<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

(Mark One)

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

For the quarter ended August 31, 1999


[ ]      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


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

Delaware                                                     22-3322277
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

One Blue Hill Plaza
Pearl River, New York                                          10965
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:   (914) 620-1212


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


         The number of shares outstanding of the Registrant's common stock is
15,379,746 (as of 10/11/99).
<PAGE>   2
                          QUINTEL COMMUNICATIONS, INC.
                     INDEX TO QUARTERLY REPORT ON FORM 10-Q
                FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                         QUARTER ENDED AUGUST 31, 1999

                               ITEMS IN FORM 10-Q



<TABLE>
<CAPTION>
                                                                                                              PAGE
<S>               <C>                                                                                         <C>
PART I            FINANCIAL INFORMATION

Item 1.           Financial Statements                                                                         1

Item 2.           Management's Discussion and Analysis
                    of Financial Condition and
                    Results of Operations                                                                      7

Item 3.           Quantitative and Qualitative
                    Disclosures About Market Risk                                                             None


PART II           OTHER INFORMATION

Item 1.           Legal Proceedings                                                                            36

Item 2.           Changes in Securities
                    and Use of Proceeds                                                                       None

Item 3.           Defaults Upon Senior Securities                                                             None

Item 4.           Submission of Matters to
                    a Vote of Security Holders                                                                None

Item 5.           Other Information                                                                           None

Item 6.           Exhibits and Reports on Form 8-K                                                             37
</TABLE>


SIGNATURES
<PAGE>   3

QUINTEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
AUGUST 31, 1999 AND AUGUST 31, 1998


<PAGE>   4


QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     AUGUST 31,      NOVEMBER 30,
                                                                        1999            1998
                                                                    (UNAUDITED)
<S>                                                                 <C>              <C>

                                   ASSETS:
    Current assets:
     Cash and cash equivalents                                       $18,472,306      $ 2,123,630
     Marketable securities                                            21,466,410       15,019,233
     Accounts receivable, trade                                        9,743,770       31,230,579
     Deferred income taxes                                             2,995,489       11,990,442
     Due from related parties                                            664,037          754,089
     Prepaid expenses and other current assets                           167,997        2,151,270
                                                                    ------------    -------------
       TOTAL CURRENT ASSETS                                           53,510,009       63,269,243

    Property and equipment, at cost, net of
      accumulated depreciation                                           555,148        1,143,901
    Long-term investment, at cost                                        500,000                -
                                                                    ------------    -------------
                                                                     $54,565,157      $64,413,144
                                                                    ============    =============

                                 LIABILITIES:
    Current liabilities:
     Accounts payable                                                $ 1,188,449      $ 4,453,663
     Accrued expenses                                                  6,120,613        6,897,246
     Reserve for customer chargebacks                                  7,019,008       15,494,138
     Due to related parties                                              129,312          140,756
     Income tax payable                                                3,256,808          745,197
                                                                    ------------    -------------
       TOTAL CURRENT LIABILITIES                                      17,714,190       27,731,000
                                                                    ------------    -------------
                            STOCKHOLDERS' EQUITY:
    Preferred stock - $.001 par value; 1,000,000 shares authorized;
     none issued and outstanding
    Common stock - $.001 par value; authorized 50,000,000 shares;
     issued 15,379,746 shares and 16,679,746 shares, respectively         15,379           16,679
    Additional paid-in capital                                        37,201,575       38,955,275
    Retained earnings (deficit)                                        1,875,495         (379,292)
    Other comprehensive income (loss)                                    (39,582)         (10,488)
    Common stock held in Treasury, at cost, 942,853 shares
     and 773,066 shares, respectively                                 (2,201,900)      (1,900,030)
                                                                    ------------    -------------
       TOTAL STOCKHOLDERS' EQUITY                                     36,850,967       36,682,144
                                                                    ------------    -------------
                                                                     $54,565,157      $64,413,144
                                                                    ============    =============
</TABLE>



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


                                        1


<PAGE>   5


QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED                 NINE MONTHS ENDED
                                               ------------------------------   --------------------------------
                                               AUGUST 31,        AUGUST 31,      AUGUST 31,          AUGUST 31,
                                                  1999              1998            1999                1998
                                               ------------      -----------   --------------        -----------
<S>                                           <C>               <C>           <C>                   <C>
    Net revenue                                 $ 8,084,023      $16,509,577      $38,313,566       $ 74,405,166
    Cost of sales                                 3,580,331       11,438,705       26,701,338         57,455,092
                                               ------------      -----------   --------------       ------------
       Gross profit                               4,503,692        5,070,872       11,612,228         16,950,074

    Selling, general and administrative
     expenses                                     1,907,960        3,503,384        8,046,919         12,363,517
    Goodwill impairment charge                            -                -                -         18,514,435
                                               ------------      -----------   --------------       ------------
                                                  2,595,732        1,567,488        3,565,309        (13,927,878)

    Interest expense                                (20,965)         (57,062)         (23,393)          (129,971)
    Other (expense) income                         (184,052)         545,398          447,187          1,755,851
                                               ------------      -----------   --------------       ------------
       Income (loss) before provision
        for income taxes                          2,390,715        2,055,824        3,989,103        (12,301,998)

    Provision (benefit) for income taxes          1,092,525          594,922        1,734,316         (1,940,977)
                                               ------------      -----------   --------------       ------------
       Net income (loss)                        $ 1,298,190      $ 1,460,902      $ 2,254,787       $(10,361,021)
                                               ============      ===========   ==============       ============
    Basic income (loss) per share (Note 2):
      Net income (loss)                         $       .09      $       .09      $       .15       $       (.60)
                                               ------------      -----------   --------------       ------------
       Average shares outstanding                14,492,793       16,543,638       15,335,010         17,374,571
                                               ============      ===========   ==============       ============
    Diluted income (loss) per share
     (Note 2):
      Net income (loss)                         $       .09      $       .09      $       .15       $       (.60)
                                               ------------      -----------   --------------       ------------
       Average shares outstanding                14,505,773       16,551,950       15,364,965         17,374,571
                                               ============      ===========   ==============       ============
</TABLE>




   The accompanying notes are an integral part of these financial statements.
                                        2


<PAGE>   6


QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                             NINE MONTHS ENDED
                                                                       -------------------------------
                                                                       AUGUST 31,         AUGUST 31,
                                                                          1999               1998
                                                                       -----------      --------------
<S>                                                                    <C>             <C>
    Cash flows from operating activities:
     Net income (loss)                                                 $ 2,254,787       $(10,361,021)
     Items not affecting cash:
      Depreciation and amortization                                        194,990          1,150,334
      Goodwill impairment charge                                                           18,514,435
      Reserve for customer chargebacks                                  (8,475,130)       (22,337,309)
      Deferred income taxes                                              8,994,953        (11,786,126)
      Loss on disposal                                                     157,553
      Other                                                                113,837           (302,829)
     Changes in assets and liabilities:
      Accounts receivable                                               21,486,809         19,937,797
      Prepaid expenses and other current assets                          1,983,273            111,115
      Accounts payable                                                  (3,265,214)         2,143,422
      Income tax payable                                                 2,511,611
      Due to related parties, net                                           78,607          6,629,295
      Other, principally accrued expenses                                 (776,633)        (3,885,227)
                                                                       -------------     -------------
       Net cash provided by (used in) operating activities              25,259,443           (186,114)
                                                                       -------------     -------------

