of principal executive offices) |  | 10965(Zip Code)                               
|(845) 620-1212Registrant's telephone number, including area code:                

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

Yes
X  No

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes
  No X

The
number of shares outstanding of the Registrant's common stock is 13,523,664 (as of 07/13/04).



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

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I     |  | Financial Information                                                                 |  |     
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  | 1   
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | None
|Item 4.    |  | Controls and Procedures                                                               |  | 43  
|Part II    |  | Other Information                                                                     |  |     
|Item 1.    |  | Legal Proceedings                                                                     |  | 44  
|Item 2.    |  | Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities     |  | 46  
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | None
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | None
|Item 5.    |  | Other Information                                                                     |  | 46  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 47  
|Signatures |  |                                                                                      

i

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS

May 31,
2004

November 30,
2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents

$
9,065,235

$
9,939,657Marketable securities


30,172,839


28,272,520Accounts receivable, trade, net of allowance for doubtful accounts of $760,492 at May 31, 2004 and $872,605 at November 30, 2003


5,402,152


4,076,947Deferred income taxes


1,371,410


1,295,983Prepaid expenses and other current assets


491,478


1,065,580Total current assets


46,503,114


44,650,687Property and equipment, at cost, net of accumulated depreciation


2,322,418


2,799,405Goodwill


1,031,881


1,071,525Other intangibles, net


1,121,308


1,157,176Deferred income taxes


66,212


271,744Total assets

$
51,044,933

$
49,950,537LiabilitiesCurrent liabilities:Accounts payable

$
3,026,921

$
2,337,445Accrued expenses


2,532,035


2,974,967Reserve for customer chargebacks


572,115


406,352Due to related parties


449,564


351,335Income taxes payable


358,070


333,705Total current liabilities


6,938,705


6,403,804Deferred income taxes


207,820


207,820Total liabilities


7,146,525


6,611,624Shareholders' equityPreferred stock$.001 par value; 1,000,000 shares authorized; none issued and outstanding





Common stock$.001 par value; authorized 50,000,000 shares; issued 13,250,023 shares and 12,882,992 shares, respectively


13,250


12,882Common stock issuable$.001 par value; -0- and 39,174 shares, respectively





242,879Additional paid-in capital


39,792,158


37,916,110Retained earnings


3,239,635


4,319,356Accumulated other comprehensive income


853,365


847,686Total shareholders' equity


43,898,408


43,338,913Total liabilities and shareholders' equity

$
51,044,933

$
49,950,537


The
acompanying notes are an integral part of these financial statements

1

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

Three Months Ended

Six Months EndedMay 31,
2004

May 31,
2003

May 31,
2004

May 31,
2003Net revenue

$
9,139,855

$
7,422,604

$
16,310,149

$
16,539,833Cost of sales


5,137,014


3,959,347


8,942,968


6,205,277GROSS PROFIT


4,002,841


3,463,257


7,367,181


10,334,556Selling expenses


515,158


1,777,890


963,088


4,097,449General and administrative expenses


3,147,860


3,978,704


6,007,437


8,184,741Bad debt (recapture) expense


(65,656
)

153,860


(112,113
)

490,048INCOME (LOSS) FROM OPERATIONS


405,479


(2,447,197
)

508,769


(2,437,682
)Other income (expense):Interest income and dividends


113,989


111,455


222,721


266,056Realized gains on marketable securities


11,647


3,330


22,670


4,068Realized gain on sale of subsidiary


199,900


1,075,000


394,900


1,075,000Other non-operating income (expense)


292,694


(47,591
)

338,887


(61,629
)Minority interest in income of subsidiary





(17,239
)




(137,567
)INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES


1,023,709


(1,322,242
)

1,487,947


(1,291,754
)Provision (benefit) for income taxes


358,917


230,297


470,264


(170,703
)NET INCOME (LOSS)

$
664,792

$
(1,552,539
)
$
1,017,683

$
(1,121,051
)Basic income (loss) per share (Note 3):Net income (loss)

$
0.05

$
(0.12
)
$
0.08

$
(0.09
)Weighted average shares outstanding


13,100,188


12,758,349


13,030,529


12,754,342Diluted income (loss) per share (Note 3):Net income (loss)

$
0.04

$
(0.12
)
$
0.07

$
(0.09
)Weighted average shares outstanding


13,765,499


12,758,349


13,659,127


12,754,342Cash dividends per common share

$
0.08

$


$
0.16

$



The
accompanying notes are an integral part of these financial statements

2

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

|                                      |                                                                                                    | Six Months Ended                                |                                                    
|------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities: |                                                                                                    |                                                 |                                                    
|                                      | Net income (loss)                                                                                  |                                                 | $                                                  
|                                      | Adjustments to reconcile net income (loss) to net cash provided by (used in) 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 bus iness: |                                                    
|                                      |                                                                                                    |                                                 | 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 (used in) operating activities
|                                      |                                                                                                    |                                                 |                                                    
|Cash flows from investing activities: |                                                                                                    |                                                 |                                                    
|                                      | Purchases of securities                                                                            |                                                 |                                                    
|                                      | Proceeds from sales of securities                                                                  |                                                 |                                                    
|                                      | Proceeds from the sale of a subsidiary                                                             |                                                 |                                                    
|                                      | 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) provided by 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                                                           |                                                 | $                                                  
|                                      |                                                                                                    |                                                 |                                                    

Non-cash
investing and financing activities are excluded from the consolidated statement of cash flows. For the six months ended May 31, 2004,
non-cash activities included $135,000 to record the purchase of a license. The license is payable in ten monthly installments of $15,000. As of May 31, 2004, the Company has made
$65,000 in payments on the license agreement, which included a $50,000 down payment, and one installment of $15,000.

The
accompanying notes are an integral part of these financial statements

3

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TRAFFIX, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY        FOR THE SIX MONTHS ENDED MAY 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 six months ended May 31, 2004    |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Unrealized losses on available-for-sale securities  |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Foreign Currency Translation adjustment             |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                    |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                    | Comprehensive income (loss) |              |  |   |        |  |   |          |   |                                              |            |  |  
|                                                    |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Dividends declared                                  |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Stock option exercises                              |                             | 327,857      |  |   | 329    |  |   |          |   |                                              | 1,376,330  |  |  
|Tax benefit from exercise of stock options          |                             |              |  |   |        |  |   |          |   |                                              | 256,878    |  |  
|Purchase of common stock, held in treasury, at cost |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Common stock issued in connection with acquisition  |                             | 39,174       |  |   | 39     |  |   | (242,879 | ) |                                              | 242,840    |  |  
|                                                    |                             |              |  |   |        |  |   |          |   |                                              |            |  |  
|Balance, May 31, 2004                               |                             | 13,250,023   |  | $ | 13,250 |  | $ |         |   | $                                            | 39,792,158 |  | $
|                                                    |                             |              |  |   |        |  |   |          |   |                                              |            |  |  

The accompanying notes are an integral part of these financial statements

4

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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, 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 six-month periods ended May 31, 2004 are not necessarily
indicative of the results to be expected for the subsequent quarters 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 six months ended May 31, 2004 and 2003, options for 327,857 shares and 16,500 shares of the Company's common stock, respectively, were exercised by our employees. Tax
benefits of $256,878 and $6,413 in the six months ended May 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 December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition" (SAB No. 104), which codifies, revises and
rescinds certain sections of SAB No. 101, "Revenue Recognition", in order to make this interpretive guidance conform with current authoritative accounting and auditing guidance and regulations.
The changes noted in SAB No. 104 did not have a material effect on our consolidated results of operations, financial position or cash flows.

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 our financial position and results of operations.

5

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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 eight basic categories: (1) delivery of consumer traffic to the websites and inbound telemarketing call centers of its Corporate Customers
(e.g., click-thrus from the game banners on the Company's websites), (2) delivery of consumer data to Corporate Customers with respect to the consumers who have registered for Corporate
Customers' products or services (e.g., a consumer who registered via the registration page of one of the Company's websites to receive on-line promotions from Corporate Customers),
(3) delivery of pre-qualified consumer data to Corporate Customers as a result of consumers' responses to targeted questions and surveys (e.g., receiving free gifts for your
children), (4) delivery of a sale or
completed application for a Corporate Customer's product or service (e.g., a consumer who responds to a Traffix email promotion on behalf of a Corporate Customer by completing an on-line
application for a credit card or subscribing for a cellular phone service), (5) generating revenue from any of the foregoing categories by placing Corporate Customers' offers on the media of
third parties with whom the Company has a marketing relationship on a revenue share basis, (6) sales of inexpensive gift items directly to consumers, (7) rentals and sales of copies of
specific segments of the Company's databases to Corporate Customers for their proprietary marketing and database enhancements, and (8) 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 a Voice Over Internet Protocol Long Distance product (VOIP). During the three months ended May 31, 2004, the Company introduced a LEC
Billed product known as "Click-Help", a service that offers 24/7 assistance to the home-computer user 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

6

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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
$161,000 and $2.4 million, or 2% and 14%, respectively, of the Company's consolidated net revenues for the three and six-month periods ended May 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.

