================================================================================

                       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 MAY 31, 2002

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

                FOR THE TRANSITION PERIOD FROM          TO

                         COMMISSION FILE NUMBER 0-27046

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

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

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

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


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

                               Yes [X]    No [ ]

        The number of shares outstanding of the Registrant's common stock is
                          14,516,146 (as of 07/12/02).

================================================================================


<PAGE>


                                  TRAFFIX, INC.

                     INDEX TO QUARTERLY REPORT ON FORM 10-Q
                FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                           QUARTER ENDED MAY 31, 2002

                               ITEMS IN FORM 10-Q


                                                                           PAGE
                                                                           ----
PART I      FINANCIAL INFORMATION
   Item 1.  Financial Statements ........................................    2
   Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations ................................   14
   Item 3.  Quantitative and Qualitative Disclosures About Market Risk ..  None
PART II     OTHER INFORMATION
   Item 1.  Legal Proceedings ...........................................   39
   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 ............................   40
SIGNATURES ..............................................................   41





                                       1
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    MAY 31,    NOVEMBER 30,
                                                                                     2002          2001
                                                                                  -----------  ------------
                                                                                  (UNAUDITED)
<S>                                                                              <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents ................................................... $18,812,755    $14,458,055
   Marketable securities .......................................................  23,072,139     23,677,999
   Accounts receivable, trade, net of allowance for doubtful accounts
     of $618,453 at May 31, 2002 and $383,676 at November 30, 2001 .............   7,458,489      7,326,032
   Deferred income taxes .......................................................   1,733,282      3,242,815
   Due from related parties ....................................................     324,392        106,654
   Prepaid expenses and other current assets ...................................     794,437      1,415,836
                                                                                 -----------    -----------
          TOTAL CURRENT ASSETS .................................................  52,195,494     50,227,391
Property and equipment, at cost, net of accumulated depreciation ...............   1,731,905        951,702
Goodwill and other intangibles, net ............................................   2,785,895      1,362,407
Deferred income taxes ..........................................................     147,084        147,084
Other ..........................................................................      54,000         54,000
                                                                                 -----------    -----------
          TOTAL ASSETS ......................................................... $56,914,378    $52,742,584
                                                                                 ===========    ===========
LIABILITIES
Current liabilities:
   Accounts payable ............................................................ $ 2,507,822    $ 3,928,418
   Accrued expenses ............................................................   7,132,279      4,098,921
   Due to related parties ......................................................     450,207        469,935
   Income taxes payable ........................................................     278,112      1,672,953
                                                                                 -----------    -----------
          TOTAL CURRENT LIABILITIES ............................................  10,368,420     10,170,227
                                                                                 -----------    -----------
Minority interest ..............................................................     276,925        159,651
                                                                                 -----------    -----------
SHAREHOLDERS' EQUITY
Preferred stock-- $.001 par value; 1,000,000 shares authorized; none issued
   and outstanding .............................................................          --             --
Common stock-- $.001 par value; authorized 50,000,000 shares; issued
   14,516,146 shares and 14,290,491 shares, respectively .......................      14,516         14,289
Common stock issuable-- $.001 par value; 78,347 shares .........................     485,758             --
Additional paid-in capital .....................................................  42,640,718     41,395,784
Retained earnings ..............................................................   5,323,230      3,206,770
Accumulated other comprehensive income .........................................      81,525         72,577
Common stock held in treasury, at cost, 961,403 shares .........................  (2,276,714)    (2,276,714)
                                                                                 -----------    -----------
          TOTAL SHAREHOLDERS' EQUITY ...........................................  46,269,033     42,412,706
                                                                                 -----------    -----------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................... $56,914,378    $52,742,584
                                                                                 ===========    ===========
</TABLE>


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



                                       2
<PAGE>


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

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED            SIX MONTHS ENDED
                                                    --------------------------    -------------------------
                                                       MAY 31,       MAY 31,        MAY 31,        MAY 31,
                                                        2002          2001           2002           2001
                                                    -----------    -----------    -----------   -----------
<S>                                                 <C>            <C>            <C>           <C>
Net revenue ....................................... $10,804,538    $ 5,828,543    $23,175,435   $10,754,097
Cost of sales .....................................   3,383,204      1,647,737      6,761,815     2,625,602
                                                    -----------    -----------    -----------   -----------
     GROSS PROFIT .................................   7,421,334      4,180,806     16,413,620     8,128,495
Selling expenses ..................................   2,370,775        652,980      5,517,314     1,168,864
General and administrative expenses ...............   3,949,851      2,404,377      7,550,471     4,943,784
Bad Debt expense ..................................     109,172             --        438,506            --
                                                    -----------    -----------    -----------   -----------
     INCOME FROM OPERATIONS .......................     991,536      1,123,449      2,907,329     2,015,847
Other income (expense):
   Interest expense ...............................      (9,266)            --        (19,768)           --
   Interest income and dividends ..................     183,386        494,309        393,599     1,144,261
   Realized (losses) gains on marketable
     securities ...................................      20,564         (1,776)        83,157        (1,776)
   Permanent impairment charges ...................          --             --             --    (4,690,258)
   Other non-operating income (expense) ...........     100,666         79,883        235,102        88,350
   Minority interest in (income) loss of
     subsidiary ...................................    (104,303)            --       (130,949)           --
                                                    -----------    -----------    -----------   -----------
     INCOME (LOSS) BEFORE PROVISION FOR
       INCOME TAXES ...............................   1,182,583      1,695,865      3,468,470    (1,443,576)
Provision for income taxes ........................     469,540        680,381      1,352,010     1,311,799
                                                    -----------    -----------    -----------   -----------
     NET INCOME (LOSS) ............................ $   713,043    $ 1,015,484    $ 2,116,460   $(2,755,375)
                                                    ===========    ===========    ===========   ===========
Basic income (loss) per share (Note 3):
   Net income (loss) .............................. $      0.05    $      0.07    $      0.16   $     (0.19)
                                                    -----------    -----------    -----------   -----------
   Weighted average shares outstanding ............  13,508,056     14,768,211     13,512,487    14,763,992
                                                    ===========    ===========    ===========   ===========
Diluted income (loss) per share (Note 3):
   Net income (loss) .............................. $      0.05    $      0.07    $      0.14   $     (0.19)
                                                    -----------    -----------    -----------   -----------
   Weighted average shares outstanding ............  14,830,315     15,267,926     14,789,936    14,763,992
                                                    ===========    ===========    ===========   ===========
</TABLE>


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



                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                        --------------------------
                                                                          MAY 31,        MAY 31,
                                                                           2002           2001
                                                                        -----------   ------------
<S>                                                                     <C>           <C>
Cash flows from operating activities:
   Net income (loss) .................................................. $ 2,116,460   $ (2,755,375)
   Adjustments to reconcilenet income (loss) to net cash used
     in operating activities:
     Depreciation and amortization ....................................     482,436        140,897
     Reserve for customer chargebacks .................................          --        (15,476)
     Provision for uncollectible accounts .............................     438,506        548,309
     Exchange loss ....................................................     (20,788)            --
     Deferred income taxes ............................................   1,509,533         34,891
     Net (gains) on sale of marketable securities .....................     (83,182)        (1,776)
     Permanent impairment charges .....................................          --      4,690,258
     Amortized discounts and premiumson marketable securities .........     (39,114)      (208,603)
     Minority interest ................................................     117,274             --
     Changes in assets and liabilities of business:
        Accounts receivable ...........................................    (570,961)    (1,774,650)
        Prepaid expenses and other current assets .....................     621,399     (1,031,228)
        Accountspayable ...............................................  (1,420,596)      (719,956)
        Income taxes payable ..........................................  (1,086,964)    (3,426,601)
        Due from/to related parties ...................................    (237,466)      (837,533)
        Other, principally accrued expenses ...........................   2,814,444        158,588
                                                                        -----------   ------------
          NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES             4,640,981     (5,198,255)
                                                                        -----------   ------------
Cash flows from investing activities:
   Purchases of securities ............................................ (96,468,324)  (124,597,572)
   Proceeds from sales of securities ..................................  97,226,217    132,866,774
   Capital expenditures ...............................................  (1,190,098)      (467,372)
   Payments for asset acquisitions, net of cash received ..............    (548,482)            --
   Purchases of long-term investments .................................          --        (49,000)
                                                                        -----------   ------------
          NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES .........    (980,687)     7,752,830
                                                                        -----------   ------------
Cash flows from financing activities:
   Proceeds from stock options exercised ..............................     580,003         60,177
   Proceeds--net on settled Section 16-b action .......................      114,403             --
                                                                        -----------   ------------
          NET CASH PROVIDED BY FINANCING ACTIVITIES ...................     694,406         60,177
                                                                        -----------   ------------
   Net increase incash andcash equivalents ............................   4,354,700      2,614,752
   Cash and cash equivalents, beginning of period .....................  14,458,055      4,551,344
                                                                        -----------   ------------
   CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $18,812,755   $  7,166,096
                                                                        -----------   ------------
</TABLE>

     During the six months ended May 31, 2002, the Company has 117,521 shares of
common  stock  issued and  issuable,  valued at $728,636 in the  purchase of the
assets of a closely held, private company (See note 9.)




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



                                       4
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. GENERAL

     The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted  accounting  principles
for interim  financial  information.  Accordingly,  the  unaudited  consolidated
financial  statements do not include certain  information  and note  disclosures
normally required by generally accepted accounting principles.  The accompanying
unaudited consolidated financial statements reflect all adjustments  (consisting
only of normal recurring  adjustments)  which are, in the opinion of management,
necessary  for a fair  presentation  of the  financial  position  and  operating
results for the interim periods presented. 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 and
sales allowances, depreciation and amortization, income taxes and contingencies.
Managements'  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,  2001.  The
results of operations for the three and six month periods ended May 31, 2002 are
not  necessarily  indicative  of the results to be expected  for the  subsequent
quarters or the entire fiscal year ending November 30, 2002.  Certain prior year
amounts  in  the  unaudited   consolidated   financial   statements   have  been
reclassified to conform with the current year presentation.