    Cash flows from investing activities:
     Purchases of securities                                           (34,954,659)       (59,503,000)
     Proceeds from sales of securities                                  28,364,552         67,606,000
     Other, principally capital expenditures                               (22,598)        (1,301,644)
     Purchase of long term investment                                     (500,000)
     Proceeds from the disposal of fixed assets                            258,808
                                                                       -------------     -------------
       Net cash (used in) provided by investing activities              (6,853,897)         6,801,356
                                                                       -------------     -------------
    Cash flows from financing activities:
     Acquisition of treasury stock                                        (301,870)        (9,609,784)
     Redemption of common stock                                         (1,755,000)
                                                                       -------------     -------------
       Net cash used in financing activities                            (2,056,870)        (9,609,784)
                                                                       -------------     -------------

    Net increase (decrease) in cash and cash equivalents                16,348,676         (2,994,542)

    Cash and cash equivalents, beginning of period                       2,123,630         10,063,717
                                                                       -------------     -------------

    Cash and cash equivalents, end of period                           $18,472,306       $  7,069,175
                                                                       =============     =============
</TABLE>


   The accompanying notes are an integral part of these financial statements.
                                        3


<PAGE>   7


QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

1.    GENERAL

     The consolidated financial statements for the three and nine month periods
     ended August 31, 1999 and August 31, 1998 are unaudited and reflect all
     adjustments (consisting only of normal recurring adjustments) which are, in
     the opinion of management, necessary for a fair presentation of the
     financial position and operating results for the interim period. The
     consolidated financial statements should be read in conjunction with the
     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, as
     amended, for the fiscal year ended November 30, 1998. The results of
     operations for the three and nine months ended August 31, 1999 are not
     necessarily indicative of the results for the entire fiscal year ending
     November 30, 1999.

2.    EARNINGS PER SHARE

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



<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED                  NINE MONTHS ENDED
                                                  ---------------------------      -------------------------------
                                                  AUGUST 31,      AUGUST 31,       AUGUST 31,           AUGUST 31,
                                                     1999            1998             1999                 1998
                                                  -----------     ----------       -----------          ----------
<S>                                              <C>             <C>              <C>                  <C>
    Denominator:
     Denominator for basic earnings per
      share - weighted-average shares             14,492,793      16,543,638       15,335,010           17,374,571
     Effect of dilutive securities:
      Stock options                                   12,980           8,312           29,955
                                                  ----------      ----------       ----------           ----------
     Dilutive potential common shares:
      Denominator for diluted earnings
      per share - adjusted weighted-average
      shares and assumed conversions              14,505,773       16,551,950      15,364,965            17,374,571
                                                 ===========      ===========    ==============         ===========
</TABLE>

      Options and warrants to purchase 1,661,609 and 1,498,402 shares of common
      stock were outstanding for the three months ended August 31, 1999 and
      1998, and 1,661,609 and 1,313,561 for the nine months ended August 31,
      1999 and 1998, respectively, but were not included in the computation of
      diluted earnings per share because their effect would be anti-dilutive.

3.    ADVERTISING EXPENSES

      The Company generally expenses advertising costs, which consist primarily
      of print, media, production, telemarketing and direct mail related
      charges, when the related advertising occurs. Total advertising expense
      incurred for the three months ended August 31, 1999 and 1998 were
      approximately $2,492,000 and $8,982,000, respectively, and nine months
      ended August 31, 1999 and August 31, 1998 were approximately $22,544,000
      and $35,701,000, respectively. Included in prepaid

                                       4
<PAGE>   8


QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

      expenses and other current assets is approximately $41,000 and $207,000
      relating to prepaid advertising expenses at August 31, 1999 and November
      30, 1998, respectively.

4.    ADOPTION OF SFAS 130, "REPORTING COMPREHENSIVE INCOME"

      As of December 1, 1998, the Company adopted Statement of Financial
      Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
      130"). SFAS No. 130 establishes new standards for reporting and displaying
      comprehensive income and its components within the Company's financial
      statements; however, the adoption of SFAS No. 130 has no impact on the
      Company's net income or stockholders' equity. SFAS No. 130 requires
      unrealized gains and losses on the Company's marketable securities to be
      reported in comprehensive income. Prior to adoption of this statement,
      such gains and losses were reported separately in stockholders' equity.
      Prior year financial statements have been reclassified to conform to the
      requirements of SFAS No. 130.

      During the three months ended August 31, 1999 and 1998, comprehensive
      income amounted to approximately $1,480,000 and $1,460,000, and for the
      nine months ended August 31, 1999 and 1998 comprehensive income (loss)
      amounted to $2,226,000 and ($10,360,000), respectively.


5.    RETIREMENT OF COMMON STOCK

      Pursuant to an agreement dated June 4, 1999, the Company redeemed
      1,300,000 shares of common stock at $1.35 per share from certain
      shareholders.

6.    RECENTLY ISSUED PRONOUNCEMENT

      The Financial Accounting Standards Board recently issued SFAS No. 131,
      "Disclosures about Segments of an Enterprise and Related Information,"
      which is effective for the Company on November 30, 1999. This
      pronouncement deals with disclosure matters and, upon adoption, will not
      have any effect on the Company's financial position, results of operations
      or cash flows. The Company is evaluating its reporting under this new
      statement.

7.    LITIGATION

      On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
      of himself and all others similarly situated v. Quintel Entertainment,
      Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in the United
      States District Court for the Southern District of New York; subsequently,
      a complaint entitled "Richard M. Woodward, on behalf of himself and all
      others similarly situated v. Quintel Entertainment, Inc., Jeffrey L.
      Schwartz and Daniel Harvey" was filed in that same court, as was a
      complaint entitled "Dr. Michael Title, on behalf of himself and all others
      similarly situated v. Jeffrey L. Schwartz, Jay Greenwald, Claudia Newman
      Hirsch, Andrew Stollman, Mark Gutterman, Steven L. Feder, Michael G.
      Miller, Daniel Harvey and Quintel Entertainment, Inc. (collectively, the
      "Complaints"). In addition to the Company, the defendants named in the
      Complaints are present and former officers and directors of the Company
      (the "Individual Defendants"). The plaintiffs seek to bring the actions on
      behalf of a purported class of all persons or entities who purchased
      shares of the Company's Common Stock from July 15, 1997 through
      October 15, 1997 and who were damaged thereby, with certain exclusions.
      The Complaints allege violations of Sections 10(b) and 20 of the
      Securities Exchange Act of 1934, and allege that the defendants made
      misrepresentations and


                                       5
<PAGE>   9

QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

      omissions concerning the Company's financial results, operations and
      future prospects, in particular relating to the Company's reserves for
      customer chargebacks and its business relationship with AT&T. The
      Complaints allege that the alleged misrepresentations and omissions caused
      the Company's Common Stock to trade at inflated prices, thereby damaging
      plaintiffs and the members of the purported class. The amount of damages
      sought by plaintiffs and the purported class has not been specified.

      On September 18, 1998, the District Court ordered that the three actions
      be consolidated, appointed a group of lead plaintiffs in the consolidated
      actions, approved the lead plaintiffs' selection of counsel for the
      purported class in the consolidated actions, and directed the lead
      plaintiffs to file a consolidated complaint. The consolidated and amended
      class action complaint ("Consolidated Complaint") which has been filed
      asserts the same legal claims based on essentially the same factual
      allegations as did the Complaints. On February 19, 1999, the Company and
      the Individual Defendants filed a motion to dismiss the Consolidated
      Complaint. Plaintiffs have filed papers in opposition to the motion to
      dismiss and the Company and the individual defendants have filed reply
      papers in further support of the motion. The District Court has not yet
      ruled on the motion to dismiss. The Company believes that the allegations
      in the Complaints are without merit, and intends to vigorously defend the
      consolidated actions. The Company is unable at this time to assess the
      outcome of the Consolidated Complaint or the materiality of the risk of
      loss in connection therewith, given the preliminary stage of the
      Consolidated Complaint and the fact that the Consolidated Complaint does
      not allege damages with specificity.