With
respect to capitalization and amortization of marketing costs, 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 the Company's websites (customer profile purchases), at the time the related cost of sale obligation or expense is incurred.

Revenue Related Accruals

The Company has historically provided for the estimated cost to fulfill customer premium obligations arising from certain of its customer acquisition services
upon the recognition of the related revenue. Such reserves had been determined based upon actual experience, estimates as to new premium offers resulting from actual experience and managements'
historical industry experience. Such estimates were trued up against actual results, with the variance being charged to operations at that time. The Company currently does not employ premiums in the
marketing of its services and products.

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

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. The allowance relates to data that fails to meet: (1) minimum age restrictions, (2) country residence
restrictions, (3) pre-existing relationships of such data with the respective corporate customers, (4) duplications of names within the same file transfer, and
(5) other data qualifications specific to the terms of the underlying marketing offer. The Company's methodology in determining the allowance for data qualifications is based on the Company's
historical experience

7

---



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 six-month periods ended May 31, 2004, the Company had one customer in its E-commerce segment accounting for
approximately $1.1 and $2 million, or 11.8% and 12.6% of consolidated net revenue, respectively. Approximately $0.3 million, or 6.4% of consolidated net accounts receivable, was
attributable to such major customer as of May 31, 2004. Regarding the balance of the Company's customer base, no single customer had net revenues that equaled or exceeded 6.2% of consolidated
net revenues for the three and six-month periods ended May 31, 2004. During the three and six-month periods ended May 31, 2003, no single customer had net
revenues that equaled or exceeded 8% of consolidated net revenues for such period.

Currently,
25.6% of the Company's revenue is derived from its proprietary products: 18.4% from iMatchUp.com, the Company's online dating sites, and 7.4% 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 |         | Six Months Ended |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | -
|
|Net income (loss):                                                                                                |  |                    |         |                  |  
|As reported                                                                                                       |  | $                  | 664,792 |                  | $
|Less: Total stock-based compensation expense determined under fair value based method, net of related tax effects |  |                    | (70,967 | )                |  
|                                                                                                                  |  |                    |         |                  |  
|Pro forma                                                                                                         |  | $                  | 593,825 |                  | $
|Basic net income (loss) per share:                                                                                |  |                    |         |                  |  
|As reported                                                                                                       |  | $                  | 0.05    |                  | $
|Pro forma                                                                                                         |  | $                  | 0.05    |                  | $
|Diluted net income (loss) per share:                                                                              |  |                    |         |                  |  
|As reported                                                                                                       |  | $                  | 0.04    |                  | $
|Pro forma                                                                                                         |  | $                  | 0.04    |                  | $

8

---



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

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 |            | Six Months Ended
|------------------------------ | --------------------------------------------------------------------------- | ------------------ | ---------- | ----------------
|
|Denominator:                   |                                                                             |                    |            |                 
|                               | Denominator for basic earnings per share-weighted average shares            |                    | 13,100,188 |                 
|Effect of dilutive securities: |                                                                             |                    |            |                 
|                               | Stock options                                                               |                    | 665,311    |                 
|                               |                                                                             |                    |            |                 
|                               | Denominator for diluted earnings per share-adjusted weighted average shares |                    | 13,765,499 |                 
|                               |                                                                             |                    |            |                 

Options
to purchase 595,050 and 1,043,096 shares of common stock for the three months ended May 31, 2004 and 2003, respectively, and 800,900 and 1,043,096 for the six months ended
May 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 |         | Six Months Ended |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | -
|
|Net income (loss)                                                                                          |  | $                  | 664,792 |                  | $
|Other comprehensive income (loss), net of tax:                                                             |  |                    |         |                  |  
|Foreign currency translation adjustment                                                                    |  |                    | (59,121 | )                |  
|Unrealized loss from available-for-sale securities, arising during the period, net of income taxes of $-0- |  |                    | (46,774 | )                |  
|                                                                                                           |  |                    |         |                  |  
|Comprehensive income (loss)                                                                                |  | $                  | 558,897 |                  | $
|                                                                                                           |  |                    |         |                  |  

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

9

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(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. Such costs are charged to operations (1) at the time of the email transmission, (2) upon receipt of the
qualified consumer data, and/or (3) at the time the promotional and creative services are provided, respectively, and are included as a component of cost of sales.

Total
advertising and marketing costs included in cost of sales for the three months ended May 31, 2004 and 2003 were approximately $4,259,000 and $3,528,000, respectively, and
for the six months ended May 31, 2004 and 2003 were approximately $7,693,000 and $5,566,000, 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 (a) gross profit and (b) net
income excluding (i) special charges, (ii) interest expense, (iii) interest and dividend income, (iv) net gains (losses) on the sale of marketable securities,
(v) permanent impairment charges to long-lived assets, (vi) 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 |           | Six Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | ----------------
|
|E-commerce                       |                     | $                  | 8,062,505 |                 
|Off-line Marketing Services      |                     |                    |          |                 
|LEC Billed Products and Services |                     |                    | 1,077,350 |                 
|                                 |                     |                    |           |                 
|                                 | Consolidated totals |                    | $         | 9,139,855       
|                                 |                     |                    |           |                 

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Segment DataGross Profit

|                                 |                     | Three Months Ended |           | Six Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | ----------------
|
|E-commerce                       |                     | $                  | 3,719,473 |                 
|Off-line Marketing Services      |                     |                    |          |                 
|LEC Billed Products and Services |                     |                    | 283,368   |                 
|                                 |                     |                    |           |                 
|                                 | Consolidated totals |                    | $         | 4,002,841       
|                                 |                     |                    |           |                 

Segment DataAdjusted EBITDA*

|                                 |                     | Three Months Ended |           | Six Months Ended
|-------------------------------- | ------------------- | ------------------ | --------- | ----------------
|
|E-commerce                       |                     | $                  | 1,429,024 |                 
|Off-line Marketing Services      |                     |                    |          |                 
|LEC Billed Products and Services |                     |                    | 186,132   |                 
|                                 |                     |                    |           |                 
|                                 | Consolidated totals |                    | $         | 1,615,156       
|                                 |                     |                    |           |                 

---

Segment DataDepreciation and Amortization

|                                 |                     | Three Months Ended |         | Six Months Ended
|-------------------------------- | ------------------- | ------------------ | ------- | ----------------
|
|E-commerce                       |                     | $                  | 261,777 |                 
|Off-line Marketing Services      |                     |                    |        |                 
|LEC Billed Products and Services |                     |                    |        |                 
|                                 |                     |                    |         |                 
|                                 | Consolidated totals |                    | $       | 261,777         
|                                 |                     |                    |         |                 

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

|                                                                                       |                                           | Three Months Ended                    |           | Six Months Ended |          
|-------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------- | --------- | ---------------- | ---------
|
|Adjusted EBITDAby segment                                                             |                                           |                                       |           |                  |          
|                                                                                       | E-commerce                                |                                       | $         | 1,429,024        |          
|                                                                                       | Off-line Marketing Services               |                                       |           |                 |          
|                                                                                       | LEC Billed Products and Services          |                                       |           | 186,132          |          
|                                                                                       |                                           |                                       |           |                  |          
|                                                                                       |                                           | Total Adjusted EBIDTA                 |           | $                | 1,615,156
|                                                                                       |                                           |                                       |           |                  |          
|Items effecting Adjusted EBITDA in arriving at consolidated income (loss) before taxes |                                           |                                       |           |                 
|                                                                                       | Corporate (expense)                       |                                       | $         | (947,900         | )        
|                                                                                       | Depreciation and amortization (expense)   |                                       |           | (261,777         | )        
|                                                                                       | Interest (expense)                        |                                       |           |                 |          
|                                                                                       | Interest income and dividends             |                                       |           | 113,989          |          
|                                                                                       | Realized gains on marketable securities   |                                       |           | 11,647           |          
|                                                                                       | Realized gain on sale of subsidiary       |                                       |           | 199,900          |          
|                                                                                       | Other non-operating income (expense)      |                                       |           | 292,694          |          
|                                                                                       | Minority interest in income of subsidiary |                                       |           |                 |          
|                                                                                       |                                           |                                       |           |                  |          
|                                                                                       |                                           | Total items effecting Adjusted EBITDA |           | $                | (591,447 
|                                                                                       |                                           |                                       |           |                  |          
|Consolidated income(loss) before taxes                                                 |                                           | $                                     | 1,023,709 |                  | $        
|                                                                                       |                                           |                                       |           |                  |          

7.    Asset 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
July 1, 2004, eighteen 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 July 1, 2004, twelve installments were received under the Media Purchase Agreement.