     During the six months  ended May 31,  2002 and 2001,  options  for  186,481
shares and 37,975  shares of the  Company's  common  stock,  respectively,  were
exercised  by certain  employees  and  directors.  Tax  benefits of $307,876 and
$9,623 in six months ended May 31, 2002 and 2001, respectively, were recorded as
an increase to  additional  paid-in  capital  and a  reduction  of income  taxes
currently payable.

   RECENT ACCOUNTING PRONOUNCEMENTS

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

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived   Assets."  SFAS  144  amends  existing
accounting  guidance on asset impairment and provides a single  accounting model
for long-lived assets to be disposed of. Among other  provisions,  the new rules
change the cri-



                                       5
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


teria for classifying an asset as held-for-sale.  The standard also broadens the
scope of businesses to be disposed of that qualify for reporting as discontinued
operations, and changes the timing of recognizing losses on such operations. The
provisions of SFAS 144 will be effective for our fiscal year ending November 30,
2003 and will be  applied  prospectively.  We are  currently  in the  process of
evaluating  the potential  impact that the adoption of SFAS 144 will have on our
consolidated financial position and results of operations. Based on the relative
components  of our balance sheet at May 31, 2002 we believe that the adoption of
SFAS 144 will have an immaterial impact on the Company's  consolidated financial
position and results of operations, if any effect at all.

2. SIGNIFICANT ACCOUNT POLICIES

   REVENUE RECOGNITION

     The Company  currently earns the most  significant  portion of revenue from
its E-commerce segment pursuant to marketing  agreements with marketing partners
and corporate customers (collectively, "Corporate Customers"). The provisions of
each  agreement  determine  the type and timing of revenue to be  recorded.  The
Company  generates  its  E-commerce  revenue  from  the  following  eight  basic
categories:  (1)  delivery  of  consumer  traffic to the  websites  and  inbound
telemarketing  call centers of our Corporate  Customers (e.g.,  click-thrus from
the game banners on the  Company's  websites),  (2) delivery of consumer data to
our Corporate  Customers  with respect to the consumers who have  registered for
our Corporate  Customers'  products or services (e.g., a consumer who registered
via the  registration  page of one of the Company's  websites to receive on-line
promotions from our Corporate Customers), (3) delivery of pre-qualified consumer
data to our Corporate Customers as a result of consumers'  responses to targeted
questions  and  surveys  (e.g.,  receiving  free gifts for your  children),  (4)
delivery of a sale or completed application for our Corporate Customers products
or services  (e.g.,  a consumer  who responds to a Traffix  e-mail  promotion on
behalf of a Corporate Customer by completing an on-line application for a credit
card or subscribes for a cellular phone  service),  (5) generating  revenue from
any of the foregoing  categories by placing our Corporate  Customers'  offers on
the media of third  parties  with  whom we have a  marketing  relationship  on a
revenue  share  basis,  (6)  sales of  costume  jewelry,  gift  items  and other
proprietary  products and services directly to consumers,  (7) rentals and sales
of copies of specific segments of its databases to Corporate Customers for their
proprietary  marketing and database  enhancements,  and (8) customer acquisition
services, both on-line and off-line, under a net branch agreement with qualified
mortgage banking establishments.

     The Company  invoices  its  customers in  accordance  with the terms of the
underlying  agreement.  Revenue is recognized at the time the marketing activity
is delivered,  or service is provided, net of estimated  contractually specified
data  qualification  allowances,   when  applicable.   Such  data  qualification
allowances may include  duplications,  invalid  addresses,  age restrictions and
other allowances, and are recorded as contra revenue. Historically, the variance
between  actual  allowances  and  previously   estimated   allowances  has  been
immaterial. In accordance with revenue recognition pronouncements,  specifically
Staff Accounting  Bulletin 101,  "Revenue  Recognition in Financial  Statements"
("SAB 101")  issued in  December  1999,  and in  accordance  with the  Company's
historical accounting policies and reporting practices,  the Company records all
related  obligations  associated  with the  related  net revenue at its point of
recognition.  The Company  adopted SAB 101 during the first three  months of the
fiscal year ended  November 30, 2001.  Such adoption did not  materially  impact
financial position or results of operations at that time.

     Revenues from the Company's off-line customer  acquisition services segment
currently include the revenue earned by Montvale Management,  LLC, the Company's
majority  owned  subsidiary.  Such revenues are  currently  less than 10% of the
Company's  consolidated  net revenues for the six months ended May 31, 2002, and
result from Montvale's  provision of net branch services to mortgage banking and
other related financial  institutions.  Approximately 15% of Montvale's revenues
are derived  from  on-line  sources,  with such  portion  being  included in the
Company's  E-commerce  segment.  Montvale  recognizes  income in accordance with
Statement of Financial



                                       6
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


     Accounting  Standards  ("SFAS") No. 91, "Accounting for Non Refundable Fees
and Costs Associated with Originating or Acquiring Loans".  Pursuant to SFAS No.
91, Montvale recognizes its commission upon the disbursement of loan proceeds.

     Prior to September 1, 2001,  revenues from the Company's  off-line customer
acquisition services consisted of residential long distance customer acquisition
programs, and were recorded upon the achievement of certain events particular to
the corresponding program's fulfillment liability. Subsequent to the delivery of
the initial sales record to the respective  long distance  carrier,  the Company
may have been required to provide to the customer  certain products and services
(fulfillment  liability),  such as  prepaid  cellular  telephones  and/or  other
suitable premiums. These costs were estimated and accrued, based upon historical
rates and costs, as a component of marketing expense and included in the cost of
sales,  at the time the  associated  revenues  were  recognized.  The  Company's
current business,  as conducted in its E-commerce segment, in certain cases also
requires  the  provision of a premium.  These  E-commerce  segment  premiums are
estimated  and  accrued,  based upon  historical  and current  experience.  Such
E-commerce  premium costs are classified as a component of marketing expense and
included  in the  cost  of  sales,  at the  time  the  associated  revenues  are
recognized.  Any  variance  in the  initial  accrual as  compared  to the actual
experience  is  taken  into  operations  in the  period  that  the  variance  is
determinable.

     Revenue  from the  Company's  LEC Billed  Product and Service  segment (the
Company has not  marketed  such  services  since  November  1998),  consisted of
various enhanced telephone services,  principally voice mail services,  and were
recognized  net of an estimated  provision for refunds and credits  subsequently
granted to customers ("customer chargebacks").  Since the provision for customer
chargebacks  was  established  prior to the  periods  in which  chargebacks  are
actually  expended,  the Company's revenues are adjusted in later periods if the
Company's incurred chargebacks varied from the amounts previously estimated. The
Company's  LEC Billed  Product and Service  segment was inactive  during the six
months ended May 31, 2002.

     With respect to  capitalization  and  amortization of marketing  costs, the
Company's policy is to expense,  as a cost of sale, data  acquisition  costs and
all other  related  marketing  costs,  at the time an  obligation  or expense is
incurred.

   TRANSACTIONS WITH MAJOR CUSTOMERS

     During the three and six months  ended May 31,  2002,  the Company had five
major customers in its E-commerce  segment,  which in combination  accounted for
approximately  $5.5  million  and $12.9  million of  consolidated  net  revenue,
respectively,  or  51%  and  56% of  consolidated  net  revenues,  respectively.
Approximately $5.1 million,  or 69% of consolidated net accounts  receivable was
attributable  to such major  customers as of May 31, 2002. For the three and six
months  ended  May 31,  2002,  two of the five  customers  referenced  above had
related net revenues that equaled or exceeded 10% of the Company's  consolidated
net revenue for such period. The five major customers referenced above accounted
for 22%, 9%, 8%, 8% and 4% of consolidated  net revenue,  respectively,  for the
three months ended May 31, 2002, and 26%, 10%, 9%, 7% and 4% of consolidated net
revenue,  respectively,  for the six months ended May 31, 2002. Of the remaining
approximate 100 active customers in the three and six months ended May 31, 2002,
no other  single  customer  had net  revenue  that  equaled  or  exceeded  4% of
consolidated net revenue.

     During the three and six months  ended May 31,  2001,  the Company had four
customers  in its  E-commerce  segment  which,  in  combination,  accounted  for
approximately  48.3% and 47.5% of consolidated net revenues,  respectively,  and
approximately 36% of consolidated net accounts receivable as of May 31, 2001.



                                       7
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)



3. 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         SIX MONTHS ENDED
                                                 ------------------------   -----------------------
                                                    MAY 31,      MAY 31,      MAY 31,      MAY 31,
                                                     2002         2001         2002         2001
                                                 ----------    ----------   ----------   ----------
<S>                                              <C>           <C>          <C>          <C>
Denominator:
   Denominator for basic earnings per
     share-- weighted average shares ..........  13,508,056    14,768,211   13,512,487   14,763,992
Effect of dilutive securities:
   Stock options ..............................   1,322,259       499,715    1,277,449           --
                                                 ----------    ----------   ----------   ----------
   Denominator for diluted earnings per
     share-- adjusted weighted average
     shares ...................................  14,830,315    15,267,926   14,789,936   14,763,992
                                                 ==========    ==========   ==========   ==========
</TABLE>

     Options to  purchase  150,000 and  887,146  shares of common  stock for the
three  months  ended  May 31,  2002 and  2001,  respectively,  and  275,000  and
2,369,081  for the six months  ended May 31, 2002 and 2001,  respectively,  were
outstanding  but were not included in the  computation  of diluted  earnings per
share because their effect would be anti-dilutive.