      An action was brought by Paramount Advertiser Services on August 13, 1998
      against Access Resource Services, Inc. ("Access") and Quintel Media
      Management, a subsidiary of the Company. The action alleges breach of a
      contract to purchase advertising time as well as breach of a settlement
      agreement resolving earlier disputes, and alleges resulting damages of
      approximately $3,300,000. In a settlement agreement dated June 30, 1999,
      all parties agreed to resolve the action in the amount of $2,300,000,
      payable by Access, of which, as of June 30, 1999, $1,850,000 has been
      paid. Access was required to make three additional payments of $150,000.
      Access has made all required payments and the claim has been settled in
      full subsequent to August 31, 1999.

      A counterclaim action was brought against the Company by a supplier of
      cellular phones alleging damages of $1,030,000 relating to a cancelled
      purchase order. The Company had previously commenced an action against the
      supplier seeking to recover approximately $480,000 from such supplier
      alleging breach of the contract. The Company intends to pursue its claim
      against the supplier and believes the counterclaim is without merit. Due
      to the early stage of the matters, it is not possible to determine the
      amount of liability, if any, that may result and exceed amounts
      recoverable under the guarantee.

                                      6
<PAGE>   10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

        OVERVIEW

               Quintel Communications, Inc. (the "Company") historically has
been engaged in the direct marketing and providing of various telecommunication
products and services to the domestic consumer market. Since the commencement of
the fiscal year ending November 30, 1999, the Company has been increasingly
relying on the utilization of its extensive database in the continued
implementation of its marketing program for its residential long distance
customer acquisition programs. The Company's revenues from the foregoing are
generated through the direct sale of products and services to consumers and
through revenue sharing arrangements with its residential long distance customer
acquisition clientelle.

        The Company's forward looking strategy includes plans for the internal
development of Internet businesses, operated within majority-owned subsidiaries,
as well as investments in Internet and related direct marketing companies. These
investments will be made directly by the Company, and in some cases investments
will be made under venture capital funding agreements, none of which have yet
been executed. See "Forward Looking Information".

                                       7
<PAGE>   11
        The following is a discussion of the financial condition and results of
operations of the Company for the three and nine month periods ended August 31,
1999 and August 31, 1998. It should be read in conjunction with the interim
consolidated financial statements of the Company, the Notes thereto and other
financial information included elsewhere in this report.

RESULTS OF OPERATIONS

Three Months Ended August 31, 1999 and August 31, 1998

The Company's net revenues for its telecommunications products and services and
related royalty income for the three months ended August 31, 1999 and 1998 are
presented below:

Net Revenues:

<TABLE>
<CAPTION>
                                     Quarter Ended
                                       August 31,
                              -------------------------      Change        Change
                                  1999         1998             $             %
                              -----------   -----------   -------------   ---------
<S>                            <C>          <C>           <C>             <C>
Royalty income                 $1,976,545   $              $  1,976,545      100 %
Club 900 products                 358,263     3,927,463     (3,569,200)      (91)
Enhanced Services               1,434,006     5,648,916     (4,214,910)      (75)
Long distance customer
  acquisitions and usage        4,315,209     4,488,786       (173,577)       (4)
Cellular phone activities                     1,849,286     (1,849,286)     (100)
Other                                           595,126       (595,126)     (100)
                               ----------   -----------    -----------        --
                               $8,084,023   $16,509,577    $(8,425,554)      (51)%
                               ==========   ===========    ===========        ==
</TABLE>

Net Revenue for the three months ended August 31, 1999 decreased $8,425,554, or
51%, when compared to the three months ended August 31, 1998. The decrease was
partially attributable to reductions in the Company's enhanced service revenues
of approximately

                                       8
<PAGE>   12
$4.2 million, or a 75% reduction, when compared with the prior year's comparable
period. This decline in enhanced service net revenue was the direct result of
the Company discontinuing the active marketing of such services in response to
the November 1998 termination of the Company's billing service agreement with
Billing Information Concepts, Inc. ("BIC"), the Company's primary enhanced
service billing agent at that time. The Company continues to bill and provide
enhanced services to the member base that was in place at the time of the
billing cessation. During the three months ended August 31, 1999, the Company
recognized an approximate 16% average monthly reduction in such remaining member
base. Subject to the Company's limited level of enhanced service customer
acquisition marketing and the above-referenced attrition rate, management
believes that the enhanced service portion of the Company's net revenues will
continue to decline for the balance of fiscal 1999 and the fiscal year ending
November 30, 2000. See "Service Bureau and Local Exchange Carriers" for further
discussion of enhanced services.

        The decrease in net revenues was also partially attributable to
reductions in the Company's Club 900 product net revenues of approximately $3.6
million, when compared with the three months ended August 31, 1998, for a
comparative percentage decrease of approximately 91%. The significant cause of
such reduction in Club 900 net revenues relates to an agreement entered into
between the Company and Access Resources Services, Inc. ("ARS"), which
eliminated the Company's active participation in the "900" pay per call business
(the "ARS Agreement"). Such ARS Agreement is more fully described in
"Consummation of Transactions Impacting Future Fiscal Periods". This reduction
is partially offset by royalty income of approximately $2 million, earned in
consideration for the suspension of the Company's active role in the "900" pay
per call

                                       9
<PAGE>   13
business. The ARS Agreement became effective June 1, 1999, and therefore, there
was no comparative prior year royalty revenue.

        Additional components of the reduction in net revenues were decreases in
conventional cellular phone customer acquisitions of approximately $1.8
million, or a 100% reduction when compared to the three months ended August 31,
1998, and a decrease in other revenue of approximately $600,000, or a reduction
of 100% when compared to the prior year. These reductions relate to (1) the sale
of the Company's 51% interest in an entity which acquired conventional cellular
phone customers for a recognized wireless carrier, and (2) the Company's
discontinuance of its prepaid cellular phone activities, both of which occurred
in the fourth quarter of fiscal 1998.

         The Company's net revenues from its long distance customer acquisition
services and related usage decreased approximately $200,000 from the prior
year's comparable period, or 4%. The customer acquisition commission component
decreased from approximately $4 million in the three months ended August 31,
1998 to approximately $2.3 million in the three months ended August 31, 1999,
for a decrease of approximately $1.7 million, or 44%. The Company ceased its
primary long distance customer acquisition program, effective July 31, 1999. As
a result thereof, management anticipates that the long distance acquisition
commission revenues will continue to decline for the remainder of fiscal 1999,
as well as for additional fiscal periods. The decrease in customer acquisition
commission revenues was offset by the Company's net revenues earned pursuant to
usage sharing agreements with the long distance carrier, whereby the Company
earned a percentage of an acquired customer's long distance telephone usage,
which increased to approximately $2.1 million in the three months ended August
31, 1999, from $500,000

                                       10
<PAGE>   14
for the three months ended August 31, 1998, representing an increase of
approximately $1.6 million, or 310%. The percentage of usage sharing revenues to
which the Company is entitled, however, was substantially reduced in accordance
with the terms of the July 31, 1999 cessation of the Company's primary
acquisition program. The usage sharing agreement revenues are a product of
current customer acquisitions and the retained customers acquired in prior
quarterly periods. Pursuant to such revenue determinants, management believes
that the Company's net revenues under existing usage sharing agreements will
decline until such time that long distance customer acquisitions begin to
increase and new usage sharing agreements are negotiated and implemented.

The Company's reported net revenues are a product of the gross revenues
generated within each reporting period less the provision for chargebacks for
the related reporting period, which is recorded as a direct reduction from such
gross revenues. The gross revenues from royalties and long distance acquisition
commissions are not subject to provision for consumer chargebacks.