12

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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 May 31, 2004

As of November 30, 2003Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
AmortizationAmortizable intangible assets:GroupLotto identifiable intangibles:GroupLotto site brand recognition

$
722,922

$
414,336

$
722,922

$
341,640GroupLotto database


433,754


248,602


433,754


204,983Intellectual property assets


289,169


165,735


289,169


136,656Marketing right license fee


500,000


305,000


300,000


300,000Infiknowledge identifiable intangibles:Internet game suite

$
222,951

$
110,312

$
231,543

$
91,438Intellectual property assets


167,214


82,734


173,657


68,578Market position acquired


185,793


91,926


201,525


79,583


Thanksmuch identifiable intangibles:Profiled customer data

$
50,000

$
35,972

$
50,000

$
28,209Restrictive covenants


10,000


5,878


10,000


4,307Total amortizable intangible assets

$
2,581,803

$
1,460,495

$
2,412,570

$
1,255,394Unamortized intangible assets:GoodwillInfiknowledge

$
742,145




$
781,789GoodwillThanksmuch


289,736





289,736Total unamortized intangible assets

$
1,031,881




$
1,071,525


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 a
five-year useful life, with corresponding straight-line amortization, was the most accurate available means of estimating such assets' finite lives. In future fiscal periods,
if facts or circumstances arise that indicate the five-year useful life assigned to such assets was, in fact, inaccurate, the Company will make the appropriate adjustments at that time.

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.

13

---



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

2004

2005

2006

2007

2008GroupLotto Identifable intangible amortization:GroupLotto site brand recognition

$
144,594

$
144,594

$
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


20,000


20,000Total Group's amortization

$
304,189

$
309,189

$
204,228

$
20,000

$
20,000Infiknowledge Identifable intangibles:Internet game suite

$
43,154

$
43,154

$
43,154

$
742

$
Intellectual property assets


32,365


32,365


32,365


556


Market position acquired


35,962


35,962


35,962


618


Total Group's amortization

$
111,481

$
111,481

$
111,481

$
1,916

$
ThanksMuch Identifable intangibles: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

$


$
SummaryGroupLotto identifable intangibles:

$
304,189

$
309,189

$
204,228

$
20,000

$
20,000Infiknowledge identifable intangibles:


111,481


111,481


111,481


1,916


ThanksMuch identifable intangibles:


18,667


7,694


1,122





Total identifiable intangible amortization

$
434,337

$
428,364

$
316,831

$
21,916

$
20,000


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, the ultimate settlement of the subsequently mentioned claims should not have a material adverse effect on the
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 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

14

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time
after matching a drawing's winning numbers in order to qualify for receipt of the appropriate prize winnings. We do not believe that there is any merit to Ms. Wingler's claim and intend to
vigorously continue our defense thereof.

In
March 2004, the Court granted our motion for summary judgment dismissing the complaint. Ms. Wingler has appealed, we have responded, and the matter is now pending before
the Circuit Court.

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 alleged that on September 24, 2002 it obtained a patent for a "Free Remote Lottery System" and that we infringed this patent.
In addition, Plasmanet asserted that trade secrets were contained in a private placement memorandum and that we misappropriated these trade secrets after we were allegedly shown such private placement
memorandum by an agent of Plasmanet's investment banker. The complaint sought injunctive relief and unspecified money damages. We asserted counterclaims, inter alia, to declare Plasmanet's patent
invalid. In December 2003, the complaint was dismissed with prejudice with respect to Plasmanet's patent infringement claim and our counterclaims, and without prejudice with respect to the
misappropriation of trade secrets claim. Such misappropriation claim has been reasserted by Plasmanet in New York court (Sup. Ct. N.Y. Co., January 27, 2004, Index
No. 60021-04). We believe there is no merit to the reasserted claim and have filed a motion to dismiss this claim, which is currently scheduled to be submitted on August 2,
2004. We intend to vigorously defend against this action.

Qwest Communications

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, have reached a tentative settlement of the action which would provide for Qwest to pay $700,000 in cash and up to
$1.5 million in additional cash depending on the number of claimants who file a proof of claim.

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

15

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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.

One
of the arbitrators was removed from the panel and the hearing date will have to await the appointment of a new arbitrator and a preliminary conference. There is currently a dispute
about the appointment process.

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.

16

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10.   Subsequent Events

On June 30, 2004, the Company consummated the acquisition of the assets of SendTraffic.com, Inc. and its affiliated entity, The Traffic Group, LLC,
two privately held search engine marketing companies based in New York. The Company purchased the assets for approximately $5.53 million, comprised of $3.75 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
July 15, 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
May 31, 2004. Such dividend is payable on or about August 10, 2004 to holders of record of such shares at the close of business on August 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, capital and
other pertinent factors relating to our financial position. You should not rely on any prior approvals of our Board as an indicator of its intent to approve the declaration of any dividends in the
future.

17

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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 an on-line database 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, and TXNet/WorldWebAccess, our ISP,
VOIP and email products, and Click-Help, our on-line technical assistance product for the home PC user, which comprise our LEC Billed Products segment. These
"direct-to-consumer" generated products and services accounted for approximately $2.7 million and $4.2 million, or 29% and 26%, respectively, of our revenue
during the three and six-month periods ended May 31, 2004, compared to $1.4 million and $1.9 million, or 19% and 11% for the three and six-month periods
ended May 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 "off-line" media arena, we have been able to provide enhanced response-based results in a

18

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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 DVD promotions site, Take 1 Entertainment.com; and our premier on-line dating service, iMatchup.com. We also operate a number of interactive games and
promotions such as Direct Deposit Promotions and Prizecade.com. We generate traffic to our websites from cross marketing, marketing to our database and marketing on the media of third parties. Our Web
properties and our marketing activities are designed to generate real-time response-based marketing results for our corporate clients, as well as for our own product and service offers.
When visiting our on-line properties, consumers are given the opportunity to purchase, sign-up for, ask to be contacted regarding, or simply indicate an interest in, hundreds
of offers for various products and services. Specifically, through these interactive Web properties we generate a variety of transactional results ranging from (a) Web traffic,
(b) inbound telemarketing calls, (c) outbound telemarketing leads, (d) demographically/psychographically profiled lists of consumers, (e) highly-targeted customized
response-based leads, (f) completed applications for products, and (g) sales of products and services.

Websites.Our PrizeDistributors, Inc. sponsored group of websites offers consumers the opportunity to win multiple
game promotions of up to $1 million daily in our free, on-line sweepstakes. The 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, Take 1 Entertainment.com, prizecade.com and jewelclaimcenter.com.
Such websites are deployed to generate revenue for our clients in a similar manner as the PrizeDistributor, Inc. model described above. Each of these sites is designed to appeal to a specific
consumer interest category that we 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

19

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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

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 May 31, 2004 and 2003, the combination of all of these newly introduced services generated approximately $2.7 million and
$1.4 million, respectively, or approximately 29% and 19%,respectively, of consolidated net revenue. During the six month periods ended
May 31, 2004 and 2003, the combination of all of these newly introduced services generated approximately $4.2 million and $1.9 million, respectively, or approximately 26% and 11%,
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.

20

---



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 six-month periods ended May 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.

RESULTS OF OPERATIONS

The following is a discussion of our financial condition and results of operations for the three and six-month periods ended May 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.

21

---



THREE MONTHS ENDED MAY 31, 2004 AND MAY 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 May 31,
2004 and May 31, 2003, are detailed in the following tables:

SEGMENT DATANET REVENUES, BY SEGMENT, BY COMPONENT

Three Months EndedMay 31,
2004

May 31,
2003

Change
Inc(Dec)
$$$

Change
Inc(Dec)
%%%E-Commerce componentsiMatchUp.com dating sites

$
1,603,282

$
809,875

$
793,407

98
%GroupLotto.com and other web sites


4,348,017


2,445,977


1,902,040

78
%Net branch commission fees





24,221


(24,221
)
-100
%Email marketing programs


1,618,311


2,313,287


(694,976
)
-30
%Data sales and rentals


332,245


431,443


(99,198
)
-23
%Sales of jewelry and gifts


96,705


257,145


(160,440
)
-62
%Internet game development and other


63,945


416,770


(352,825
)
-85
%Total E-commerce


8,062,505


6,698,718


1,363,787

20
%Off-line Marketing Service componentsNet branch commission fees





137,254


(137,254
)
-100
%Total Off-line Marketing Service





137,254


(137,254
)
-100
%LEC Billed Products and Services componentsWWA, Click-Help and TXNet LEC products


1,077,350


586,632


490,718

84
%Total LEC Billed Products and Services


1,077,350


586,632


490,718

84
%Total Consolidated Net Revenue

$
9,139,855

$
7,422,604

$
1,717,251

23
%


Net
Revenue increased approximately $1.7 million, or 23%, to $9.1 million for the three months ended May 31, 2004 from $7.42 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 $1.4 million in revenues earned by our
E-commerce segment. This increase resulted primarily from our ability to generate increased traffic to our websites, which yielded a 78%, or $1.9 million, increase in revenue from
our GroupLotto and other websites when compared to the prior year's comparable quarter. Additionally, we increased membership in our iMatchUp.com dating sites, with such increased membership
contributing to a 98%, or $0.8 million, increase in iMatchUp.com revenue over the prior year's comparable quarter. Offsetting revenue increases within our E-commerce segment were
declines in revenue from our email marketing programs of approximately 30%, or $0.7 million. We believe that a primary cause of this decrease was the actions of ISP's that have increased their
filtering of commercial email regardless of whether the email was permission-based.