4. COMPREHENSIVE INCOME (LOSS)

     Unrealized  gains and losses on the  Company's  marketable  securities  are
reported in  comprehensive  income (loss) and  accumulated  other  comprehensive
income (loss).  Comprehensive  income (loss) is defined as "the change in equity
of a business  enterprise during a period from transactions and other events and
circumstances  from  non-owner  sources."  Excluding  net income,  the Company's
primary  source of  comprehensive  income  (loss) would  ordinarily  include the
after-tax net unrealized  gains and (losses) on  available-for-sale  securities,
and the equity  adjustment  from foreign  currency  translation.  Based on prior
fiscal year  unrealized  capital losses in excess of the current years three and
six month  periods  unrealized  gains,  a full credit has been taken against the
estimated deferred tax liability attributable to the unrealized gains arising in
the three and six month periods  ended May 31, 2002. At November 30, 2001,  full
valuation  allowances  were taken  against  the  estimated  deferred  tax assets
attributable to the unrealized  losses based on the absence of other appreciated
capital  gain  property.  The  components  of  comprehensive  income  (loss) are
presented below:

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED         SIX MONTHS ENDED
                                                   ----------------------   -----------------------
                                                   MAY 31,      MAY 31,      MAY 31,       MAY 31,
                                                    2002         2001         2002          2001
                                                   --------    ----------   ----------  -----------
<S>                                                <C>         <C>          <C>         <C>
   Net income (loss) ............................  $713,043    $1,015,484   $2,116,460  $(2,755,375)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ........   (21,057)           --      (20,788)          --
Unrealized gain (loss) from available-for-sale
   securities, arising during the period,
   net of income taxes of $ -0- .................    47,723       266,683       29,736      430,480
Less: reclassification adjustment for loss
   realized in net income .......................        --            --           --    4,190,207
                                                   --------    ----------   ----------  -----------
Comprehensive income ............................  $739,709    $1,282,167   $2,125,408   $1,865,312
                                                   ========    ==========   ==========  ===========
</TABLE>


                                       8
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


5. ADVERTISING AND MARKETING COSTS

     Currently,  the material portion of the Company's advertising and marketing
costs are  comprised of (1) costs  associated  with the  transmission  of e-mail
marketing messages,  both from internal sources and external third party vendors
(2) costs  associated with the purchase of on-line  consumer data, and (3) email
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 (3) at the time  the  promotional  and  creative
services are provided,  respectively, and are included as a component of cost of
sales.

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

     Total  advertising and marketing costs,  included in the cost of sales, for
the three months ended May 31, 2002 and 2001 were  approximately  $3,288,000 and
$1,494,000,  respectively,  and for the six months  ended May 31,  2002 and 2001
were approximately $6,576,000 and $2,307,000, respectively.

     Included in prepaid  expenses and other current  assets at May 31, 2002 and
November 30, 2001,  were  approximately  $112,000  and  $324,000,  respectively,
relating  to  the  unamortized  portion  of  prepayments  related  to  marketing
arrangements.

6. MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS, AT COST

     During the current  quarter and six months ended May 31, 2002,  the Company
did not  have  any  material  events  regarding  its  marketable  securities  or
long-term, cost-based investments.

     During the prior fiscal year's  three-month period ended February 28, 2001,
the  Company  recognized  losses  (through  a  permanent  impairment  charge) of
$4,190,207  on  certain of its  available-for-sale  marketable  securities.  The
underlying  securities' historical carrying values were reduced to their related
closing prices at February 28, 2001, giving effect to the prior year's permanent
impairment charge.  The Company had continually  evaluated the carrying value of
such investments,  and in terms of risk at the individual  company level coupled
with risk at the market level,  the Company's  prior year  evaluation  indicated
that the  decline in the related  securities  was  "other-than-temporary".  As a
result  of this  analysis,  the  Company  adjusted  the  "cost  basis"  of these
securities,  effective February 28, 2001, to the closing prices on that date and
realized the corresponding loss during the three-month period ended February 28,
2001. This loss is included in the Company's other income (expense),  "Permanent
impairment charges" for the six months ended May 31, 2001.

     During the fiscal year ended  November 30,  2000,  the Company had invested
approximately  $500,000 in a private  company,  and carried the investment under
the cost method. After continued review of such investment, and the investment's
consistent  failure to achieve  significant  goals set forth in its business and
financing plans, such investment fell within the Company's impairment evaluation
criteria. According to the above analysis, the Company's impairment loss for the
six months  ended May 31,  2001  amounted  to  $500,051,  and is  included  as a
component of other income (expense)  "Permanent  impairment charges" for the six
months ended May 31, 2001.

7. TALK AMERICA, INC. ARBITRATION AWARD

     During the year ended  November 30, 2001, the Company was successful in its
legal action against Talk America,  Inc.  ("Talk"),  resulting in an approximate
$6.2 million  arbitration  award.  The award  represented  restitution  for long
distance  customers  delivered  to Talk,  and for lost  profits  suffered by the
Company due to Talk's



                                       9
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


wrongful termination of an agreement between the parties.  During the year ended
November 30, 2001, the Company  collected the first  installment of $3.7 million
resulting from the  arbitration  award.  The first  installment  was included as
revenue in the Company's  fourth  quarter of the fiscal year ended  November 30,
2001, as it was deemed to relate to the lost profit  portion of the  arbitration
settlement.  During the six months ended May 31, 2002, the Company  received the
final installment,  with interest,  from Talk in the sum of approximately  $2.54
million.  The  final  installment  represented  approximately  $227,000  in lost
profits for long distance customers  delivered to Talk and, as such was included
as revenue  during the six months ended May 31, 2002.  The balance of the second
and final  installment,  or approximately  $2.3 million  represented  liquidated
damages.  The liquidated  damage portion of the final installment is included in
the Company's "Other  income(expense)"  income statement caption, and is grouped
within that caption's "Other non-operating income(expense)" sub-set. The balance
of the second installment,  or $227,000,  is included in the Company's revenues,
with approximately  $158,000 included in the Company's  E-commerce segment,  and
the balance of approximately  $70,000 included in the Company Off-line Marketing
Services segment.

8. SEGMENT INFORMATION

     Historically,  the Company's reportable operating segments are aligned into
three fundamental  areas: (1) Internet Commerce billed directly to the Company's
marketing partners and corporate customers,  as well as consumers  (E-commerce),
(2) Off-line  Marketing  services  billed  directly to long  distance  carriers,
wireless carriers and other service  providing  businesses  (Off-line  Marketing
services)  and (3) Products and Services  billed to consumers by Local  Exchange
Carriers  (LEC Billed  products and  services-inactive  during the three and six
month  periods ended May 31,  2002).  The balance of the  Company's  operations,
immaterial individually and in the aggregate,  are included as part of Corporate
and other.  This business  segment  delineation is consistent with the Company's
management and financial reporting structure based on products and services. The
Company evaluates  performance based on many factors,  with the primary criteria
being each segment's  gross profit and EBITDA,  which the Company has defined as
net income excluding (i) special charges, (ii) interest expense,  (iii) interest
and  dividend  income,  (iv)  net  gains  (losses)  on the  sale  of  marketable
securities,  (v) long-lived asset impairment charges, (vi) gains on non-monetary
cost basis exchanges, (vii) other non-operating income, (viii) minority interest
income (loss),  (ix)  depreciation,  (x) amortization and (xi) income taxes. The
Company shares a common  workforce and office  headquarters,  which precludes an
allocation  of all overhead  components.  Overhead  items that are  specifically
identifiable  to a particular  segment are applied to such segment and all other
overhead  costs are included in Corporate and other.  The  following  tables set
forth the Company's financial results, by management  performance  criteria,  by
operating segment. All revenues are from non-intersegment sources;  therefore no
intersegment elimination applies.

   SEGMENT DATA -- NET REVENUE

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED           SIX MONTHS ENDED
                                              --------------------------   -------------------------
                                                MAY 31,       MAY 31,       MAY 31,        MAY 31,
                                                 2002          2001          2002           2001
                                              -----------    -----------   -----------   -----------
<S>                                           <C>             <C>          <C>           <C>
For the periods:
   E-commerce ..............................  $ 9,549,917     $5,510,106   $21,184,367   $ 9,630,672
   Off-line Marketing Services .............    1,254,621             --     1,991,068            --
   LEC Billed Products and Services ........           --        318,437            --     1,123,425
   Corporate and other .....................           --             --            --            --
                                              -----------     ----------   -----------   -----------
     CONSOLIDATED TOTALS ...................  $10,804,538     $5,828,543   $23,175,435   $10,754,097
                                              ===========     ==========   ===========   ===========
</TABLE>



                                       10
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


   SEGMENT DATA -- GROSS PROFIT

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED           SIX MONTHS ENDED
                                                  --------------------------   -------------------------
                                                     MAY 31,       MAY 31,       MAY 31,        MAY 31,
                                                      2002          2001          2002           2001
                                                  -----------    -----------   -----------   -----------
<S>                                                <C>            <C>          <C>            <C>
For the periods:
   E-commerce ...................................  $6,282,821     $3,933,121   $14,603,882    $7,146,028
   Off-line Marketing Services ..................   1,138,513        (16,176)    1,809,738       (29,303)
   LEC Billed Products and Services .............          --        263,861            --     1,011,770
   Corporate and other ..........................          --             --            --            --
                                                   ----------     ----------   -----------    ----------
     CONSOLIDATED TOTALS ........................  $7,421,334     $4,180,806   $16,413,620    $8,128,495
                                                   ==========     ==========   ===========    ==========

   SEGMENT DATA -- EBITDA

<CAPTION>
                                                     THREE MONTHS ENDED           SIX MONTHS ENDED
                                                  --------------------------   -------------------------
                                                     MAY 31,       MAY 31,       MAY 31,        MAY 31,
                                                      2002          2001          2002           2001
                                                  -----------    -----------   -----------   -----------
<S>                                                <C>            <C>          <C>           <C>
For the periods:
   E-commerce ...................................  $1,945,829     $1,884,156   $ 5,145,354   $ 3,122,787
   Off-line Customer Acquisition Services .......     254,311       (102,881)      291,681      (237,949)
   LEC Billed Products and Services .............          --        167,195            --       833,981
   Corporate and other ..........................    (959,863)      (745,917)   (2,047,270)   (1,562,075)
                                                   ----------     ----------   -----------   -----------
     CONSOLIDATED TOTALS ........................  $1,240,277     $1,202,553   $ 3,389,765   $ 2,156,744
                                                   ==========     ==========   ===========   ===========