The Company's gross revenues for its telecommunications products and services
and related royalty income for the three months ended August 31, 1999 and 1998
are presented below:

<TABLE>
<CAPTION>
Gross Revenues:                     Quarter Ended
                                      August 31,
                               ------------------------       Change       Change
                                  1999          1998            $            %
                               ----------   -----------    ------------   ---------
<S>                            <C>          <C>            <C>            <C>
Royalty income                 $1,976,545   $        --    $  1,976,545     100 %
Club 900 products                 403,802     5,075,333      (4,671,531)    (92)
Enhanced Services               1,704,216    11,414,713      (9,710,497)    (85)
Long distance customer
  acquisitions and usage        4,315,209     4,488,786        (173,577)     (4)
Cellular phone activities              --     3,259,450      (3,259,450)   (100)
Other                                  --       592,893        (592,893)   (100)
                               ----------   -----------    ------------    -----
                               $8,399,772   $24,831,175    $(16,431,403)    (66)%
                               ==========   ===========    ============    =====
</TABLE>

                                       11
<PAGE>   15
The factors listed in the net revenue section, above, describing the reasons
for the changes in net revenues for the three months ended August 31, 1999, as
compared to the three months ended August 31, 1998, are directly applicable to
gross revenues as well.

The provisions for chargebacks for the Company's telecommunication product and
service revenues for the three months ended August 31, 1999 and 1998 are
presented below:

<TABLE>
<CAPTION>
Chargebacks                        Quarter Ended
                                     August 31,
                                ---------------------      Change       Change
                                  1999        1998            $           %
                                --------   ----------    -----------   ---------
<S>                             <C>        <C>           <C>           <C>
"900" Entertainment Services
Royalty income
Club 900 products               $ 45,539   $1,147,870    $(1,102,331)     (96)%
Enhanced Services                270,210    5,765,797     (5,495,587)     (95)
Long distance customer
  acquisitions And usage
Cellular phone activities                   1,394,800     (1,394,800)    (100)
Other                                          13,132        (13,132)    (100)
                                --------   ----------    -----------     -----
                                $315,749   $8,321,599    $(8,005,850)     (96)%
                                ========   ==========    ===========     =====
</TABLE>

        The substantial decrease in the provision for chargebacks is directly
related to the decrease in gross revenues. The actual chargebacks incurred for
services and programs which, as

                                        12

<PAGE>   16
referred to above, are no longer being marketed, are charged against the
previously established reserves, with any adjustment being reflected currently.

        The Company's cost of revenues are comprised of (1) marketing costs
directly associated with the procurement and retention of customers, which
include direct response advertising costs, promotional costs and premium
fulfillment costs, and (2) the related billing, collection and customer service
costs, both of which are offset by the net revenue generated from certain
premium offerings in conjunction with the marketing of other products and
services.

         The Company's cost of revenues for the three months ended August 31,
1999 and 1998 are presented below:

<TABLE>
<CAPTION>
                                         Quarter
                                          Ended
Cost of revenues                        August 31,
                                 -------------------------       Change        Change
                                    1999          1998              $             %
                                 ----------    -----------    ------------    ---------
<S>                              <C>           <C>            <C>               <C>
Advertising, promotion and
  fulfillment costs              $3,041,716    $13,888,038     $(10,846,322)     (78)%
Service Bureau fees, including
  customer service and psychic
  operators                       1,088,434      2,456,471      (1,368,037)      (56)
"900" Pay Per Call Premium
  Net revenues                     (549,819)    (4,905,804)     (4,355,985)      (89)
                                 ----------    -----------    ------------      -----
                                 $3,580,331    $11,438,705    $ (7,858,374)      (69)%
                                 ==========    ===========    ============      =====
</TABLE>

        The decrease in cost of revenues is directly attributable to the
Company's significantly reduced marketing efforts and related expenditures
during the three months ended August 31, 1999, when compared to the three months
ended August 31, 1998. The reduction of these costs resulted from the Company's
discontinuance of marketing its

                                        13

<PAGE>   17
enhanced services in response to the termination, by BIC, of the billing service
agreement in November 1998. In addition, the Company significantly reduced its
marketing efforts directed at the Company's residential long distance customer
acquisition activities based on increased costs to acquire customers, associated
fulfillment costs and significantly increased customer service costs. All of
these factors contributed to decreased margins. Decreases in the cost of
revenues were also attributable to the discontinuance of the Company's active
marketing of its "900" pay-per call services as a premium to potential and
acquired long distance customers, and the discontinuance of the marketing of the
Club 900 product, both in accordance with the ARS Agreement. For additional
discussion of the Company's prior periods' "900" pay per call activities, see
"Prior Year Special Charge".

        The service bureau fees decreased to a lesser degree when compared to
advertising, promotion and fulfillment cost percentage decreases, as a result of
increased customer service costs at our service bureaus and at the local
exchange carrier level.

        The Company's selling, general and administrative expenses ("SG&A") are
comprised of compensation costs and related expenses for executive, sales,
finance and general administration personnel, professional fees, insurance, rent
and all other general corporate expense items.

         The Company's SG&A expenses for the three months ended August 31, 1999
and 1998 are presented below:

<TABLE>
<CAPTION>
                                    Quarter
                                     Ended
                                   August 31,
                            -----------------------     Change        Change
                               1999         1998           $             %
                            ----------   ----------   -----------    ---------
<S>                         <C>          <C>          <C>            <C>
Selling, general and
  administrative expenses   $1,907,960   $3,503,384   $(1,595,424)     (46)%
                            ==========   ==========   ===========      ===
</TABLE>


                                        14

<PAGE>   18
        The decrease in SG&A expense in the three months ended August 31, 1999,
as compared to the prior year's three month period, is primarily attributable to
the Company's reduction in personnel (and all associated costs of insurance,
payroll taxes and overhead) during the period commencing September 1, 1998 and
continuing into the three months ended August 31, 1999. Additional reductions in
SG&A are attributable to the ARS Agreement, pursuant to which the Company (1)
eliminated its media buying operation, which included a staff of approximately
twenty-one employees, (2) was released from continuing rent expense obligations
under an assignment of a lease for the office space occupied by such media
buying operation and (3) disposed of all the media buying operation's property
and equipment.

        The Company's other (expense) income classification for the three months
ended August 31, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
Other (expense) income                 Quarter
                                        Ended
                                      August 31,
                               ----------------------      Change       Change
                                  1999         1998          $             %
                               ----------    --------    ----------    ---------
<S>                            <C>           <C>         <C>           <C>
Other (expense) income         $(184,052)    $545,398    $(729,450)      (134)%
                               =========     ========    =========       =====
</TABLE>

        Other income (expense) primarily consisted of interest income on the
Company's investments and funds held in reserve for future chargebacks escrowed
by the Company's primary "900" entertainment service bureau, offset by joint
venture

                                            15

<PAGE>   19
investment write-downs and losses on fixed asset dispositions resulting from the
terms of the ARS Agreement.

The Company's effective income tax rate is a result of the combination of
federal income taxes at statutory rates and state taxes.