Our
E-commerce segment revenue increase was partially offset by a decline in net revenue of approximately $140,000 related to our majority-owned subsidiary (Montvale
Management, LLC), which was sold during the quarter ended May 31, 2003.

Additional
increases in revenue of $0.5 million were recognized in the Company's LEC Billed Products and Services segment, resulting from increased marketing and enrollment into
our WWA Email Service ($0.5 million), the launch of our Click-Help LEC Product ($0.3 million) and favorable variances in LEC chargeback experience ($0.1 million),
offset by decreases in our TXNet ISP LEC Product ($0.4 million).

22

---



Our
cost of sales during the three months ended May 31, 2004 and May 31, 2003 were comprised of (1) direct and indirect marketing costs associated with the
acquisition and retention of consumers for our databases, including direct response email marketing costs, data purchases, promotional costs and premium fulfillment costs, and (2) 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 May 31, 2004 and
May 31, 2003, are set forth below:

CONSOLIDATED COST OF SALES, BY SEGMENT, BY COMPONENT

Three Months EndedMay 31,
2004

May 31,
2003

Change
Inc(Dec)
$$$

Change
Inc(Dec)
%%%E-commerceAdvertising, promotion and fulfillment costsEmail marketing and related delivery costs

$
986,955

$
1,300,659

$
(313,704
)
-24
%Website registrations, customer profiles and other customer acquisition costs


3,205,072


2,074,112


1,130,960

55
%Promotional, creative and other costs


67,202


79,703


(12,501
)
-16
%Total E-commerce Advertising

$
4,259,229

$
3,454,474

$
804,755

23
%Service Bureau feesContingent based prize indemnification costs

$
83,803

$
109,165


(25,362
)
-23
%Total E-commerce Cost of Sales

$
4,343,032

$
3,563,639

$
779,393

22
%Off-line Marketing ServicesAdvertising, promotion and fulfillment costsTelemarketing, direct mail and related costs

$


$
73,746

$
(73,746
)
-100
%Total Off-line Marketing Cost of Sales

$


$
73,746

$
(73,746
)
-100
%LEC Billed Products and ServicesService Bureau feesService provision, billing and collection fees

$
793,982

$
321,962


472,020

147
%Total LEC Billed Cost of Sales

$
793,982

$
321,962

$
472,020

147
%Consolidated Cost of Sales

$
5,137,014

$
3,959,347

$
1,177,667

30
%


23

---



Cost of sales on a consolidated basis increased $1.2 million, or 30%, to $5.1 million for the three months ended May 31, 2004 from $3.9 million in the
comparable prior year period.

The
significant factor contributing to the increase in cost of sales was an approximate $1.1 million, or 55%, increase in costs incurred for customer profiles. These costs were
incurred primarily as a result of an increase in the volume of profiles generated on registrants for our other websites. These increased costs were partially responsible for the increased revenues
earned in our E-commerce segment, as discussed above. 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 $0.8 million, or an increase of 147%, when compared to the prior year's
comparable period. The increase relates to higher levels of customer service on our existing customer base and initial marketing expenditures incurred in the expansion of the segment's telemarketing
activities during the quarter ended May 31, 2004. The marketing expenditures amounted to approximately $0.4 million and generated revenue of approximately $0.3 million in the
second quarter of Fiscal 2004. This activity has also established recurring billed customers that should generate marketing-cost free revenues in future fiscal quarters.

The
above referenced cost increases were offset by: (a) decreases in email marketing delivery costs of approximately $0.3 million, or 24%, related to decreased reliance on
third-party mailing vendors and an overall decrease in the level of revenue-generating email promotions (with a decline in the corresponding email-marketing revenue of $0.7 million, or 30%);
and (b) a decrease in marketing costs associated with our Off-line Marketing segment resulting from the sale of Montvale Management, LLC in March 2003.

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

Consolidated Gross Profit, by Segment

|                                 |  | For the
Three Months Ended |           |  |   |           | 
|-------------------------------- |  | -------------------------- | --------- |  | - | --------- | 
|
|E-commerce                       |  | $                          | 3,719,473 |  | $ | 3,135,079 | 
|Off-line Marketing services      |  |                            |          |  |   | 63,508    | 
|LEC Billed products and services |  |                            | 283,368   |  |   | 264,670   | 
|                                 |  |                            |           |  |   |           | 
|CONSOLIDATED TOTALS              |  | $                          | 4,002,841 |  | $ | 3,463,257 | 
|                                 |  |                            |           |  |   |           | 

Consolidated Gross Profit Percentages, by Segment

|                                     |  | For the
Three Months Ended |   |      |   |       |  
|------------------------------------ |  | -------------------------- | - | ---- | - | ----- | -
|
|
|E-commerce                           |  | 46.1                       | % | 46.8 | % | -0.7  | %
|Off-line Marketing services          |  | 0.0                        | % | 46.3 | % | -46.3 | %
|LEC Billed products and services     |  | 26.3                       | % | 45.1 | % | -18.8 | %
|                                     |  |                            |   |      |   |       |  
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 43.8                       | % | 46.7 | % | -2.9  | %
|                                     |  |                            |   |      |   |       |  

24

---



Consolidated
Gross Profit Percentage ("Gross Margin") as a percentage of net revenue was 43.8% during the three months ended May 31, 2004, compared to 46.7% in the prior year's
comparable period, representing an absolute percentage point decrease of 2.9%, or a 6.2% decrease on a relative basis.

The
decline in gross profit is primarily attributable to (a) increased customer profile acquisition costs for our iMatchUp.com dating sites, (b) increased marketing and
related customer registration costs for our other website properties, and (c) the reintroduction of the LEC Billed Products segment activity, which has a gross profit that is typically lower
than our historical gross profit. 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 eighteen, 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
May 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 May 31, 2004 and May 31, 2003 are presented, on a segmental basis, and with the components of the individual
segments, in the tables set forth below:



|                                      |  | Three Months Ended |         |  |   |           | 
|------------------------------------- |  | ------------------ | ------- |  | - | --------- | 
|
|E-commerce                            |  |                    |         |  |   |           | 
|Fee share commissions                 |  | $                  | 295,119 |  | $ | 1,337,276 | 
|Selling salaries and related expenses |  |                    | 185,726 |  |   | 378,404   | 
|Travel and entertainment              |  |                    | 34,313  |  |   | 28,603    | 
|                                      |  |                    |         |  |   |           | 
|TOTAL SellingE-commerce segment      |  | $                  | 515,158 |  | $ | 1,744,283 | 
|                                      |  |                    |         |  |   |           | 
|Off-line Marketing Services           |  |                    |         |  |   |           | 
|Fee share commissions                 |  | $                  |        |  | $ |          | 
|Selling salaries and related expenses |  |                    |        |  |   | 33,607    | 
|Travel and entertainment              |  |                    |        |  |   |          | 
|                                      |  |                    |         |  |   |           | 
|TOTAL SellingOff-line segment        |  | $                  |        |  | $ | 33,607    | 
|                                      |  |                    |         |  |   |           | 
|Consolidated Totals                   |  | $                  | 515,158 |  | $ | 1,777,890 | 
|                                      |  |                    |         |  |   |           | 

Selling
expenses, on a consolidated basis, decreased approximately $1.3 million, or 71%, from $1.8 million during the three months ended May 31, 2003 to
$0.5 million during the three months ended May 31, 2004. The decrease was primarily related to an approximate $1.2 million reduction in E-commerce segment selling
expenses, of which (a) approximately $1.0 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 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
May 31, 2003.

25

---



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; public relations; database management and consulting; and public company related
printing costs), (iii) insurance costs, (iv) occupancy and other equipment rental costs, (v) site development, maintenance and modification costs related to our various active
segments, and (vi) all other general and miscellaneous corporate expense items.