   SEGMENT DATA -- DEPRECIATION AND AMORTIZATION

<CAPTION>
                                                     THREE MONTHS ENDED           SIX MONTHS ENDED
                                                  --------------------------   -------------------------
                                                     MAY 31,       MAY 31,       MAY 31,        MAY 31,
                                                      2002          2001          2002           2001
                                                  -----------    -----------   -----------   -----------
<S>                                                  <C>             <C>          <C>            <C>
For the periods:
   E-commerce ...................................    $173,864        $19,503      $338,545       $25,937
   Off-line Customer Acquisition Services .......       6,484             --        10,987            --
   LEC Billed Products and Services .............          --             --            --            --
   Corporate and other ..........................      68,393         59,601       132,904       114,960
                                                     --------        -------      --------      --------
     CONSOLIDATED TOTALS ........................    $248,741        $79,104      $482,436      $140,897
                                                     ========        =======      ========      ========
</TABLE>

9. ASSET ACQUISITIONS

     In December  2001,  the Company  acquired the assets of the  following  two
entities for a total cost of  $1,676,682.  The  components of the asset purchase
prices are set forth following the descriptions of the assets acquired:

     o  InfiKnowledge,  a software  development and Internet services firm based
        in New Brunswick,  Canada,  with the key assets  purchased  including an
        email delivery  system,  a suite of over 50 on-line games,  as well as a
        team of highly  skilled,  interactive  game  developers who, the Company
        believes, possesses the capabilities to enhance, develop and add support
        to its on-line marketing business and provide the foundational assets to
        allow the Company to  internalize  its email delivery  platform  through
        capital expenditures, thereby reducing its reliance on third party email
        delivery vendors.

     o  ThanksMuch,  a Woodmere,  New York based company that specializes in the
        on-line sale of costume jewelry and other small gift items.  The Company
        anticipates that the assets acquired, coupled with the man-



                                       11
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


        agement team who will continue to run the business,  will be utilized to
        provide an  opportunity  for increased  revenue,  gross profits and cash
        flows in future fiscal periods.

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

10. LITIGATION

     1. NANCY  GAREN-- On or about  October 16,  2001,  Nancy  Garen,  author of
"Tarot Made Easy", commenced an action against a series of defendants, including
the Company,  in the United States  District  Court for the Central  District of
California,  entitled NANCY GAREN V. STEVEN L. FEDER, PETER L. STOLZ,  THOMAS H.
LINDSEY,  GALACTIC TELCOM, INC., ACCESS RESOURCE SERVICES, INC., PSYCHIC READERS
NETWORK,  INC. D/B/A MISS CLEO, OSHUN 5  COMMUNICATIONS,  INC., CIRCLE OF LIGHT,
INC.,  CENTRAL  TALK  MANAGEMENT,   INC.,   TRAFFIX,   INC.,  WEKARE  READERS  &
INTERPRETERS,  INC.,  WEST  CORPORATION,  AND DOES 1  THROUGH  10  (EDCV  01-790
(VAP-SGLx)).  Plaintiff  alleges  that  defendants  are liable  for a  copyright
infringement,   contributory   copyright   infringement,   vicarious   copyright
infringement,  unfair competition,  contributory  federal unfair competition and
state  statutory  and common  law unfair  competition,  and  further  requests a
constructive  trust,  a temporary  restraining  order,  and damages from alleged
infringement of a copyright or, alternatively, statutory damages for each act of
infringement  in "an amount provided by law in excess of  $250,000,000",  all as
the same may have arisen from the  defendants'  marketing  of tarot card reading
and other psychic services. The Company does not believe that there is any merit
to Ms.  Garen's  claims as they relate to the Company,  has denied the claims in
its answer to the  complaint,  and  intends  vigorously  to defend  against  the
claims.

     2. MAVIES WINGLER -- On or about May 9, 2001,  Mavies Wingler  commenced an
action  against Group Lotto,  Inc.  ("GLI"),  a  wholly-owned  subsidiary of the
Company, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims
to have picked the winning  numbers  entitling  her to $10  million.  On June 8,
2001,  the action was  removed to the United  States  District  Court,  Southern
District of West Virginia,  and is entitled WINGLER V. GROUPLOTTO,  Inc., Docket
Number 2:01 -- CV -- 518. The action is in the discovery stage. The Company does
not  believe  that  there  is any  merit to Ms.  Wingler's  claim,  and  intends
vigorously  to  defend  against  it.  The  Company  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.

     3. DANIEL  RODGERS-- In March,  2002,  Daniel  Rodgers  commenced an action
against the Company in Supreme Court of the State of New York,  Rockland County.
The complaint alleges that the Company disseminated false


                                       12
<PAGE>


                         TRAFFIX, INC. AND SUBSIDIARIES

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                                   (UNAUDITED)


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

     4.  PHILIP  MICHAEL  THOMAS--  On June 3, 2002,  the  American  Arbitration
Association  rendered  an  award  in  the  sum  of  approximately  $2.3  million
(inclusive of interest) in favor of the Claimants,  in the arbitration  entitled
PHILIP  MICHAEL  THOMAS,  PMT  PRODUCTIONS  INC.,  KAYE PORTER  MANAGEMENT,  RMI
ENTERTAINMENT,  INC., MILLENNIUM  TELEMEDIA,  INC., CLAIMANTS V. NEW LAUDERDALE,
LLC  D/B/A  CALLING  CARD  CO.,   PSYCHIC  READERS   NETWORK,   INC.  D/B/A  PRN
TELECOMMUNICATIONS,   AND  QUINTEL   ENTERTAINMENT,   INC.,   RESPONDENTS   (NO.
131400004900).  The award  consists of  approximately  $1.48 million in damages,
plus  interest at nine percent (9%) from January 1, 1996 and January 1, 1997, or
approximately  $785,000.  The award also denied Claimants'  punitive damages and
all other claims asserted in the arbitration.

     The Claimants in the  arbitration  have filed a motion in an action pending
in the Circuit Court,  Broward County,  Florida (Thomas et al v. New Lauderdale,
LLC et al, Case No.  98-12259-07)  (the  "Action"),  to confirm  the award.  The
Respondents in the arbitration  have also filed a motion to vacate and\or modify
the award.  In addition,  the plaintiffs in the Action have filed a motion to be
relieved from a stay of those  proceedings in order to pursue claims against the
defendants  in the  Action  which they  contend  have not been  resolved  by the
arbitration,  including  claims for punitive damages against the Company as well
as the  individual  defendants.  The  Company  has  indemnified  the  individual
defendants in the Action;  believes that the arbitration  award finally resolves
all claims;  and intends  vigorously to defend against the  plaintiffs'  further
pursuit of claims in the Action.

11. SUBSEQUENT EVENTS

     On June 3, 2002, the American Arbitration  Association rendered an award in
the sum of  approximately  $2.3 million  (inclusive of interest) in favor of the
Claimants,  in the arbitration  entitled PHILIP MICHAEL THOMAS,  PMT PRODUCTIONS
INC., KAYE PORTER MANAGEMENT,  RMI ENTERTAINMENT,  INC.,  MILLENNIUM  TELEMEDIA,
INC.,  CLAIMANTS V. NEW LAUDERDALE,  LLC D/B/A CALLING CARD CO., PSYCHIC READERS
NETWORK, INC. D/B/A PRN  TELECOMMUNICATIONS,  AND QUINTEL  ENTERTAINMENT,  INC.,
RESPONDENTS  (NO.  131400004900).  The award  consists  of  approximately  $1.48
million in damages,  plus interest at nine percent (9%) from January 1, 1996 and
January 1, 1997, or  approximately  $785,000.  The award also denied  Claimants'
punitive damages and all other claims asserted in the arbitration.

     The Company has accrued and recorded this award as a non-operating  expense
at May 31, 2002, and for the three months ended May 31, 2002,  respectively,  as
it results  from a segment of the  Company's  business  in which it is no longer
active.

     The Claimants in the  arbitration  have filed a motion in an action pending
in the Circuit Court,  Broward County,  Florida (Thomas et al v. New Lauderdale,
LLC et al, Case No.  98-12259-07)  (the  "Action"),  to confirm  the award.  The
Respondents in the arbitration  have also filed a motion to vacate and\or modify
the award.  In addition,  the plaintiffs in the Action have filed a motion to be
relieved from a stay of those  proceedings in order to pursue claims against the
defendants  in the  Action  which they  contend  have not been  resolved  by the
arbitration,  including  claims for punitive damages against the Company as well
as the individual defendants. The Company has indemnified


                                       13
<PAGE>


the individual  defendants in the Action;  believes that the  arbitration  award
finally  resolves  all claims;  and  intends  vigorously  to defend  against the
plaintiffs' further pursuit of claims in the Action.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The matters discussed in the following Management's Discussion and Analysis
of Financial  Condition  and Results of Operations  may contain  forward-looking
statements and information relating to the Company that are based on the current
beliefs and  expectations  of  Management,  as well as  assumptions  made by and
information  currently available to the Company.  When used in this Management's
Discussion   and  Analysis,   and  elsewhere  in  this  Form  10-Q,   the  words
"anticipate",  "believe",  "estimate", and "expect" and similar expressions,  as
they relate to the Company are intended to identify forward-looking  statements.
Such  statements  reflect the current  views of the Company's  management,  with
respect to future  events and are subject to certain  risks,  uncertainties  and
assumptions,  which could  cause the actual  results to differ  materially  from
those reflected in the forward-looking statements.

OVERVIEW

     We are a leading on-line database marketing company that acquires customers
for, drives consumer traffic to, and generates sales for our corporate  clients.
We provide  complete  end-to-end  marketing  solutions for companies  seeking to
increase sales and customers  through on-line marketing  programs,  and database
development  and  enhancement  programs.  The  services  we offer range from the
development of a complete  creative  promotion to be used to market the client's
product to consumers,  broadcasting  the promotion  on-line in order to generate
new  customers  for the  client,  delivery  of data  files  from the  results of
campaigns,  creating and hosting the customized  websites or web pages necessary
to effect the consumer transaction that drives the clients' sales and generating
comprehensive  reporting in order for the client to analyze the effectiveness of
the  promotion.   We  use  the  proprietary   on-line  media  of  our  websites,
newsletters,    interactive    games,    email   marketing   and   database   of
permission-based, profiled records to generate the customers, sales and/or leads
for our clients. We are paid by our clients primarily on a success- based model;
in that we receive a fee for every  lead,  customer  or sale  generated  for the
client. In addition to our third party client-based revenue,  during fiscal 2002
we began  generating  revenue from our proprietary  products and services (e.g.,
costume jewelry and inexpensive  gift items) and from the sales and rentals (for
use both on-line and off-line) of our proprietary, profiled databases.