                                        16
<PAGE>   20
NINE MONTHS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998

The Company's net revenues for its telecommunications products and services and
related royalty income for the nine months ended August 31, 1999 and 1998 are
presented below:

<TABLE>
<CAPTION>
Net Revenues:                      Nine-months Ended
                                       August 31,
                               -------------------------      Change        Change
                                   1999         1998             $             %
                               -----------   -----------   ------------    ---------
<S>                            <C>           <C>           <C>             <C>
"900" Entertainment Services   $        --   $24,304,753   $(24,304,753)      100%
Royalty income                   1,976,545            --      1,976,545       100
Club 900 products                2,486,901    13,184,858    (10,697,957)      (81)
Enhanced Services                4,898,540    18,263,869    (13,365,329)      (73)
Long distance customer
  acquisitions and usage        28,837,767    13,250,187     15,587,580
Cellular phone activities               --     4,230,522     (4,230,522)     (100)
Other                              113,813     1,170,977     (1,057,164)      (90)
                               -----------   -----------   ------------      -----
                               $38,313,566   $74,405,166   $(36,091,600)      (49)%
                               ===========   ===========   ============      =====
</TABLE>

        Net Revenue for the nine months ended August 31, 1999 decreased
$36,091,600, or 49%, when compared to the nine months ended August 31, 1998. The
decrease was partially attributable to reductions in the Company's enhanced
service revenues of approximately $13.4 million, or a 73% reduction when
compared with the prior year's comparable period. This decline in enhanced
service net revenue was the direct result of the Company discontinuing the
active marketing of such services in response to the November 1998 billing
service agreement termination by Billing Information Concepts, Inc.("BIC"), the
Company's primary enhanced service billing agent at that time. The

                                        17
<PAGE>   21
Company continues to bill and provide enhanced services to the member base that
was in place at the time of the billing cessation. During the nine months ended
August 31, 1999, the Company has recognized an approximate 14% average monthly
reduction in such remaining member base. Subject to the limited level of
enhanced service customer acquisition marketing and the above referenced
attrition rate, management believes that the enhanced service portion of the
Company's net revenues will continue to decline for the balance of fiscal 1999
and the fiscal year ending November 30, 2000. See "Service Bureau and Local
Exchange Carriers" for further discussion of enhanced services.

        The decrease in net revenue was also partially attributable to
reductions in the Company's Club 900 product net revenues of approximately $10.7
million, when compared with the nine months ended August 31, 1998, for a
comparative percentage decrease of approximately 81%. The significant cause of
such reduction in Club 900 net revenues was the Company's intentional migration
away from the "900" entertainment service business, which began in May 1998 and
culminated in the consummation of the Company's June 1999 agreement with Access
Resource Services, Inc. ("ARS"), which fully eliminated the Company's active
participation in the "900" pay per call business (the "ARS Agreement"). Such ARS
Agreement is more fully described in "Consummation of Transactions Impacting
Future Fiscal Periods". The "900" entertainment business was the exclusive
avenue for Club 900 product marketing and member procurement. This reduction is
partially offset by royalty income of approximately $2 million, earned in
consideration for the suspension of the Company's active role in the

                                        18

<PAGE>   22
"900" pay per call business. The ARS Agreement became effective June 1,
1999, and therefore, there was no comparative prior year royalty revenue.

        Additional components of the reduction in net revenues were decreases in
conventional cellular phone customer acquisitions of approximately $4.2 million,
or a 100% reduction when compared to the nine months ended August 31, 1998, and
a decrease in other revenue of approximately $1.1 million, or a reduction of
90%, when compared to the prior year's comparable period. These reductions
relate to (1) the sale of the Company's 51% interest in an entity which acquired
conventional cellular phone customers for a recognized wireless carrier, and (2)
the Company's discontinuance of its prepaid cellular phone activities, both of
which occurred in the fourth quarter of fiscal 1998.

        The Company's net revenues from its long distance customer acquisition
services and related usage increased $15.6 million from the prior year's
comparable period, or 118%. The customer acquisition commission component
increased from approximately $12.6 million in the nine months ended August 31,
1998 to approximately $21.6 million in the nine months ended August 31, 1999,
for an increase of approximately $9 million, or 72%. The Company ceased its
primary long distance customer acquisition program effective July 31, 1999. As
a result thereof, management anticipates that the long distance acquisition
commission revenues will decline for the remainder of fiscal 1999, as well as
for additional fiscal periods. The decrease in customer acquisition commission
revenues was offset by the Company's net revenues earned pursuant to usage
sharing agreements with the long distance carrier, whereby the Company earned a
percentage of an acquired customer's long distance telephone usage, which
increased to approximately $7.2 million in the nine months ended August 31,
1999, from $600,000 for the nine months ended August 31, 1998, representing an
increase of approximately

                                        19

<PAGE>   23
$6.6 million, or 1,033%. The percentage of usage sharing revenues to which the
Company is entitled, however, was substantially reduced in accordance with the
terms of the July 31, 1999 cessation of the Company's primary acquisition
program. The usage sharing agreement revenues are a product of current customer
acquisitions and the retained customers acquired in prior quarterly periods.
Pursuant to such revenue determinants, management believes that the Company's
net revenues under existing usage sharing agreements will decline until such
time that long distance customer acquisitions begin to increase and new usage
sharing agreements are negotiated and implemented.

The Company's reported net revenues are a product of the gross revenues
generated within each reporting period less the provision for chargebacks for
the related reporting period, which is recorded as a direct reduction from such
gross revenues. The gross revenues from royalties and long distance acquisition
commissions are not subject to provision for consumer chargebacks.

The Company's gross revenues for its telecommunications products and services
and related royalty income for the nine months ended August 31, 1999 and 1998
are presented below:

<TABLE>
<CAPTION>
Gross Revenues                      Nine-months Ended
                                       August 31,
                               --------------------------       Change       Change
                                   1999          1998              $            %
                               -----------   ------------    ------------   ---------
<S>                            <C>           <C>             <C>            <C>
"900" Entertainment Services   $        --   $ 50,046,532    $(50,046,532)     (100)%
Royalty income                   1,976,545             --       1,976,545       100
Club 900 products                5,888,519     20,761,480     (14,872,961)      (72)
Enhanced Services               11,165,767     32,083,111     (20,917,344)      (65)
Long distance customer
  acquisitions and usage        28,884,197     13,250,187      15,634,010       118
Cellular phone activities               --      6,130,393      (6,130,393)     (100)
Other                              113,813      1,387,015      (1,273,202)      (92)
                               -----------   ------------    ------------      -----
                               $48,028,841   $123,658,718    $(75,629,877)      (61)%
                               ===========   ============    ============      =====
</TABLE>

                                             20

<PAGE>   24
The factors listed in the net revenue section, above, describing the reasons for
the changes in net revenues for the nine months ended August 31, 1999, as
compared to the nine months ended August 31, 1998, are directly applicable to
gross revenues as well.

        The provisions for chargebacks for the Company's telecommunication
product and service revenues for the nine months ended August 31, 1999 and 1998
are presented below:

<TABLE>
<CAPTION>
Chargebacks                        Nine-months Ended
                                       August 31,
                               -------------------------      Change        Change
                                   1999         1998             $             %
                               -----------  ------------   ------------    ---------
<S>                            <C>          <C>            <C>             <C>
"900" Entertainment Services   $       --   $25,741,779    $(25,741,779)     (100)%
Royalty income                         --            --              --
Club 900 products               3,401,620     7,576,622      (4,175,002)      (55)
Enhanced Services               6,313,565    13,819,242      (7,505,677)      (54)
Long distance customer
  acquisitions and usage               --            --              --
Cellular phone activities              --     1,899,871      (1,899,871)     (100)
Other                                  --       216,038        (216,038)     (100)
                               ----------   -----------    ------------      ----
                               $9,715,185   $49,253,552    $(39,538,367)      (80)%
                               ==========   ===========    ============      ====
</TABLE>


        The substantial decrease in the provision for chargebacks is directly
related to the decrease in gross revenues. The actual chargebacks incurred for
services and programs which, as referred to above are no longer being marketed,
are charged against the previously established reserves, with any adjustment
being reflected currently.

        The Company's cost of revenues are comprised of (1) marketing costs
directly associated with the procurement and retention of customers, which
include direct response advertising costs, promotional costs and premium
fulfillment costs, and (2) the related billing, collection and customer service
costs, both of which are offset by

                                          21

<PAGE>   25
the net revenue generated from certain premium offerings in conjunction with the
marketing of other products and services.