Our
General and Administrative Expenses for the three months ended May 31, 2004 and May 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         |  | $                  | 973,708   |  | $ | 942,248   | 
|Professional fees                               |  |                    | 295,824   |  |   | 249,799   | 
|Insurance costs                                 |  |                    | 136,882   |  |   | 122,594   | 
|Occupancy and equipment costs                   |  |                    | 82,355    |  |   | 70,077    | 
|Site development, maintenance and modifications |  |                    | 343,707   |  |   | 665,016   | 
|All other G&A expenses                          |  |                    | 270,249   |  |   | 346,718   | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&AE-commerce segment                    |  | $                  | 2,102,725 |  | $ | 2,396,452 | 
|                                                |  |                    |           |  |   |           | 
|Off-line Marketing Services                     |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  |          |  | $ |          | 
|Professional fees                               |  |                    |          |  |   |          | 
|All other G&A expenses                          |  |                    |          |  |   |          | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&AOff-line segment                      |  | $                  |          |  | $ |          | 
|                                                |  |                    |           |  |   |           | 
|LEC Billed Products and Services                |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  | 56,563    |  | $ | 177,715   | 
|Insurance costs                                 |  |                    | 18,886    |  |   | 22,165    | 
|Occupancy and equipment costs                   |  |                    | 13,752    |  |   | 13,634    | 
|All other G&A expenses                          |  |                    | 8,035     |  |   | 66,271    | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&ALEC segment                           |  | $                  | 97,236    |  | $ | 279,785   | 
|                                                |  |                    |           |  |   |           | 
|Corporate                                       |  |                    |           |  |   |           | 
|Compensation costs and related expenses         |  | $                  | 501,488   |  | $ | 814,447   | 
|Professional fees                               |  |                    | 169,975   |  |   | 191,221   | 
|Insurance costs                                 |  |                    | 123,768   |  |   | 144,437   | 
|All other G&A expenses                          |  |                    | 152,668   |  |   | 152,362   | 
|                                                |  |                    |           |  |   |           | 
|TOTAL G&ACorporate                             |  | $                  | 947,899   |  | $ | 1,302,467 | 
|                                                |  |                    |           |  |   |           | 
|Consolidated Totals                             |  | $                  | 3,147,860 |  | $ | 3,978,704 | 
|                                                |  |                    |           |  |   |           | 

General
and Administrative expenses ("G&A") on a consolidated basis decreased approximately $0.8 million, or 21%, when comparing G&A of $3.9 million for the three months
ended May 31, 2003 to G&A of $3.1 million incurred during the three months ended May 31, 2004. The net decrease was attributable to decreases in our:
(a) E-commerce segment ($0.3 million) and Corporate ($0.4 million), both relating to reductions in: (i) compensation costs pursuant to cost cutting reductions
to our

26

---



workforce
undertaken in the third and fourth quarters of Fiscal 2003, (ii) site development and maintenance costs as provided by third parties, with the bulk of these services being provided by
our Canadian subsidiary, Infiknowledge, and (iii) other expenses primarily reflecting the benefit of general cost reduction efforts undertaken in the third and fourth quarters of Fiscal 2003.

Feder,
Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of
actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $194,000 in legal fees
(exclusive of disbursements) from FKIWSBR during the three months ended May 31, 2004. We incurred approximately $196,000 in legal fees (exclusive of disbursements) from FKIWSBR during the three
months ended May 31, 2003.

Consolidated Bad Debt Expense, by segment

|                                 |  | For the periods:
Three Months Ended |         |   |   |         | 
|-------------------------------- |  | ----------------------------------- | ------- | - | - | ------- | 
|
|E-commerce                       |  | $                                   | (65,656 | ) | $ | 153,860 | 
|Off-line Marketing Services      |  |                                     |        |   |   |        | 
|LEC Billed Products and Services |  |                                     |        |   |   |        | 
|                                 |  |                                     |         |   |   |         | 
|Consolidated Totals              |  | $                                   | (65,656 | ) | $ | 153,860 | 
|                                 |  |                                     |         |   |   |         | 

Bad
Debt expense decreased approximately $0.2, or 143%, due to a recapture of bad debt expense of $65,656 in the three months ended May 31, 2004 from bad debt expense of
approximately $154,000 in the three months ended May 31, 2003. Our bad debt expense resulted from our assessment of the risk
of collection embedded in our customer base as described below. When comparing the aging of our receivables, subsequent collections on such receivables and other factors, it was deemed that our
allowance for doubtful accounts required a reduction, with such reduction yielding the current quarter's bad debt recapture of approximately $66,000.

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.

27

---



OTHER INCOME (EXPENSE)

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

|                                                |                                                  | Three Months Ended |         |         |   |           |          
|----------------------------------------------- | ------------------------------------------------ | ------------------ | ------- | ------- | - | --------- | ---------
|
|Other income (expense):                         |                                                  |                    |         |         |   |           |          
|Interest income and dividends                   |                                                  | $                  | 113,989 |         | $ | 111,455   |          
|Realized gains on sale of marketable securities |                                                  |                    | 11,647  |         |   | 3,330     |          
|Realized gain on sale of subsidiary             |                                                  |                    | 199,900 |         |   | 1,075,000 |          
|Other non-operating income:                     |                                                  |                    |        |         |   |          |          
|                                                | Other miscellaneous income (expense)             |                    |         | (6,414  | ) |           | (32,400  
|                                                | Vendor settlement on prior year marketing fee    |                    |         | 350,000 |   |           |         
|                                                | Foreign Currency Exchange Rate Fees and interest |                    |         | (3,102  | ) |           | (15,191  
|                                                | Interest and penaltiesFlorida tax settlement    |                    |         | (47,790 | ) |           |         
|Minority interest (income) loss                 |                                                  |                    |        |         |   | (17,239   | )        
|                                                |                                                  |                    |         |         |   |           |          
|Total Consolidated Other                        |                                                  |                    |         |         |   |           |          
|                                                | Income (Expense)                                 |                    | $       | 618,230 |   | $         | 1,124,955
|                                                |                                                  |                    |         |         |   |           |          

Consolidated
Other Income (Expense) decreased approximately $0.5 million, from approximately $1.1 million for the three months ended May 31, 2003, to
approximately $0.6 million for the three months ended May 31, 2004.

The
material factors contributing to the net decrease, in their order of magnitude, 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

28

---



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 May 31, 2004 reflects a tax expense of approximately $359,000 on pre-tax income of $1,023,709. This effective tax rate of 35% differs from our
historically recognized effective tax rate of approximately 39%. We recognized tax benefits from the use of approximately $0.2 million in previously devalued capital loss carryover deferred tax
assets. Such prior year devalued capital loss deferred tax assets were utilized in the three months ended May 31, 2004 to offset the tax expense on the current period's capital gain income of
approximately $0.2 million.

SIX MONTHS ENDED MAY 31, 2004 AND MAY 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 May 31,
2004 and May 31, 2003, are detailed in the following tables:

SEGMENT DATANET REVENUES, BY SEGMENT, BY COMPONENT

|                                            |  | Six Months Ended |            |  |   |            | 
|------------------------------------------- |  | ---------------- | ---------- |  | - | ---------- | 
|
|E-Commerce components                       |  |                  |            |  |   |            | 
|iMatchUp.com dating sites                   |  | $                | 2,999,893  |  | $ | 1,143,028  | 
|GroupLotto.com and other web sites          |  |                  | 7,937,739  |  |   | 5,179,863  | 
|Net branch commission fees                  |  |                  |           |  |   | 355,981    | 
|Email marketing programs                    |  |                  | 3,019,632  |  |   | 4,530,945  | 
|Data sales and rentals                      |  |                  | 691,656    |  |   | 1,366,592  | 
|Sales of jewelry and gifts                  |  |                  | 197,560    |  |   | 502,607    | 
|Internet game development and other         |  |                  | 262,726    |  |   | 662,631    | 
|                                            |  |                  |            |  |   |            | 
|Total E-commerce                            |  |                  | 15,109,206 |  |   | 13,741,647 | 
|                                            |  |                  |            |  |   |            | 
|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 |  |                  |            |  |   |            | 
|TXNet LEC Products                          |  |                  | 1,200,943  |  |   | 780,961    | 
|                                            |  |                  |            |  |   |            | 
|Total LEC Billed Products and Services      |  |                  | 1,200,943  |  |   | 780,961    | 
|                                            |  |                  |            |  |   |            | 
|Total Consolidated Net Revenue              |  | $                | 16,310,149 |  | $ | 16,539,833 | 
|                                            |  |                  |            |  |   |            | 

Net
Revenue decreased approximately $0.2 million, or 1%, to $16.3 million for the six months ended May 31, 2004 from $16.5 million in the
comparable prior year period. The primary factor contributing to the decline in net revenue was the sale of a majority-owned subsidiary (Montvale Management, LLC) during the quarter ended
May 31, 2003. Such subsidiary accounted for approximately $2.4 million, or 14% of our revenue during the six months ended May 31, 2003. Our E-commerce segment's net
revenue increased approximately $1.0 million in the Fiscal 2004 first half, after consideration of the on-line revenue attributable to Montvale. This net increase was attributable
to increases in revenue earned at our dating websites ($1.8 million) and other websites ($2.8 million), offset by a decrease of $2.9 million in our other e-commerce
segment components, principally email marketing revenue ($1.5 million decline) and data sales and rentals ($0.6 million decline). Net revenue

29

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in
our LEC Billed Product segment increased $0.4 million, resulting from increased marketing and enrollment into our WWA Email Service ($0.7 million) and the launch of our
Click-Help LEC product ($0.3 million), offset by decreases in our TXNet ISP LEC product ($0.6 million), resulting from new enrollment discontinuance.