                                   BACKGROUND

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

                                ON-LINE MARKETING

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


                                       14
<PAGE>


     GROUPLOTTO.COM.  The GroupLotto website offers consumers the opportunity to
win up to $10 million daily in a free,  on-line lottery.  The lottery prizes are
indemnified  by an  independent,  third-party  agency.  In order  to play,  each
consumer must provide complete and accurate  registration  information and agree
to receive  ("opt-in")  marketing  messages  from  GroupLotto  and our marketing
partners.  The interactive  media on this website includes  registration  pages,
game banners,  and  "pop-ups",  the purpose of which is to generate web traffic,
leads and sales. Revenue is generated at this website from our corporate clients
who pay for such traffic, leads and sales. We generate our bulk consumer traffic
to this website through email marketing to lists of consumers who have indicated
an interest in our marketing programs by opting in to receive such offers.

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

     We  own  and  operate   several  other  websites  such  as   prizecade.com,
atlas-credit.com,      altas-education.com,      jewel-claim-center.com      and
games-to-win.com.  We use these sites to generate  revenue from our clients in a
similar manner as the GroupLotto  model. We believe these sites could also offer
other new revenue opportunities,  such as brand marketing.  For the three months
ended May 31, 2002, these sites contributed  immaterially to the net revenue and
operating income of the Company.

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

     Compared  to  postal  marketing  and  telemarketing,   email  marketing  is
significantly  less  expensive,  offers  much  faster  response  times,  and, we
believe, provides for a more rich consumer media experience. We now own an email
delivery system, which reduces our dependence on third party vendors and further
reduces the expenses  associated  with delivering our monthly  commercial  email
messages.  FOR A FURTHER  DISCUSSION OF RECENT  BUSINESS AND LEGAL  DEVELOPMENTS
REGARDING THIS SUB-SEGMENT,  AND SPECIFICALLY EMAIL MARKETING, SEE "--RESULTS OF
OPERATIONS."

     One of the attractive features for clients,  and, we believe, a significant
competitive advantage,  is our ability to create and test a variety of marketing
campaigns  for  prospective  and  existing  corporate  clients at no risk to the
client. Since we own extensive databases,  manage a creative department, and can
deliver  email at a low  cost,  we are able to offer  prospective  and  existing
clients the opportunity to test market new products,  services, price points and
creative  concepts in order to  determine if an on-line  campaign  works for the
client and which campaigns work most effectively.

     Even  after  campaigns  are  fully  implemented,  we  further  analyze  the
marketing  results to gauge  whether the  campaigns  are  continuing to generate
adequate   results  for  the  client,   whether  the  media  is  being  utilized
cost-efficiently,  and to determine  whether new and different  copy is yielding
better overall results. These are the traditional direct-marketing  disciplines,
which we believe, when applied together with our proprietary databases, delivery
systems  and  reporting  systems,  distinguish  us from our  competitors  in the
on-line marketing industry.

     SYNDICATION.  After we develop a campaign  that  works  efficiently  on our
proprietary  media,  we often  "syndicate"  the  program to  third-party  media.
Typically,  we have expended time,  media and other costs in developing  certain
campaigns.  In exchange for this invested effort,  we obtain the right to market
those  campaigns  to a list of other  online  media  companies.  We  enter  into
agreements  with  these  other  on-line  media  companies  to run the  campaigns
generally on a fee-share  arrangement.  We believe these media companies benefit
by receiving an  immediately  marketable,  fully-packaged  and tested  marketing
program. As a result, we believe we are able to


                                       15
<PAGE>


leverage  campaigns we have developed  (including our  proprietary  products and
services) so that we can generate  additional revenue with virtually no costs or
risks associated with such business extension.

                        PROPRIETARY PRODUCTS AND SERVICES

     A new  business  unit,  which we  introduced  during the three months ended
February 28, 2002,  is the on-line  marketing of our own products and  services.
For example, one of our websites,  Thanksmuch.com, now sells inexpensive costume
jewelry and other gift items  directly to consumers.  When a consumer  selects a
gift item and tenders his credit card, he is given the  opportunity  to purchase
other, more valuable products and services at special discounts.  In addition to
the  Thanksmuch  line of jewelry and gifts,  we are developing and testing other
products and services for direct  marketing to consumers.  No assurances  can be
given,  however,  that these  anticipated  sources of revenue will  generate any
significant income to our operations in future fiscal periods, if at all. During
the three  months  ended May 31,  2002,  the  Thanksmuch.com  website  generated
approximately  $622,000, or approximately 6% of net revenue, with an approximate
$120,000 contribution to income from operations from such revenue.

     Our expansion in, and dependence on, our on-line direct marketing  efforts,
coupled  with the  continued  unproven  reliability  and  profitability  of such
efforts,  the potential for state and/or  federal  legislation  limiting  online
marketing's  consumer  contact  capability,  and the potential  for  seasonality
within the E-commerce  marketplace,  should all be considered  when referring to
our current three and six month results, as well as prior historical results, in
evaluating the potential for our future  operations,  cash flows,  and financial
position.

BASIS OF PRESENTATION

     Certain amounts for the prior period that are presented in the accompanying
unaudited consolidated financial statements,  and referred to in the discussions
below, have been reclassified to conform with the current period presentation.

SEGMENT INFORMATION

     Segments are defined as  components  of an  enterprise  for which  separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision  maker(s)  in  deciding  how to  allocate  resources  and in
assessing performance.  Disclosure is also required about products and services,
geographic areas and major customers.

     During  the three and six month  periods  ended May 31,  2002 and 2001,  we
generated revenue from the following  segments:  E-Commerce,  Off-line Marketing
and, for fiscal 2001 only, LEC Billed Products.  The E-Commerce segment realized
significant  growth during the six months ended May 31, 2002 and the fiscal year
ended  November 30, 2001,  when compared to the prior  comparable  periods,  and
currently  represents  the  core  of our  business  operations.  Revenue  in the
E-commerce segment is generated primarily from marketing of third party products
and  services  on our  websites  and through  e-mail  promotions.  The  Off-Line
Marketing  services segment consists of revenue generated by us through off-line
direct  marketing  channels.   Historically,   this  segment's  activities  were
primarily  telemarketing for the acquisition of long distance and wireless phone
customers for the  respective  carriers.  Currently,  this segment also includes
Montvale  Management,  LLC and its provision of net branch services to qualified
mortgage  banking  and lending  institutions.  The LEC Billed  Products  segment
represented  telecommunications-related  products  and  services  marketed by us
directly  to  consumers  who were  billed  by  local  exchange  carriers  on the
consumer's telephone bill. This segment was inactive during the six months ended
May 31, 2002.

     The Company evaluates  performance based on many factors,  with the primary
criteria  being each  segment's  gross  profit and  EBITDA,  which is net income
excluding  (i) special  charges,  (ii)  interest  expense,  (iii)  interest  and
dividend income, (iv) realized net (losses) gains on marketable securities,  (v)
permanent  impairment  charges,  (vi) gains on nonmonetary cost basis exchanges,
(vii) other nonoperating income (loss),  (viii) minority interest income (loss),
(ix) depreciation,  (x) amortization and (xi) income taxes. The Company shares a
common workforce and office  headquarters,  which precludes an allocation of all
overhead  components.  Overhead items that are  specifically  identifiable  to a
particular  segment are applied to such segment and all other overhead costs are
included in Corporate and other.


                                       16
<PAGE>


RESULTS OF OPERATIONS

     The  following is a discussion  of the  financial  condition and results of
operations of the Company for the three and six-month periods ended May 31, 2002
and May 31,  2001,  respectively.  It  should  be read in  conjunction  with the
Company's  Form 10-K as filed for the year ended  November 30,  2001,  the Notes
thereto and other financial information included elsewhere in this report.

THREE MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

     The Company's net revenues,  on a segmental  basis,  and with disclosure of
the components of the individual  segments,  for each of the three month periods
ended May 31, 2002 and May 31, 2001, are detailed in the following tables:

   SEGMENT DATA -- NET REVENUES, BY SEGMENT COMPONENT

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED MAY 31,       CHANGE        CHANGE
                                                      ---------------------------     INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                   <C>             <C>              <C>              <C>
E-COMMERCE COMPONENTS
GroupLotto and other web sites ...................... $ 1,802,829     $1,404,383       $ 398,446        28%
Net branch commission fees ..........................     202,248             --         202,248       100%
Email marketing programs ............................   5,548,049      2,897,310       2,650,739        91%
Data sales and rentals ..............................   1,329,542      1,208,413         121,129        10%
Sales of jewelry and gifts ..........................     622,459             --         622,459       100%
Internet game development and other .................      44,790             --          44,790       100%
                                                      -----------     ----------      ----------     -----
TOTAL E-COMMERCE ....................................   9,549,917      5,510,106       4,039,811        73%
                                                      -----------     ----------      ----------     -----
OFF-LINE MARKETING SERVICE COMPONENTS
Net branch commission fees ..........................   1,185,682             --       1,185,682       100%
Other off-line marketing ............................      68,939             --          68,939
                                                      -----------     ----------      ----------     -----
TOTAL OFF-LINE MARKETING SERVICE ....................   1,254,621             --       1,254,621       100%
                                                      -----------     ----------      ----------     -----
LEC BILLED PRODUCTS AND SERVICES COMPONENTS
Enhanced Services, principally voice mail ...........          --        318,437        (318,437)     -100%
                                                      -----------     ----------      ----------     -----
TOTAL LEC BILLED PRODUCTS AND SERVICES ..............          --        318,437        (318,437)     -100%
                                                      -----------     ----------      ----------     -----
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other ......          --             --              --         0%
                                                      -----------     ----------      ----------     -----
TOTAL CONSOLIDATED NET REVENUE ...................... $10,804,538     $5,828,543      $4,975,995        85%
                                                      ===========     ==========      ==========     =====
</TABLE>

     Net Revenue  increased  $4,975,995,  or 85%, to  $10,804,538  for the three
months ended May 31, 2002 from  $5,828,543 in the comparable  prior year period.
The primary  component of the increase was  attributable  to an  approximate  $4
million increase in the Company's E-commerce segment net revenues, combined with
an increase of  approximately  $1.3  million in net revenue  from the  Company's
Off-line Marketing  services segment.  Such increases were partially offset by a
decrease of $318,437 in the  Company's  LEC Billed  Product and Services  legacy
segment.  The E-commerce  segment revenue  increase  resulted from the Company's
increasing focus on generating  revenue from its current core business,  on-line
direct marketing.  The Company expects this segment to continue to represent the
substantial part of the Company's revenue in future fiscal periods.  The Company
is assessing the potential of an increased  emphasis of revenue  generation from
off-line,  conventional  direct  marketing  activities  and will  implement  the
strategy if deemed beneficial for the Company.  Currently,  the Company is using
its on-line  databases to enhance  third party  off-line  databases  through the
application  of  overlay  technology,  whereby  databases  are  appended  to one
another, effectively increasing the depth of consumer related information within
the appended database.