         The Company's cost of revenues for the nine months ended August 31,
1999 and 1998 are presented below:

<TABLE>
<CAPTION>
                                      Nine-months Ended
Cost of revenues                         August 31,
                                 --------------------------      Change        Change
                                     1999          1998            $             %
                                 ------------   -----------    ------------    ---------
<S>                              <C>            <C>            <C>             <C>
Advertising, promotion and
  fulfillment costs              $ 31,572,119   $40,607,047    $ (9,034,928)      (22)%
Service Bureau fees, including
  customer service and psychic
  operators                         4,157,876    21,753,849     (17,595,973)      (81)
"900" Pay Per Call Premium
  Net revenues                     (9,028,657)   (4,905,804)     (4,122,853)      (84)
                                 ------------   -----------    ------------       ---
                                 $ 26,701,338   $57,455,092    $(30,753,754)      (54)%
                                 ============   ===========    ============       ===
</TABLE>

        The decrease in cost of revenues is directly attributable to the
Company's significantly reduced marketing efforts and related expenditures
during the nine months ended August 31, 1999, when compared to the nine months
ended August 31, 1998. The reduction of these costs resulted from the Company's
discontinuance of marketing its enhanced services in response to the
termination, by BIC, of the billing services agreement in November 1998. In
addition, the Company significantly reduced its marketing efforts directed at
the Company's residential long distance customer acquisition activities based on
increased costs to acquire customers, associated fulfillment costs and
significantly increased customer service costs. All of these factors contributed
to decreased margins. Decreases in the cost of revenues were also attributable
to the discontinuance of the Company's active marketing of its "900" pay per
call services as a

                                          22

<PAGE>   26
premium to potential and acquired long distance customers, and the
discontinuance of the marketing of the Club 900 product, both in accordance with
the ARS Agreement.

        Advertising, promotion and fulfillment costs decreased, to a lesser
degree, when compared to the percentage decreases in service bureau fees during
the nine months ended August 31, 1999. This resulted from the Company's
intentional migration from the "900" entertainment service business. Such
migration commenced late in the second quarter of fiscal 1998 (see - "Prior Year
Special Charge") and was effectively completed with the consummation of the ARS
Agreement in June of 1999. The "900" entertainment service activity in the first
six months of fiscal 1998 accounted for substantial service bureau costs which
significantly exceeded the similar service bureau costs incurred in the entire
nine months ended August 31, 1999. The advertising, promotion and fulfillment
costs decreased by approximately $9 million, or 22 % when compared with the
prior year's nine-month period. This percentage decrease of only 22% was the
result of the Company's increased marketing and fulfillment costs incurred in
fiscal 1999 which related to the residential long distance customer acquisition
program. These cost increases partially offset the reductions in marketing costs
incurred when the Company significantly curtailed marketing expenditures for its
"900" pay per call business.

                                        23

<PAGE>   27
        The Company's selling, general and administrative expenses ("SG&A") are
comprised of compensation costs and related expenses for executive, sales,
finance and general administration personnel, professional fees, insurance,
rent and all other general corporate expense items.

        The Company's SG&A expenses for the nine months ended August 31, 1999
and 1998 are presented below:

<TABLE>
<CAPTION>
                                Nine-months Ended
                                   August 31,
                            ------------------------     Change        Change
                               1999          1998           $             %
                            ----------   -----------   -----------    ---------
<S>                         <C>          <C>           <C>            <C>
Selling, general and
  administrative expenses   $8,046,919   $12,363,517   $(4,316,598)      (35)%
                            ==========   ===========   ===========       ====
</TABLE>

        The decrease in SG&A expense, in the nine months ended August 31, 1999
compared to the prior year's comparable period, is primarily attributable to the
Company's reduction in personnel (and all associated costs of insurance, payroll
taxes and overhead) during the period commencing September 1, 1998 and
continuing into the three months ended August 31, 1999. Additional reductions in
SG&A are attributable to the ARS Agreement, pursuant to which the Company (1)
eliminated its media buying operation which included a staff of approximately
twenty-one employees, (2) was released from continuing rent expense obligations
under an assignment of a lease for the office space occupied by such media
buying operation and (3) disposed of all the media buying operation's property
and equipment.

                                        24

<PAGE>   28
The Company's other (expense) income classification for the nine months ended
August 31, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
Other (expense) income       Nine-months Ended
                                August 31,           Change        Change
                           ---------------------
                             1999        1998           $             %
                           --------   ----------   -----------    ---------
<S>                        <C>        <C>          <C>            <C>
  Other (expense) income   $545,398   $1,755,851   $(1,210,453)      (69)%
                           ========   ==========   ===========       ====
</TABLE>

        Other income (expense) primarily consisted of interest income on the
Company's investments and funds held in reserve for future chargebacks escrowed
by the Company's primary "900" entertainment service bureau, offset by joint
venture investment write-downs and losses on fixed asset dispositions resulting
from the terms of the ARS Agreement.

The Company's effective income tax rate is a result of the combination of
federal income taxes at statutory rates and state taxes.

                                        25

<PAGE>   29
LIQUIDITY AND CAPITAL RESOURCES

         At August 31, 1999, the Company had cash of $18,472,306, reflecting an
increase of approximately $16.3 million, when compared to the $2,123,630 in cash
held at November 30, 1998.

         During the nine months ended August 31, 1999 net cash provided by
operating activities was $25,259,443. The significant components resulting in
the increase were collections on trade accounts receivable of approximately
$21.5 million, collections on Federal income tax refunds of approximately $9
million, reductions to prepaid expenses of approximately $2.5 million and net
income of approximately $2.3 million, for the nine months ended August 31, 1999,
offset by payments on trade payables and chargeback reserves for the nine months
ended August 31, 1999 of approximately $3.3 and $8.5 million, respectively.

         The $6,853,897 in net cash used in investing activities primarily
resulted from marketable security purchases exceeding cash generated on
marketable securities, which matured during the nine months ending August 31,
1999. Additional net cash used in investing activities during the three months
ended August 31, 1999 amounted to $500,000, and was used to acquire an
approximate three percent interest in an internet start up company. As an offset
to cash used in investing activities during the three months ended August 31,
1999, the Company received approximately $250,000 in proceeds from the sale of
its media departments' property and equipment.


                                          26


<PAGE>   30
        Cash used by investing activities during the nine months ended August
31, 1999 amounted to $2,056,870, of which $301,870 was expended for the
repurchase of treasury stock and $1,755,000 was used for the redemption and
subsequent retirement of 1,300,000 shares of common stock at $1.35 per share.
This transaction was completed in June 1999 and is more fully described in
"Consummation of Transactions Impacting Future Fiscal Periods".

        During the fiscal year ended November 30, 1997, the Company had begun to
recognize substantial increases in chargebacks experienced on its "900"
entertainment service revenues. As a result, two of the Company's service
providers instituted a cash reserve policy. Under this cash reserve policy, the
service providers withhold cash flows from carrier collections in amounts that
approximate the Company's future expected chargebacks, as they relate to each
service provider. As of August 31, 1999, the reserves withheld approximated
$5.9 million and are included as a component of the Company's accounts
receivable. Historically, the Company has financed its working capital
requirements principally through cash flow from operations and receivables
financing. See "Forward Looking Information".