Our
cost of sales during the six months ended May 31, 2004 and May 31, 2003 were comprised of (1) direct and indirect marketing costs associated with the acquisition
and retention of consumers for our databases, including direct response email marketing costs, data purchases, promotional costs and premium fulfillment costs, and (2) 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 six-month periods ended May 31, 2004 and
May 31, 2003 are set forth below:

Consolidated Cost of Sales, by Segment, by Component

|                                                                              |                                        | Six Months Ended           |           |           |           |           |          
|----------------------------------------------------------------------------- | -------------------------------------- | -------------------------- | --------- | --------- | --------- | --------- | ---------
|
|E-commerce                                                                    |                                        |                            |           |           |           |           |          
|Advertising, promotion and fulfillment costs                                  |                                        |                            |           |           |           |           |          
|Email marketing and related delivery costs                                    |                                        | $                          | 1,861,646 |           | $         | 2,700,592 |          
|Website registrations, customer profiles and other customer acquisition costs |                                        |                            | 5,707,620 |           |           | 2,398,068 |          
|Promotional, creative and other costs                                         |                                        |                            | 123,434   |           |           | 205,620   |          
|                                                                              |                                        |                            |           |           |           |           |          
|                                                                              | Total E-commerce Advertising           |                            | $         | 7,692,700 |           | $         | 5,304,280
|                                                                              |                                        |                            |           |           |           |           |          
|Service Bureau fees                                                           |                                        |                            |           |           |           |           |          
|Contingent based prize indemnification costs                                  |                                        | $                          | 146,316   |           | $         | 178,760   |          
|                                                                              |                                        |                            |           |           |           |           |          
|                                                                              | Total E-commerce Cost of Sales         |                            | $         | 7,839,016 |           | $         | 5,483,040
|                                                                              |                                        |                            |           |           |           |           |          
|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                                |                                        | $                          | 1,103,952 |           | $         | 460,451   |          
|                                                                              |                                        |                            |           |           |           |           |          
|                                                                              | Total LEC Billed Cost of Sales         |                            | $         | 1,103,952 |           | $         | 460,451  
|                                                                              |                                        |                            |           |           |           |           |          
|                                                                              |                                        | Consolidated Cost of Sales |           | $         | 8,942,968 |           | $        
|                                                                              |                                        |                            |           |           |           |           |          

Cost
of sales on a consolidated basis increased $2.7 million, or 44%, to $8.9 million for the six months ended May 31, 2004 from
$6.2 million in the comparable prior year period.

The
significant factor contributing to the increase in cost of sales was an approximate $3.3 million, or 138%, increase in costs incurred for customer profiles. These costs were
incurred primarily as a result of an increase in the volume of profiles generated on registrants for our other websites. These increased costs were partially responsible for the increased revenues
earned in our E-commerce segment, as discussed above. The six-month period ended May 31, 2003 included a reversal of a fulfillment accrual from Fiscal 2002 of
approximately $0.5 million. The increase in website registrations, customer profiles and other customer acquisition costs, after adjustment for Fiscal 2002's fulfillment reversal, was
approximately $2.8 million.

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Other increases in cost of sales related to our LEC Billed Product segment, which amounted to approximately $0.6 million, or an increase of 140%, when compared to the prior year's
comparable period. The increase relates to initial marketing expenditures incurred in the expansion of the segment's programs in the first half of Fiscal 2004 and higher levels of customer service on
our existing customer base.

The
above referenced cost increases were offset by: (a) decreases in email marketing delivery costs of approximately $0.8 million, or 31%, related to decreased reliance on
third-party mailing vendors and an overall decrease in the level of revenue-generating email promotions (with a decline in the corresponding email-marketing revenue of $1.5 million, or 33%);
and (b) a decrease in marketing costs associated with our Off-line Marketing segment resulting from the sale of Montvale Management, LLC in March 2003.

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

CONSOLIDATED GROSS PROFIT, BY SEGMENT

|                                 |  | For the
Six Months Ended |           |  |   |            | 
|-------------------------------- |  | ------------------------ | --------- |  | - | ---------- | 
|
|E-commerce                       |  | $                        | 7,270,190 |  | $ | 8,258,607  | 
|Off-line Marketing services      |  |                          |          |  |   | 1,755,439  | 
|LEC Billed products and services |  |                          | 96,991    |  |   | 320,510    | 
|                                 |  |                          |           |  |   |            | 
|CONSOLIDATED TOTALS              |  | $                        | 7,367,181 |  | $ | 10,334,556 | 
|                                 |  |                          |           |  |   |            | 

CONSOLIDATED GROSS PROFIT PERCENTAGES, BY SEGMENT

|                                     |  | For the
Six Months Ended |   |      |   |       |  
|------------------------------------ |  | ------------------------ | - | ---- | - | ----- | -
|
|
|E-commerce                           |  | 48.1                     | % | 60.1 | % | -12.0 | %
|Off-line Marketing services          |  | 0.0                      | % | 87.0 | % | -87.0 | %
|LEC Billed products and services     |  | 8.1                      | % | 41.0 | % | -32.9 | %
|                                     |  |                          |   |      |   |       |  
|CONSOLIDATED GROSS PROFIT PERCENTAGE |  | 45.2                     | % | 62.5 | % | -17.3 | %
|                                     |  |                          |   |      |   |       |  

Consolidated
Gross Profit Percentage ("Gross Margin") as a percentage of net revenue was 45.2% during the six months ended May 31, 2004, compared to 62.5% in the prior year's
comparable period, representing an absolute percentage point decrease of 17.3%, or a 27.7% decrease on a relative basis.

The
decline in gross profit is primarily attributable to (a) increased data acquisition costs for our iMatchUp.com dating sites, (b) increased marketing and related data
acquisition costs for our other website properties, and (c) the reintroduction of the LEC Billed Products segment activity, which has a gross profit that is lower than our historical gross
profit. 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 eighteen, or more, months after acquisition, based on available historical experience.

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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 the three-month and six-month memberships at May 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 six months ended May 31, 2004 and May 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

|                                      |  | Six Months Ended |         |  |   |           | 
|------------------------------------- |  | ---------------- | ------- |  | - | --------- | 
|
|E-commerce                            |  |                  |         |  |   |           | 
|Fee share commissions                 |  | $                | 508,216 |  | $ | 2,390,892 | 
|Selling salaries and related expenses |  |                  | 387,692 |  |   | 771,928   | 
|Travel and entertainment              |  |                  | 67,180  |  |   | 87,987    | 
|                                      |  |                  |         |  |   |           | 
|TOTAL SellingE-commerce segment      |  | $                | 963,088 |  | $ | 3,250,807 | 
|                                      |  |                  |         |  |   |           | 
|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                   |  | $                | 963,088 |  | $ | 4,097,449 | 
|                                      |  |                  |         |  |   |           | 

Selling
expenses, on a consolidated basis, decreased approximately $3.1 million, or 76%, from $4.1 million during the six months ended May 31, 2003 to
$1.0 million during the six months ended May 31, 2004. The decrease was primarily related to an approximate $2.3 million reduction in E-commerce segment selling
expenses, of which (a) approximately $1.9 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 data acquisition costs as discussed in the "Cost of Goods Sold" section, above), and (b) approximately $0.4 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.

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; 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.