                                       17
<PAGE>


     The growth in the Company's  E-commerce segment was primarily  attributable
to  approximately  $5.5 million in revenue  generated from the segment's  E-mail
marketing program sub-set. This represented an approximate $2.6 million increase
over the prior  year's $2.9  million in revenue  generated  from such  segment's
sub-set.  This substantial  increase of approximately  91% over the prior year's
comparable  period was  primarily  the result of the  Company's  acquisition  of
significant volumes of permission-based email records, extension of the quantity
and quality of third party  (client)  offers being  emailed to the databases and
greater  effectiveness  in the Company's email delivery  programs.  In the prior
year's comparable period, the Company had been in the early stages of developing
and carrying out its online  strategy,  and as such had not benefited from these
efficiencies.  The  sub-set  of E-mail  marketing  program  revenue  represented
approximately 51% of the Company's consolidated net revenue for the three months
ended May 31, 2002.

     During  the  three  months  ended May 31,  2002,  the  Company  experienced
problems  with the  delivery  of its email  promotional  offers.  Such  problems
reduced revenue and income from the E-Commerce sub-segment. The Company believes
that the significant  component of the email delivery problem is attributable to
Internet  Service  Providers  that  unilaterally  block  commercial  emails from
reaching  their  consumer  subscribers.  The Company has  addressed the issue by
deploying new  reinforced  delivery  platforms  with  increased  redundancy  and
expanded  diversification  using both internal and external emailing  resources.
Although  the Company  has  conceived  of a number of  programs to address  this
specific problem, there can be no assurance that any of these programs will work
effectively, or can be timely implemented.

     Any further  changes in the Internet  operating  landscape that  materially
hinders the Company's  current ability and/or cost to deliver  commercial  email
messages to the consumer  records in its databases,  and the consumer records in
the databases of its affiliates,  could  potentially  cause a material impact on
net revenue and gross margin and,  therefore,  its  profitability and cash flows
could be adversely  affected.  Various state laws exist, and federal legislation
is currently  pending,  that limit the Company's  ability to deliver  commercial
e-mail messages to consumers.  There are presently no federal laws that regulate
sending  unsolicited  email.  The pending  federal bills and existing state laws
require that  certain  "opt-out"  procedures  be included in emails and prohibit
"false routing" or "fictitious address" information. Existing state, and pending
federal,  laws require functioning return e-mail addresses and that valid postal
addresses be included by the senders of commercial  email messages.  Some states
require an "ADV"  label in the  subject  line,  and  proscribe  false  header or
misleading subject lines. Attorneys General and/or consumers are given authority
to enforce the state  laws.  States with  legislation  affecting  the sending of
unsolicited  commercial  email  include:  California,   Colorado,   Connecticut,
Delaware, Idaho, Illinois, Iowa, Louisiana,  Maryland,  Missouri,  Nevada, North
Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia,
Washington and West  Virginia.  If strict  federal  legislation is  subsequently
written into law, with its terms specifically  limiting the Company's ability to
market its offers,  the Company  could  potentially  realize a material  adverse
impact in future fiscal period net revenue growth, and therefore,  profitability
and cash flows could be adversely affected.

     The Company's E-commerce segment's web site sub-set realized an increase in
revenues of  approximately  $398,000,  or 28%, when  comparing the current three
months ended May 31, 2002 ($1.8  million in revenue) with the three months ended
May 31,  2001 ($1.4  million in  revenue).  This  increase  is the result of the
Company's  shift from low priced "click  through"  revenue to higher  generating
registration,  lead generation and on-line customer  acquisition  based revenue.
The  Company  generates a  significant  portion of its site  traffic  from email
marketing.  SEE THE  PRECEDING  PARAGRAPH  FOR A  FURTHER  DISCUSSION  OF RECENT
BUSINESS AND LEGAL DEVELOPMENTS ATTRIBUTABLE TO EMAIL MARKETING.

     Additional   increases  in  the   Company's   consolidated   revenues  were
attributable  to new sub-sets added to the  E-commerce  segment during the three
months ended May 31, 2002 when  compared to the three months ended May 31, 2001.
The combined revenue resulting from the new sub-sets amounted to $869,497 and is
detailed as follows:  (a)  $202,248 of such  increase  relates to the  Company's
majority-owned subsidiary (Montvale Management LLC) that provides services under
a net branch agreement with licensed mortgage banking and brokerage companies in
the  acquisition of candidates for new mortgages and the refinancing of existing
debt, which subsidiary also conducts the same services  off-line and is the sole
component  of the  Company's  Off-line  Marketing  Services  segment  revenue of
$1,185,682;  (b)  $622,459  of such  increase  relates to the  on-line  sales of
jewelry and gifts by the Company's new subsidiary,  ThanksMuch,  Inc., which was
formed with the assets  acquired from a closely held private company on December
14, 2001, all as more fully described in Note 8 to the financial statements; and
(c) $44,790 of such increase relates to the Internet game  development  revenues
generated by the Company's new subsidiary,  InfiKnowledge  ULC, which was formed
with the assets  acquired from a private  Canadian  company on December 6, 2001,
all as more fully described in Note 8 to the financial statements.

     The  increases  in  revenues  from the  Company's  E-commerce  segment  and
Off-line  Marketing  Services  segment  were  partially  offset by a decrease of
$318,437 in revenues from the Company's LEC Billed Products and Services


                                       18
<PAGE>


segment.  Such decrease resulted from the Company's elimination of billing voice
mail  services  under its  contract  with the  service  bureau  known as Federal
Transtel, Inc. ("FTT") in October 2001. FTT has since filed for protection under
the United States Bankruptcy Code.

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

     The Company's  cost of revenues  during the three months ended May 31, 2002
and May 31, 2001 are comprised of direct and indirect marketing costs associated
with the (1)  acquisition  of consumer data,  (2) costs of email  delivery,  (3)
premium  fulfillment  costs  and  (4)  contingent-based   prize  indemnification
expense, billing and collection fees, and customer service costs.

     The Company's cost of sales, on a segmental  basis,  and with disclosure of
the components of the individual  segments,  for each of the three month periods
ended May 31, 2002 and May 31, 2001 are set forth below:

   CONSOLIDATED COST OF SALES, BY SEGMENT, BY COMPONENT

<TABLE>
<CAPTION>
                                                      FOR THE THREE MONTHS ENDED
                                                      ---------------------------      CHANGE        CHANGE
                                                        MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                    <C>             <C>             <C>              <C>
E-COMMERCE
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Email marketing and related delivery costs ........... $1,141,215     $  699,695      $  441,520        63%
Data purchases and premium costs .....................  1,960,386        747,755       1,212,631       162%
Promotional, creative and other costs ................     69,959         30,404          39,555       130%
                                                       ----------     ----------      ----------     -----
     TOTAL E-COMMERCE ADVERTISING .................... $3,171,560     $1,477,854      $1,693,706       115%
                                                       ----------     ----------      ----------     -----
SERVICE BUREAU FEES
Contingent based prize indemnification costs ......... $   95,536     $   99,131          (3,595)       -4%
                                                       ----------     ----------      ----------     -----
     TOTAL E-COMMERCE COST OF SALES .................. $3,267,096     $1,576,985      $1,690,111       107%
                                                       ----------     ----------      ----------     -----
OFF-LINE MARKETING SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing, direct mail and related costs ......... $  116,108     $   16,176      $   99,932       618%
     TOTAL OFF-LINE MARKETING COST OF SALES .......... $  116,108     $   16,176      $   99,932       618%
                                                       ----------     ----------      ----------     -----
LEC BILLED PRODUCTS AND SERVICES
SERVICE BUREAU FEES
Billing and collection fees .......................... $       --     $   54,576         (54,576)     -100%
                                                       ----------     ----------      ----------     -----
     TOTAL LEC BILLED COST OF SALES .................. $       --     $   54,576         (54,576)     -100%
                                                       ----------     ----------      ----------     -----
       TOTAL COST OF SALES ........................... $3,383,204     $1,647,737      $1,735,467       105%
                                                       ----------     ----------      ----------     -----
</TABLE>

     Cost of sales on a consolidated  basis  increased  $1,735,467,  or 105%, to
$3,383,204  for the three  months  ended May 31,  2002  from  $1,647,737  in the
comparable prior year period.

     On a  segmental  level,  the  Company's  E-commerce  segment  cost of sales
increased, on a net basis,  approximately $1.7 million, or 107%, to $3.3 million
during the three  months  ended May 31,  2002,  when  compared  to $1.6  million
incurred  in the  prior  year's  comparable  period.  The  Company's  continuing
strategy  of  generating  revenues  primarily  from direct  marketing  campaigns
delivered on-line was the significant factor contributing to this increase.  The
Company  realized  marketing  costs for email  delivery  of  approximately  $1.1
million in the  current  fiscal  quarter  ended May 31,  2002,  representing  an
increase of $441,520,  or 63%, when compared to approximately  $700,000 in email
delivery costs incurred in the prior year's comparable period. In December 2001,
the


                                       19
<PAGE>


Company   acquired   the   assets  of  a   Canadian-based   technology   company
(InfiKnowledge).  The Company  continues to expect that the  integration  of the
acquired  assets,  technology and human  resources into its operations and email
delivery  platform  will  continue  to  reduce  the  unitary  costs of its email
promotions  and serve to preserve  and/or  improve  operating  margins.  SEE THE
PRECEDING "NET REVENUE" SECTION FOR A FURTHER  DISCUSSION OF RECENT BUSINESS AND
LEGAL DEVELOPMENTS ATTRIBUTABLE TO EMAIL MARKETING.