         Historically, the Company's primary cash requirements were to fund the
cost of advertising and promotion. Due to the repositioning of the Company's
operations, its primary cash requirement will be to fund overhead. Additional
funds may be used in the purchasing of equipment and services in connection with
the commencement of new business lines and further development of businesses
currently being test marketed, as well as for investment in Internet and related
direct marketing companies. The Company currently has no other plans or material
commitments for capital expenditures. Under currently proposed operating plans
and assumptions (including the substantial costs associated with

                                        27
<PAGE>   31
the Company's test marketing and business development activities), management
believes that projected cash flows from operations and available cash resources
will be sufficient to satisfy the Company's anticipated cash requirements for at
least the next twelve months. Currently, the Company does not have any long-term
obligations and does not intend to incur any long-term obligations in the near
future. As the Company seeks to diversify with new business ventures, as well as
new telecommunication products and services, the Company may use existing cash
reserves, long-term financing, or other means to finance such diversification.
See "Forward Looking Information ".

CONSUMMATION OF TRANSACTIONS IMPACTING FUTURE FISCAL PERIODS

        In accordance with the Company's strategy of intentionally migrating
away from its active role in the 900 pay per call business, on June 4, 1999, the
Company entered into an agreement (the "ARS Agreement") with Access Resource
Services, Inc. ("ARS"), pursuant to which the Company agreed to cease
conducting, marketing, advertising or promoting certain "stand alone" 900
Pay-Per-Call Psychic Services described in the ARS Agreement (the "900 Psychic
Services") directly or indirectly through any affiliate, until January 17, 2001.
In addition, the Company agreed to cease the conduct of the media buying
operation which it conducted under the name "Quintel Media" and ARS agreed to
assume responsibility for the "Quintel Media" employees and for the lease of the
premises used by "Quintel Media" in Fort Lauderdale, Florida, and to acquire the
computer equipment and other furniture, fixtures and leasehold improvements used
by "Quintel Media" at such premises. The ARS Agreement does not prohibit the
Company from offering psychic and psychic-related services, provided such
services are (a) not


                                   28

<PAGE>   32
billed to the consumer as a "900" telephone billing record or (b) offered as a
free premium with or adjunct to the marketing or offering of other products and
services.

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

        The ARS Agreement was consummated on June 4, 1999 with an effective date
of May 31, 1999. During the quarter ended August 31, 1999, the Company has
recorded royalty revenue under the terms of the ARS Agreement amounting to
$1,976,545, all of which has been collected as of the date of this filing.
Additionally, within the three months ended August 31, 1999 the Company has
received $258,808 in consideration for the sale of the media department assets
discussed above. Earnings of the Company, as well as the cost of revenues
associated therewith, for all future periods will be significantly impacted as a
result of the consummation of the ARS Agreement, as the Company will no longer
be conducting, marketing, advertising or promoting 900 Psychic Services, but
will be receiving royalty fees for the ongoing usage of such 900 Psychic
Services that the Company did not receive in prior periods.

                                   29

<PAGE>   33
See "Forward Looking Information".

PRIOR YEAR SPECIAL CHARGE

During the fiscal year ended November 30, 1998, the Company experienced
decreasing margins on its "900" entertainment services, attributable to
significant increases in marketing expenditures related thereto and customer
chargebacks. As a result, these services were not providing positive operating
results and cash flow. Consequently, during the fiscal quarter ended August 31,
1998, the Company discontinued marketing such services as an independent revenue
source and began using them in conjunction with marketing the Company's other
products and services, including its residential distributor program agreement
with LCI International Telecom Corp., d/b/a Qwest Communications Services
("Qwest"). See " -- Residential Long Distance Customer Acquisition Services."
Accordingly, as required by Statement of Financial Standards No. 121 ("FAS
121"), the Company reviewed long-lived assets, including goodwill, for
impairment. The Company has evaluated the recoverability of its long-lived
assets by measuring the carrying amount of the assets against projected
undiscounted future cash flows associated with them. The Company determined the
"900" entertainment services could not be disposed of and there was no
predictable estimate of any future cash flows associated with any alternative
uses. Accordingly, the Company concluded that the intangibles, primarily
goodwill, associated with the Company's 1996 acquisition of the remaining 50%
interest in New Lauderdale, were impaired. As such, a non-cash charge of
approximately $18.5 million, which represented the remaining balance of the
intangibles, primarily goodwill, was recorded at May 31, 1998. This impairment
is directly responsible for the decrease in gross revenues generated from the
Company's "900" entertainment services for the nine months ended August 31, 1999
of approximately

                                        30

<PAGE>   34
$42 million, or 84%, when compared with gross revenues of $50,046,532 recorded
in the nine months ended August 31, 1998. The aforementioned decrease in the
marketing of the Company's "900" entertainment service is also partially
responsible for the decrease in the Company's Club 900 revenues. Such Club 900
revenues are generated by soliciting a caller to subscribe to the Company's Club
900 product while such potential Club member is conducting a live psychic call
as offered through the Company's "900" entertainment services. Therefore, with
the reduction in the emphasis of marketing the "900" entertainment services as
an independent revenue source, a corresponding effect was the reduction in
potential callers available for solicitation of the Company's Club 900 product.
In accordance with the ARS Agreement, such Club 900 product revenue ceased being
effective June 1, 1999.

SERVICE BUREAU AND LOCAL EXCHANGE CARRIERS

        In November 1998, three of the Local Exchange Carriers ("LECs"),
Ameritech Corp., Bell Atlantic Corp. and SBC Communications, Inc., refused to
bill customers for enhanced services provided by the Company. This was the
result of what the LECs claimed was excessive complaints by customers for
"cramming" (unauthorized charges billed to a customer's phone bill) against the
Company and its affiliates. This billing cessation effectively prevented the
Company from selling its enhanced services in those areas serviced by such LECs.
The remaining LECs have not altered their billing practices for the Company's
services and the Company has continued to offer its enhanced services in those
areas.

        As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing

                                        31

<PAGE>   35
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continues
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Federal Transtel, Inc. ("Transtel"), whereby Transtel
provides the enhanced service revenue billing services previously provided by
BIC. In effect, between the termination of the BIC billing service arrangement
and the commencement of the billing under the agreement with Transtel
(approximately two months), the Company was unable to bill for any enhanced
services provided. Subsequent to this billing cessation and re-commencement of
enhanced service billing with Transtel, the Company substantially discontinued
marketing for new enhanced service customers, but continues to bill and provide
enhanced services to the member base that was in place at the time of the
billing cessation. This member base is subject to significant rates of member
attrition that substantially exceed the current level of new member
acquisitions. Therefore, these enhanced services cannot be expected to
contribute significant amounts to future periods' net revenues and corresponding
cash flows. "See Forward Looking Information". The Company had previously
engaged, and continues to use, Transtel for the provision of billing and
collection services in connection with the Club 900 product.

RESIDENTIAL LONG DISTANCE CUSTOMER ACQUISITION SERVICES

        During the fiscal year ended November 30, 1996, the Company entered into
an agreement with AT&T Communications, Inc. ("AT&T"), whereby it marketed AT&T's
long distance products. The Company terminated its strategic corporate
partnership with AT&T during the first three months ended February 28, 1998. The
termination resulted

                                   32

<PAGE>   36
from modifications made by AT&T to its customer acquisition strategies which
significantly reduced the Company's ability to successfully market under such
strategic partnership. During the three months ended February 28, 1998 the
Company recorded net revenues of approximately $4,980,000 from the AT&T
strategic partnership. The Company concluded an agreement with Qwest during the
three months ended February 28, 1998. The Company currently provides marketing
services to Qwest primarily through outbound telemarketing and broadcast media,
directed at the acquisition of residential long distance customers for Qwest. In
addition to commissions paid to the Company for its successful customer
acquisitions on behalf of Qwest, the agreement also calls for the Company to
participate in Qwest's net revenues earned from such customer's residential long
distance usage. During the nine months ended August 31, 1999, a total of
$28,837,767 of net revenues was earned under such agreement with Qwest. Of this
total, customer acquisition commissions accounted for $21,635,387, with the
balance of $7,202,380 being attributable to usage revenues earned. During the
nine months ended August 31, 1998, the Company recorded customer acquisition
commissions of $12,614,219 and usage revenues of $635,968, all of which were
primarily earned in 1998's second and third fiscal quarters. The first quarter
of fiscal 1998 was the test marketing phase of the Qwest arrangement and
accordingly the Company did not record revenue from Qwest customer acquisitions
in such quarter.