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

|                                                |  | Six Months Ended |           |  |   |           | 
|----------------------------------------------- |  | ---------------- | --------- |  | - | --------- | 
|
|E-commerce                                      |  |                  |           |  |   |           | 
|Compensation costs and related expenses         |  | $                | 1,866,807 |  | $ | 2,070,892 | 
|Professional fees                               |  |                  | 516,437   |  |   | 759,336   | 
|Insurance costs                                 |  |                  | 278,641   |  |   | 258,281   | 
|Occupancy and equipment costs                   |  |                  | 123,348   |  |   | 158,882   | 
|Site development, maintenance and modifications |  |                  | 696,489   |  |   | 806,858   | 
|All other G&A expenses                          |  |                  | 483,736   |  |   | 772,252   | 
|                                                |  |                  |           |  |   |           | 
|TOTAL G&AE-commerce segment                    |  | $                | 3,965,458 |  | $ | 4,826,501 | 
|                                                |  |                  |           |  |   |           | 
|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         |  | $                | 113,125   |  | $ | 177,715   | 
|Insurance costs                                 |  |                  | 36,774    |  |   | 22,165    | 
|Occupancy and equipment costs                   |  |                  | 27,686    |  |   | 13,634    | 
|All other G&A expenses                          |  |                  | 14,152    |  |   | 66,271    | 
|                                                |  |                  |           |  |   |           | 
|TOTAL G&ALEC segment                           |  | $                | 191,737   |  | $ | 279,785   | 
|                                                |  |                  |           |  |   |           | 
|Corporate and other                             |  |                  |           |  |   |           | 
|Compensation costs and related expenses         |  | $                | 1,001,227 |  | $ | 1,360,268 | 
|Professional fees                               |  |                  | 330,968   |  |   | 419,443   | 
|Insurance costs                                 |  |                  | 249,178   |  |   | 274,770   | 
|All other G&A expenses                          |  |                  | 268,869   |  |   | 311,394   | 
|                                                |  |                  |           |  |   |           | 
|TOTAL G&ACorporate and other                   |  | $                | 1,850,242 |  | $ | 2,365,875 | 
|                                                |  |                  |           |  |   |           | 
|Consolidated Totals                             |  | $                | 6,007,437 |  | $ | 8,184,741 | 
|                                                |  |                  |           |  |   |           | 

General
and Administrative expenses ("G&A") on a consolidated basis decreased approximately $2.2 million, or 27%, when comparing G&A of $6.0 million for the six months
ended May 31, 2003 to G&A of $8.2 million incurred during the six months ended May 31, 2004. 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; (b) E-commerce segment
($0.9 million) and Corporate ($0.5 million), both 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.

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

33

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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 $296,000 in legal fees (exclusive
of disbursements) from FKIWSBR during the six months ended May 31, 2004. We incurred approximately $501,000 in legal fees (exclusive of disbursements) from FKIWSBR during the six months ended
May 31, 2003.

ConsolidatedBad Debt Expense, by Segment

|                                       |  | Six Months Ended |          |   |   |         | 
|-------------------------------------- |  | ---------------- | -------- | - | - | ------- | 
|
|E-commerce                             |  | $                | (112,113 | ) | $ | 490,048 | 
|Off-line Customer Acquisition Services |  |                  |         |   |   |        | 
|LEC Billed Products and Services       |  |                  |         |   |   |        | 
|                                       |  |                  |          |   |   |         | 
|Consolidated Totals                    |  | $                | (112,113 | ) | $ | 490,048 | 
|                                       |  |                  |          |   |   |         | 

Bad
Debt expense decreased approximately $0.6, or 123%, due to a recapture of bad debt expense of $112,113 in the six months ended May 31, 2004 from bad debt expense of
approximately $490,000 in the six months ended May 31, 2003. Our bad debt expense resulted from our assessment of the risk of collection embedded in our customer base as described below. When
comparing the aging of our receivables, subsequent collections on such receivables and other factors, it was deemed that our allowance for doubtful accounts required a reduction, with such reduction
yielding the current quarter's bad debt recapture of approximately $112,000.

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,
(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.

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OTHER INCOME (EXPENSE)

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

|                                                |                                                  | Six Months Ended |         |         |   |           |        
|----------------------------------------------- | ------------------------------------------------ | ---------------- | ------- | ------- | - | --------- | -------
|
|Other income (expense):                         |                                                  |                  |         |         |   |           |        
|Interest income and dividends                   |                                                  | $                | 222,721 |         | $ | 266,056   |        
|Realized gains on sale of marketable securities |                                                  |                  | 22,670  |         |   | 4,068     |        
|Realized gain on sale of subsidiary             |                                                  |                  | 394,900 |         |   | 1,075,000 |        
|Other non-operating income:                     |                                                  |                  |         |         |   |           |        
|                                                | Other miscellaneous income(expense)              |                  |         | 9,921   |   |           | (46,438
|                                                | Vendor settlement on prior year marketing fee    |                  |         | 350,000 |   |           |       
|                                                | Foreign Currency Exchange Rate Fees and interest |                  |         | (7,425  | ) |           | (15,191
|                                                | 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)       |                                                  | $                | 979,178 |         | $ | 1,145,928 |        
|                                                |                                                  |                  |         |         |   |           |        

Consolidated
Other Income (Expense) decreased approximately $0.1 million, from approximately $1.1 million for the six months ended May 31, 2003, to approximately
$1.0 million for the six months ended May 31, 2004.

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



35

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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
six months ended May 31, 2004 reflects a tax expense of approximately $407,000 on pre-tax income of $1,487,947. This effective tax rate of 32% differs from our
historically recognized effective tax rate of approximately 39%. We recognized tax benefits from the use of approximately $0.4 million in previously devalued capital loss carryover deferred tax
assets. Such prior year devalued capital loss deferred tax assets were utilized in the six months ended May 31, 2004 to offset the tax expense on the current period's capital gain income of
approximately $0.4 million.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2004, we had aggregate working capital of $39.5 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 $37.5 million as of May 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 $1.7 million at
May 31, 2004, compared to $1.6 million at November 30, 2003.

Cash
provided by operating activities was approximately $1.3 million for the six months ended May 31, 2004, compared to approximately $0.9 million in cash used in
operating activities in the six months ended May 31, 2003, representing an approximate $2.2 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 $1.0 million earned during the six months ended May 31, 2004, when compared to a net loss of
$1.1 million incurred during the prior year's comparable period.

Cash
used in investing activities was approximately $1.4 million during the six months ended May 31, 2004, compared to $15.0 million used in financing activities
during the prior year's comparable quarter. The primary use of cash in investing activities related to the acquisition of short-term marketable debt securities purchased for us by our
professional money managers amounting to approximately $1.7 million, and approximately $83,000 paid for capital expenditures and an intangible license asset, with both being offset by the
collection of approximately $0.4 million on installments from the prior year's sale of one of our subsidiaries. The prior year's comparable period used cash of approximately
$15.0 million, approximately $14.8 million of which was used for the acquisition of short-term marketable debt securities purchased for us by our professional money managers,
approximately $1.1 million of which was provided from proceeds received from the sale of a subsidiary, and approximately $1.3 million of which was used for capital expenditures payments.

Cash
used for financing activities was approximately $0.7 million for the six months ended May 31, 2004, compared to $23,523 provided by financing activities for the six
months ended May 31, 2003. During the six months ended May 31, 2004 we declared and paid two quarterly dividends, amounting to approximately $2.1 million and offset such outflows
with approximately $1.4 million in proceeds from stock options exercised.

Our
days-sales-outstanding ("DSO") in accounts receivable at May 31, 2004 was 60 days, compared to 52 days at February 29, 2004, 46 days at
November 30, 2003, 49 days at August 31, 2003, and

36

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54 days
at May 31, 2003. The increase in the current quarter's DSO compared to the first quarter of the current fiscal year and the second, third and fourth quarters of the prior fiscal
year relates to the longer collection cycles attributable to our LEC Billed Products segment activities, offset by improved collection cycles on our client billed business. Our DSO may rise above
60 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. Currently, one such
customer accounts for approximately $0.8 million, or 15.2%, of our accounts receivable at May 31, 2004. Such extension of credit also contributed to our increased DSO referenced above.
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 60-day DSO recognized in the six-month period ended May 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 six-month periods ended May 31, 2004. We may, in
future fiscal periods, continue to invest considerable amounts of capital into our E-commerce segment ($1.9 million in Fiscal 2002, $1.5 million in Fiscal 2003 and less than
$84,000 in the six months ended May 31, 2004). If the E-commerce segment's activities 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 data
acquisitions, (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. and its affiliated entity, The Traffic Group, LLC, privately held search engine
marketing companies based in New York. We purchased the assets for approximately $5.53 million, comprised of $3.75 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 anniversary dates following the signing. As of May 31, 2004, one $15,000 installment had been made in accordance with the terms of the license agreement.

37

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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
July 1, 2004, twelve 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 July 1, 2004, we have collected the requisite twelve payments, for a total of $480,000.

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 six 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.

38

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A
summary table of future contractual commitments, for future minimum lease payments under non-cancelable operating leases and employment contracts are set forth below:

Operating Leases

Employment agreements

Total Contractual
ObligationsDomestic

Foreign

Domestic

Foreign

Domestic

Foreign2004

$
331,600

$
72,220

$
1,484,500

$
246,177

$
1,816,100

$
318,3972005


322,500


30,091


12,850


268,556


335,350


298,6472006


215,000








290,936


215,000


290,9362007











3,679





3,679Thereafter

















$
869,100

$
102,311

$
1,497,350

$
809,348

$
2,366,450

$
911,659




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 $296,000 in legal fees (exclusive of disbursements) from FKIWSBR during the six months ended May 31, 2004. We incurred
approximately $501,000 in legal fees (exclusive of disbursements) from FKIWSBR during the six months ended May 31, 2003.