     The Company realized costs of  approximately  $1,200,000 for data purchases
necessary to build and  maintain  its  marketing  databases.  In  addition,  the
Company  realized  cost of  approximately  $746,000 for premium costs related to
redemption  obligations for certain of its marketing program offers. These costs
represent an increase of approximately $1.2 million, or 162%, over data purchase
costs of  $747,755  during the three  months  ended May 31,  2001.  In the prior
fiscal year's  comparable  period,  the Company had immaterial costs relative to
redemption obligations.

     The  Company  uses  the  services  of  an  agency  for  the   provision  of
indemnification  coverage in the event the GroupLotto  site produces a winner in
one of its free on-line lottery games.  The costs  attributable to the provision
of such  indemnification  coverage decreased  approximately  $3,600, or 4%, when
compared with the fiscal period ended May 31, 2001. The reason for this decrease
was due to an approximate 7% decrease in the games played at the  GroupLotto.com
website.

     The Company's Off-line Marketing Services segment's cost of sales increased
$99,932, or 618%, to $116,108,  when compared to $16,176 during the three months
ended  May  31,  2001.   The  increase  was   attributable   to  the   Company's
majority-owned  subsidiary  (Montvale Management LLC), which was inactive during
the three months ended May 31, 2001.

     The balance of the decrease in cost of goods sold relates to the LEC Billed
Product  and  Service  segment and  amounted  to a  reduction  of $54,576.  This
reduction resulted from the Company's elimination of billing voice mail services
under its contract with the service bureau  Federal  Transtel,  Inc.  ("FTT") in
October  2001.  FTT has since  filed for  protection  under  the  United  States
Bankruptcy Code.

     The Company's gross profit in terms of dollars,  on a segmental  basis, and
the Company's gross profit  percentage,  on a segmental  basis,  for each of the
three month periods ended May 31, 2002 and 2001 are set forth below:

   CONSOLIDATED GROSS PROFIT, BY SEGMENT

<TABLE>
<CAPTION>
                                                     FOR THE PERIODS:
                                                    THREE MONTHS ENDED
                                                ---------------------------      CHANGE        CHANGE
                                                  MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                   2002            2001            $$$           %%%
                                                -----------     -----------    -----------     -------
<S>                                              <C>            <C>             <C>               <C>
E-commerce ..................................... $6,282,821     $3,933,121      $2,349,700        60%
Customer Acquisition services ..................  1,138,513        (16,176)      1,154,689       100%
LEC Billed products and services ...............         --        263,861        (263,861)     -100%
                                                 ----------     ----------      ----------     -----
CONSOLIDATED TOTALS ............................ $7,421,334     $4,180,806      $3,240,548        78%
                                                 ==========     ==========      ==========     =====
</TABLE>

   CONSOLIDATED GROSS PROFIT PERCENTAGES, BY SEGMENT

<TABLE>
<CAPTION>
                                                     FOR THE PERIODS:
                                                    THREE MONTHS ENDED          ABSOLUTE      RELATIVE
                                                ---------------------------    PERCENTAGE    PERCENTAGE
                                                  MAY 31,         MAY 31,        CHANGE        CHANGE
                                                   2002            2001         INC (DEC)     INC (DEC)
                                                -----------     -----------    -----------     -------
<S>                                                <C>             <C>             <C>           <C>
E-commerce .....................................   65.8%           71.4%          -5.6%         -7.8%
Customer Acquisition services ..................   90.7%            0.0%          90.7%        100.0%
LEC Billed products and services ...............    0.0%           82.9%         -82.9%       -100.0%
                                                   ----            ----          -----        ------
CONSOLIDATED GROSS PROFIT PERCENTAGE ...........   68.7%           71.7%          -3.0%         -4.2%
                                                   ====            ====          =====        ======
</TABLE>


                                       20
<PAGE>


     Consolidated  Gross Profit  Percentage  ("Gross Margin") as a percentage of
net revenue was 68.7% during the three  months  ended May 31, 2002,  compared to
71.7% in the prior year's  comparable  fiscal period,  representing  an absolute
percentage  point  decrease of 3%, or a 4.2% decline on a relative  basis.  On a
segmental basis, the Company's  E-commerce segment accounted for the majority of
the  decrease in margin  when  compared to the prior  year's  comparable  fiscal
period. The 5.6% absolute  percentage point decrease resulted from the Company's
increased costs associated with data purchases,  which are fully expensed at the
time of the data's receipt.  The Company  anticipates that this expensing policy
could provide a margin improvement  benefit in future fiscal periods through the
continued  marketing to such acquired data. An additional factor contributing to
the slight decline in the gross margin  percentage is  attributable to the costs
of fulfillment  obligations related to the Company's marketing program conducted
for a long distance service provider.  Such costs  approximated  $746,000 in the
quarter  ended May 31, 2002.  During the prior  year's  comparable  period,  the
Company did not have an email  program that  generated  significant  fulfillment
costs.  Changes  in the gross  margins  generated  from the  Company's  Off-line
Marketing Services segment and LEC Product and Services segment primarily offset
each other in terms of percentage changes.

     The Company's Selling Expenses and General and Administrative  Expenses for
each of the three months ended May 31, 2002 and May 31, 2001 are presented, on a
segmental  basis,  and with the  components of the individual  segments,  in the
tables set forth below:

<TABLE>
<CAPTION>
                                                     FOR THE PERIODS:
                                                    THREE MONTHS ENDED
                                                ---------------------------      CHANGE        CHANGE
                                                  MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                   2002            2001            $$$           %%%
                                                -----------     -----------    -----------     -------
<S>                                              <C>              <C>           <C>              <C>
E-COMMERCE
Fee share commissions .......................... $  900,173       $251,986      $  648,187       257%
Other commissions ..............................    473,223             --         473,223       100%
Selling salaries and related expenses ..........    417,868        318,288          99,580        31%
Occupancy and equipment costs ..................      4,515          4,305             210         5%
Travel and entertainment .......................     59,648         78,401         (18,753)      -24%
                                                 ----------       --------      ----------     -----
     TOTAL SELLING-- E-COMMERCE SEGMENT ........ $1,855,427       $652,980      $1,202,447       184%
                                                 ----------       --------      ----------     -----
OFF-LINE MARKETING SERVICES
Fee share commissions .......................... $       --       $     --      $       --         0%
Other commissions ..............................         --             --              --         0%
Selling salaries and related expenses ..........    458,335             --         458,335       100%
Occupancy and equipment costs ..................     45,889             --          45,889       100%
Travel and entertainment .......................     11,124             --          11,124       100%
                                                 ----------       --------      ----------     -----
     TOTAL SELLING-- OFF-LINE SEGMENT .......... $  515,348       $     --      $  515,348       100%
                                                 ----------       --------      ----------     -----
       Consolidated Totals ..................... $2,370,775       $652,980      $1,717,795       263%
                                                 ==========       ========      ==========     =====
</TABLE>

     Selling  expenses on a  consolidated  basis  increased  approximately  $1.7
million,  or 263%,  from $652,980  during the three months ended May 31, 2001 to
$2,370,775  during  the  three  months  ended May 31,  2002.  The  increase  was
primarily  attributable to the Company's E-commerce segment, with an increase of
approximately $1.2 million, and increases of $515,348 in selling expenses in the
Company's Off-line Marketing Services segment.

     The significant  factors  contributing to the increase in selling  expenses
were (a)  increased  fee share  commissions  ($648,187)  and other sales related
commissions  ($473,223) incurred in the Company's  E-commerce segment (see below
for a detailed description of this expense category);  and (b) increased selling
based  compensation  of $99,580,  arising from the  expansion of the  E-commerce
segment's sales force and selling activities.


                                       21
<PAGE>


     Regarding  the  increase in fee share  commissions,  during the fiscal year
ended  November 30,  2001,  the Company  significantly  expanded the practice of
marketing  promotional offers on behalf of its marketing clients  ("Clients") to
third party databases on a fee share commission  basis. The fee share commission
relationship   generally  arises  after  the  Company  concludes  a  contractual
arrangement  with a Client  pursuant to which the  Company  modifies or develops
the:(i) copy, (ii) offer form and (iii)  promotional  materials for the Client's
product or service. The Company then tests the promotion,  and agrees to deliver
a  minimum  level  of new  customers,  and/or  targeted  leads  to  the  Client.
Simultaneously with the execution of these contractual arrangements, the Company
often obtains the rights from the Client to market their promotions to a list of
third  parties  with whom the Company has  marketing  relationships  (the "Third
Parties").  The Company enters into contracts with each Third Party with whom it
intends to market Client  promotions.  The terms of these  agreements  generally
provide that the Third Party has the right to (i) approve the creative materials
for each promotion,  (ii) approve the timing of each promotion's mailing,  (iii)
terminate  the contract on short  notice,  and (iv) reject any promotion for any
reason.  Each  agreement also restricts the third party from doing business with
the client  other than through the Company for the period of time covered by the
agreement, and sets forth the terms of the Third Party's compensation.  Payments
are  performance  based only and are either fixed fees paid for each customer or
lead  generated  for the Client,  or a revenue share that is a percentage of the
revenue  generated (after deduction for certain direct costs) by the Company for
marketing that offer to the Third Party  database.  The Company  utilizes unique
Universal  Resource Locater identifier links ("URLs") when promotions are mailed
to the Third  Party  database.  It is the unique  URL's  that form the  tracking
mechanism by which the Client reports results to the Company, and the Company is
able to account for revenue generated under the fee share arrangement with Third
Parties.  In addition,  the Company  manages third party  databases on a revenue
share  basis.  Amounts  payable to the third  parties  under these  programs are
captured in the "fee share commission" category of selling expense.