               THE YEAR 2000 PROBLEM

        At the time computer programs were first being written, two digits were
used

                                       33
<PAGE>   37
instead of four to define years on such programs. For example, the year "1998"
was written within such computer programs as "98". As a result, at the onset of
the new millennium, any programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a major system failure or miscalculations. This potential difficulty is
commonly referred to as the "Y2K" Problem".

         The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be effected by the "Y2K" Problem. The
Company presently believes that its entire internal computer programs, software
packages, systems and networks are Y2K compliant. Within the past 12 months, the
Company has replaced all personal computers that were not Y2K compliant and
rewritten its entire billing system to become compliant. The Company also
recently acquired a new main database server that is compliant and that runs on
commercially available software package that is compliant. The cost of all of
the foregoing did not have a material impact on the operations of the Company.
See "Forward Looking Information".

        Notwithstanding the foregoing, the Company is reliant on third parties
for the operation of the Company's day-to-day business. The Company can not
provide any assurances that the steps being taken by such third parties, if any,
will be sufficient to eliminate the Y2K problem from the computer systems used
by such third parties and relied upon by the Company. The Company has
corresponded with all its vendors, informing them that the Company will only
conduct business with those entities that are "Y2K" compliant. In addition, the
Company only accepts inbound files from outside

                                       34
<PAGE>   38
sources that define years with four digit codes, ensuring compliance. Lastly,
the Company's customer service department operates via the Company's computer
network, which is compliant. However, in the event modifications and conversions
to computer systems are required by such third parties and are not completed on
a timely basis, the Y2K Problem may have a material impact on the operations of
the Company.


                                       35
<PAGE>   39
                                     PART II

                                OTHER INFORMATION


Item 1.           Legal Proceedings.

         All of the Company's entertainment services and advertisements are
reviewed by the Company's regulatory counsel, and management believes that the
Company is in substantial compliance with all material federal and state laws
and regulations governing its provision of "800" and "900" number entertainment
services, all of its billing and collection practices and the advertising of its
services and has obtained or is in the process of obtaining all licenses and
permits necessary to engage in telemarketing activities. Nevertheless, on or
about September 30, 1998, the Company was notified by the Federal Trade
Commission ("FTC") that the FTC was conducting an inquiry into the past and
present marketing practices of the Company to determine if the Company was
engaging in unfair or deceptive practices. The FTC has since notified counsel
for the Company that the investigation has been closed and no enforcement action
will be taken. The Company has also received subpoenas to produce documents
related to its marketing practices from the offices of the Attorneys General of
the States of Kansas, Pennsylvania and Vermont. To date, the Company has not
been subject to any enforcement actions by any regulatory authority and
management believes that the inquiries of the Attorneys General will not result
in any enforcement actions or claims which would have a material adverse effect
on the Company. However, in the event the Company is found to have failed to
comply with applicable laws and regulations, the Company could be subject to
civil remedies, including substantial fines, penalties and injunctions, as well
as possible criminal sanctions, which would have a material adverse effect on
the Company. See "Forward Looking Information."

         At the request of the Federal Communications Commission, a group of the
largest Local Exchange Carriers (the "LECs") have developed a set of voluntary
Best Practices Guidelines (the "Guidelines") with regard to the problem of
"cramming" -- unauthorized, deceptive or ambiguous charges included on end-user
customers' monthly local telephone bills. The cramming problem has increasingly
been receiving a great deal of attention from federal and state legislators,
regulatory agencies and law enforcement agencies throughout the country. The FTC
has proposed regulations addressing cramming, and legislation is pending to
combat the cramming problem, as well. The Guidelines, and regulations and
legislation, if enacted, require that service providers obtain detailed and
documented authorization from end users prior to billing for miscellaneous
products or services. Advertising for products and services to be billed through
a certain type of billing mechanism known as the "4250 billing mechanism" will
need to be pre-approved by the LECs and clearing houses prior to their billing.
Moreover, each LEC is in the process of revising its individual billing and
collection agreements to implement the Guidelines and further restrict the types
of services for which it will provide billing services. Consequently, the LECs
will have broad discretionary powers to restrict services for which the Company
may bill through the customer's telephone bill and assess administrative charges
to service providers when a charge for a product or service not pre-approved by
the LEC and/or

                                       36
<PAGE>   40
authorized by the end user, is placed on the customer's bill. As the Company has
employed the 4250 billing mechanism to bill for products and services, the
Guidelines (and possible regulations and legislation) and LEC restrictions need
to be taken into account in formulating the Company's business practices.


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

(A)      EXHIBITS.

EXHIBIT
NUMBER

3.1.1    Articles of Incorporation of the Company, as amended (1)

3.1.2    Amendment to the Articles of Incorporation of the Company (2)

3.2      By-Laws of the Company (3)

27.1*    Financial Data Schedule

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

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

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

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

(b)      REPORTS ON FORM 8-K.

         On June 4, 1999, the Company filed a current report on Form 8-K
reporting that on May 27, 1999, the Company's Board of Directors approved the
Company's execution of several agreements (the "ARS Agreements") with Access
Resource Services, Inc. (or the shareholders thereof), a Florida corporation
("ARS"), controlled by Steven L. Feder, a former director of the Company who
resigned in January 1999, under which the Company agreed to refrain until
January 17, 2001 from conducting, marketing, advertising or promoting
"pay-per-call" psychic services billed as a 900 telephone record. In addition,
ARS agreed to pay the Company fees based on each billable minute generated
during the period June 1, 1999 to January 17, 2001 by ARS' 900 pay-per-call
psychic services and a percentage fee of ARS' billings to membership clubs
during such period. ARS also assumed responsibility for the media buying
operation

                                       37
<PAGE>   41
which the Company conducted from offices in Fort Lauderdale, Florida, under the
name "Quintel Media."

         The foregoing is a summary of the ARS Agreements and the transactions
contemplated thereby and should be read in conjunction with the ARS Agreements,
copies of which are included as exhibits to the June 4, 1999 Current Report on
Form 8-K.

         The Company also reported in such Form 8-K that it redeemed an
aggregate of 1,300,000 shares of the Company's common stock from partnerships
controlled by each of the shareholders of ARS, Messrs. Steven Feder, Peter Stolz
and Thomas H. Lindsey, at a redemption price of $1.35 per share (the
"Redemption").

         The transactions contemplated by the ARS Agreements, as well as the
Redemption, were consummated on June 4, 1999.

         Other than the foregoing, no reports on Form 8-K were filed during the
third quarter of the fiscal year ending November 30, 1999.

                           FORWARD LOOKING INFORMATION

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

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<PAGE>   42
                                   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.


                                      QUINTEL COMMUNICATIONS, INC.


                                      By: /s/ Jeffrey L. Schwartz
                                          -----------------------
                                              Jeffrey L. Schwartz
Date:    October 15, 1999                     Chairman and CEO





                                      By: /s/ Daniel Harvey
                                          -----------------
                                              Daniel Harvey
                                              Chief Financial Officer
Date:    October 15, 1999                     (Principal Financial Officer)


                                       39
<PAGE>   43
Exhibit Index

EXHIBIT
NUMBER

3.1.1    Articles of Incorporation of the Company, as amended (1)

3.1.2    Amendment to the Articles of Incorporation of the Company (2)

3.2      By-Laws of the Company (3)

27.1*    Financial Data Schedule

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

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

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

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

                                       40