TRANSACTIONS WITH MAJOR CUSTOMERS

During the three and six-month periods ended May 31, 2004, we had one customer in our E-commerce segment accounting for
approximately $1.1 and $2 million, or 11.8% and 12.6% of consolidated net revenue, respectively. Approximately $0.3 million, or 6.4% of consolidated net accounts receivable, was
attributable to such major customer as of May 31, 2004. Regarding the balance of our customer base, no single customer had net revenues that equaled or
exceeded 6.2% of consolidated net revenues for the three and six-month periods ended May 31, 2004. During the three and six-month periods ended May 31, 2003, no
single customer had net revenues that equaled or exceeded 8% of consolidated net revenues for such period.

Currently,
25.6% of our revenue is derived from our proprietary products: 18.4% from iMatchUp.com, our online dating sites, and 7.4% from our LEC Billed Product 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.

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 March 1, 2002 through
May 31, 2004, and the effect of the potential

39

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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
quarterMay 31, 2002

$
10,804,538

-12.66
%(1)August 31, 2002


10,664,246

-1.30
%(1)November 30, 2002


10,203,244

-4.32
%(1)February 28, 2003


9,117,229

-10.64
%(1)May 31, 2003


7,422,604

-18.59
%(1)August 31, 2003


8,503,267

14.56
%November 30, 2003


7,345,752

-13.61
%February 29, 2004


7,170,294

-2.39
%May 31, 2004


9,139,855

24.42
%


---

Quarterly
period endedMay 31, 2002

$
1,387,903August 31, 2002


1,876,069November 30, 2002


1,941,270February 28, 2003


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


161,475


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

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

|Quarterly
period ended |  | Selling
Expense |           | G&A
expense |   | Bad Debt
expense |  | Total
Overhead |        
|---------------------- |  | --------------- | --------- | ----------- | - | ---------------- |  | -------------- | -------
|May 31, 2002           |  | $               | 2,370,775 |             | $ | 3,949,851        |  | $              | 109,172
|August 31, 2002        |  |                 | 3,133,682 |             |   | 3,665,681        |  |                | 48,941 
|November 30, 2002      |  |                 | 2,799,663 |             |   | 4,057,299        |  |                | 106,428
|February 28, 2003      |  |                 | 2,319,559 |             |   | 4,206,037        |  |                | 336,188
|May 31, 2003           |  |                 | 1,777,890 |             |   | 3,978,704        |  |                | 153,860
|August 31, 2003        |  |                 | 1,480,191 |             |   | 2,946,741        |  |                | 117,382
|November 30, 2003      |  |                 | 918,284   |             |   | 2,515,042        |  |                | (31,080
|February 29, 2004      |  |                 | 447,930   |             |   | 2,859,577        |  |                | (46,457
|May 31, 2004           |  |                 | 515,158   |             |   | 3,147,860        |  |                | (65,656

---

40

---





Quarterly
period endedMay 31, 2002

$
890,686August 31, 2002


1,130,917November 30, 2002


1,233,823February 28, 2003


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


33,607


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 May 31, 2004 with the three months ended February 29, 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, 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
six months ended May 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 six months
ended May 31, 2004, or other currently unknown third party influences on our ability to deliver email messages to the records in our databases, or the

41

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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.

Major Customers and Disposition of Majority-owned Subsidiary

During the three and six-month periods ended May 31, 2004, we had one customer in our E-commerce segment accounting for
approximately $1.1 and $2 million, or 11.8% and 12.6% of consolidated net revenue, respectively. Approximately $0.3 million, or 6.4% of consolidated net accounts receivable, was
attributable to such major customer as of May 31, 2004. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 6.2% of consolidated net
revenues for the three and six-month periods ended May 31, 2004. During the three and six-month periods ended May 31, 2003, no single customer had net revenues
that equaled or exceeded 8% of consolidated net revenues for such period.

Currently,
25.6% of our revenue is derived from our proprietary products: 18.4% from iMatchUp.com, our online dating sites, and 7.4% from our LEC Billed Product 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

42

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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 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 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 May 31, 2004 amounted to approximately $1.7 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. We believe that all of the claims made against us to date are either without merit or will ultimately result in a judgment against us (if at all) in
an amount less than 10% of our current assets. Nevertheless, as the plaintiff in theWingleraction is seeking damages in excess of 10% of our current
assets, and as certain of the remaining legal claims made against us fail to specify an amount of damages being sought by the plaintiff, and as there is a potential that the ultimate damages awarded
in a claim could exceed such 10% threshold, in compliance with the Exchange Act, we listed below theWingleraction, as well as all legal claims made
against us for which no amount of damages has been specified. TheQwestaction seeks damages against us in an amount slightly less than 10% of our
current assets.

Mavies Wingler

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

In
March 2004, the Court granted our motion for summary judgment dismissing the complaint. Ms. Wingler has appealed, we have responded, and the matter is now pending before
the Circuit Court.

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 alleged that on September 24, 2002 it obtained a patent for a "Free Remote Lottery System" and that we infringed this patent.
In addition, Plasmanet asserted that trade secrets were contained in a private placement memorandum and that we misappropriated these trade secrets after we were allegedly shown such private placement
memorandum by an agent of Plasmanet's investment banker. The complaint sought injunctive relief and unspecified money damages. We asserted counterclaims, inter alia, to declare Plasmanet's patent
invalid. In December 2003, the complaint was dismissed with prejudice with respect to Plasmanet's patent infringement claim and our counterclaims, and without prejudice with respect to the
misappropriation of trade secrets claim. Such misappropriation claim has been reasserted by Plasmanet in New York court (Sup. Ct. N.Y. Co., January 27, 2004, Index
No. 60021-04). We believe there is no merit to the reasserted claim and have filed a motion to dismiss this claim, which is currently scheduled to be submitted on August 2,
2004. We intend to vigorously defend against this action.

44

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Qwest Communications

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, have reached a tentative settlement of the action which would provide for Qwest to pay
$700,000 in cash and up to $1.5 million in additional cash depending on the number of claimants who file a proof of claim.

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.

One
of the arbitrators was removed from the panel and the hearing date will have to await the appointment of a new arbitrator and a preliminary conference. There is currently a dispute
about the appointment process.

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.

45

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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.

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 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On June 30, 2004, we, through our wholly-owned subsidiary, New Send, Inc., acquired substantially all of the assets (including net working capital
of approximately $500,000) and certain of the liabilities of SendTraffic.com Inc. ("SendTraffic") and The Traffic Group LLC ("The Traffic Group", and with SendTraffic, the "Sellers"), two
privately-held search engine marketing companies, pursuant to an Asset Acquisition Agreement dated June 9, 2004, as amended on June 29, 2004 (collectively, the "Agreement")
by and among New Send, Inc., the Sellers, the stockholders of the Sellers, Greg Byrnes and Craig Handleman (the "Stockholders"), and our Company.

The
purchase price was approximately $5.43 million, comprised of 233,941 shares of our common stock (the "Shares") and $3.75 million in cash. In addition, we agreed to pay
SendTraffic a contingent earn out of $2.5 million if SendTraffic generates EBITDA (as quantified in the Agreement) of $3.75 million in the first year following the closing, an additional
$2.5 million if SendTraffic generates EBITDA of $4.75 million in the second year following the closing, and an additional $2.5 million if SendTraffic generates EBITDA of
$5.75 million in the third year following the closing. If SendTraffic generates certain lower agreed upon annual EBITDA benchmarks, we will pay a portion of the contingent earn out payments.
The contingent earn out, if earned, will be paid in a combination of cash and stock in accordance with the Agreement.

The
Shares were delivered absent registration under the Securities Act of 1933, as amended, in reliance upon Section 4(2) of that Act as being a transaction not involving any
public offering.

The
investment banking firm of Merriman Curhan Ford & Co. represented (and were paid by) the Sellers in the transaction.

Item 5.    Other Information

On July 15, 2004, our Board of Directors declared a dividend out of our surplus of $0.08 per share on the outstanding shares of our common stock for the
quarter ended May 31, 2004. Such dividend is payable on or about August 10, 2004 to holders of record of such shares at the close of business on August 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

46

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retained
earnings and other pertinent factors relating to our financial position. You should not rely on any prior approvals of our Board as an indicator of its intent to approve the declaration of
any dividends in the future.

Item 6.    Exhibits and Reports on Form 8-K



|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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On April 15, 2004, we filed a Current Report on Form 8-K incorporating our Fiscal 2004 first quarter's earnings release. Other than the
foregoing report, we did not file any reports on Form 8-K during the second quarter of the fiscal year ending November 30, 2004.

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.

47

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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: July 15, 2004 |  | By:          
|Date: July 15, 2004 |  | By:          

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Exhibit Index

Exhibit
Number3.1.1

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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