     Selling expenses within the Company's  Off-line  Marketing Services segment
increased  $515,348,  or 100%,  when  compared  to the prior  year's  comparable
period.  The  Company  expects  that in the  balance  of the  fiscal  year ended
November  30,  2002 it will  continue  to realize  quarterly  increases  in this
segment's selling expenses based on the anticipated  expansion of the operations
of its majority  owned  subsidiary,  Montvale  Management  LLC,  which  conducts
business  off-line,  as well as on-line,  as a net branch for licensed  mortgage
banking and brokerage companies.

     The Company's general and  administrative  expenses ("G&A") are principally
comprised of (i) compensation costs and related expenses for executive, finance,
information systems and general administration personnel, (ii) professional fees
(which include legal;  audit,  accounting 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  the  Company's
E-commerce  segment,  and (vi) all other  general  and  miscellaneous  corporate
expense items.

   CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES, BY SEGMENT, BY COMPONENT

<TABLE>
<CAPTION>
                                                           FOR THE PERIODS:
                                                          THREE MONTHS ENDED
                                                      ---------------------------      CHANGE        CHANGE
                                                        MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                    <C>            <C>             <C>               <C>
E-COMMERCE
Compensation costs and related expenses .............  $1,133,945     $  592,719      $  541,226        91%
Professional fees ...................................     474,195        197,471         276,724       140%
Insurance costs .....................................     119,718        141,544         (21,826)      -15%
Occupancy and equipment costs .......................      77,179         57,214          19,965        35%
Site development, maintenance and modifications .....     287,133        406,145        (119,012)      -29%
All other G&A expenses ..............................     454,084         20,395         433,689      2126%
                                                       ----------     ----------      ----------     -----
TOTAL G&A-- E-COMMERCE SEGMENT ......................  $2,546,254     $1,415,488      $1,130,766        80%
                                                       ----------     ----------      ----------     -----
</TABLE>


                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                      FOR THE PERIODS:
                                                     THREE MONTHS ENDED
                                                 ---------------------------      CHANGE        CHANGE
                                                   MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                    2002            2001            $$$           %%%
                                                 -----------     -----------    -----------     -------
<S>                                               <C>            <C>             <C>              <C>
OFF-LINE MARKETING SERVICES
Compensation costs and related expenses ......... $       --     $   49,404      $  (49,404)     -100%
Professional fees ...............................     20,284             --          20,284       100%
Insurance costs .................................      1,260          3,672          (2,412)      -66%
Occupancy and equipment costs ...................         --          7,702          (7,702)     -100%
All other G&A expenses ..........................    353,794         25,927         327,867      1265%
                                                  ----------     ----------      ----------     -----
TOTAL G&A-- OFF-LINE SEGMENT .................... $  375,338     $   86,705      $  288,633       333%
                                                  ----------     ----------      ----------     -----
LEC BILLED PRODUCTS AND SERVICES
Compensation costs and related expenses ......... $       --     $   49,272      $  (49,272)     -100%
Insurance costs .................................         --         34,604         (34,604)     -100%
Occupancy and equipment costs ...................         --          7,702          (7,702)     -100%
All other G&A expenses ..........................         --          5,088          (5,088)     -100%
                                                  ----------     ----------      ----------     -----
TOTAL G&A-- LEC SEGMENT ......................... $       --     $   96,666      $  (96,666)     -100%
                                                  ----------     ----------      ----------     -----
CORPORATE AND OTHER
Compensation costs and related expenses ......... $  515,909     $  370,619      $  145,290        39%
Professional fees ...............................    226,306        349,171        (122,865)      -35%
Insurance costs .................................    121,025            453         120,572       100%
All other G&A expenses ..........................    165,019         85,275          79,744        94%
                                                  ----------     ----------      ----------     -----
TOTAL G&A-- CORPORATE AND OTHER ................. $1,028,259     $  805,518      $  222,741        28%
                                                  ----------     ----------      ----------     -----
CONSOLIDATED TOTALS ............................. $3,949,851     $2,404,377      $1,545,474        64%
                                                  ==========     ==========      ==========     =====
</TABLE>

     General  and  Administrative  expenses  ("G&A")  on  a  consolidated  basis
increased   approximately   $1.5  million,   or  64%,  when   comparing  G&A  of
approximately  $2.4  million  from the three months ended May 31, 2001 to G&A of
approximately  $3.9 million incurred during the three months ended May 31, 2002.
The net  increase  was  attributable  to (a) the  Company's  E-commerce  segment
(approximately $1.1 million,  or 73% of the total increase),  with such increase
related  to  increased  compensation  costs,  professional  fees and  other  G&A
expenses, offset by a decline in maintenance costs associated with the Company's
web sites,  all  required to support the 73%  increase in revenues  generated by
such  segment  during  the  three  months  ended  May 31,  2002;  (b)  increases
attributable to the Company's Off-line Marketing Services segment (approximately
$289,000, or 19% of total increase), with such increase related to G&A necessary
to support the  segment's  growth in revenues from $ -0- in fiscal 2001's second
quarter to  approximately  $1.2  million  during the three  months ended May 31,
2002; and (c) other corporate overhead  (approximately  $222,000,  or 14% of the
total  increase)  not  specifically  identifiable  to  the  Company's  operating
segments, with such cost increase including (i) directors and officers liability
insurance,  (ii)  professional  fees incurred in the defense of actions  arising
from  legacy   operations,   and  (iii)  other   non-allocable  G&A  aggregating
approximately  $1 million.  These overhead  increases were slightly offset by an
approximate $97,000 decrease in overhead attributable to the Company's currently
inactive LEC Billed Product and Services segment.



                                       23
<PAGE>


OTHER INCOME (EXPENSE)

     The Company's  components of "Other income  (expense)" for the three months
ended May 31, 2002 and 2001 are set forth below:

   CONSOLIDATED OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                                           FOR THE PERIODS:
                                                          THREE MONTHS ENDED
                                                      ---------------------------      CHANGE        CHANGE
                                                        MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                    <C>             <C>            <C>              <C>
Other income (expense):
Interest expense ....................................  $   (9,266)     $      --      $   (9,266)      100%
Interest income and dividends .......................     183,386        494,309        (310,923)      -63%
Net gains(losses) on sale of marketable securities ..      20,564         (1,776)         22,340       100%
Other non-operating income:
   Talk.com  Arbitration Settlement .................   2,314,121                      2,314,121       100%
   P.M.Thomas Arbitration Settlement ................  (2,275,582)                    (2,275,582)      100%
   Residual revenues from terminated programs .......          --         79,883         (79,883)     -100%
   Other miscellaneous (expense) ....................      62,126             --          62,126       100%
Minority interest (income) loss .....................    (104,303)            --        (104,303)      100%
                                                       ----------     ----------      ----------     -----
TOTAL CONSOLIDATED OTHER INCOME (EXPENSE) ...........  $  191,046      $ 572,416      $ (381,370)      -67%
                                                       ==========     ==========      ==========     =====
</TABLE>

     Consolidated Other Income (Expense) decreased  approximately $381,000, from
approximately  $572,000 for the three months ended May 31, 2001 to approximately
$191,000 for the three months ended May 31, 2002.

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

     (a) a decrease in interest and dividend  income of  approximately  $311,000
resulting  from  significant  decreases  in  the  interest  rates  available  on
short-term commercial paper during the three months ended May 31, 2002;

     (b) an increase in gains  realized  through sales of marketable  securities
approximating  $22,000 in the quarter  ended May 31, 2002,  when compared to the
quarter ended May 31, 2001, which included a loss of approximately $2,000; and

     (c) the three  months  ended May 31, 2002  included  the final  installment
related  to the  Talk.com  arbitration  victory  ($2.3  million)  awarded to the
Company  in  November  2001,  offset by the $2.3  million  award  granted to the
claimants  in the  Phillip  Michael  Thomas  arbitration.  See "Part II -- Legal
Proceedings."

PROVISION FOR INCOME TAXES

     The Company's  effective  income tax rate is a result of the combination of
federal income taxes at statutory rates, and state taxes, subject to the effects
of  valuation  allowances  taken  against the  "realizability"  of deferred  tax
assets. The Company recorded income tax expense of $469,540 for the three months
ended May 31, 2002 on pre-tax income of approximately  $1,182,583.  This equates
to an effective tax rate of approximately 39.7%. This effective tax rate is less
than the Company's  historically  recognized tax rate due to the  realization in
the three months ended May 31, 2002 of previously  devalued  deferred tax assets
related  to  capital  losses,  coupled  with the  effect of  interim  period tax
allocation.  In the prior comparable period, the Company had recorded income tax
expense  of  $680,381  on a pre-tax  profit of  approximately  $1,695,865.  This
represented an effective tax rate of 40.1%.


                                       24
<PAGE>


SIX MONTHS ENDED MAY 31, 2002 AND MAY 31, 2001

     The Company's net revenues,  on a segmental  basis,  and with disclosure of
the  components of the  individual  segments,  for each of the six month periods
ended May 31, 2002 and May 31, 2001, are detailed in the following tables:

   SEGMENT DATA -- NET REVENUES, BY SEGMENT COMPONENT

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                   ---------------------------      CHANGE        CHANGE
                                                     MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                      2002            2001            $$$           %%%
                                                   -----------     -----------    -----------     -------
<S>                                                <C>            <C>             <C>               <C>
E-COMMERCE COMPONENTS
GroupLotto and other web sites ................... $ 4,239,862    $ 2,491,927     $ 1,747,935        70%
Net branch commission fees .......................     332,209             --         332,209       100%
Email marketing programs .........................  13,462,033      5,556,433       7,905,600       142%
Data sales and rentals ...........................   2,064,018      1,582,312         481,706        30%
Sales of jewelry and gifts .......................     821,137             --         821,137       100%
Internet game development and other ..............     265,108             --         265,108       100%
                                                   -----------    -----------     -----------     -----
TOTAL E-COMMERCE .................................  21,184,367      9,630,672      11,553,695       120%
                                                   -----------    -----------     -----------     -----
OFF-LINE MARKETING SERVICE COMPONENTS
Net branch commission fees .......................   1,922,129             --       1,922,129       100%
Other off-line marketing .........................      68,939             --          68,939       100%
                                                   -----------    -----------     -----------     -----
TOTAL OFF-LINE MARKETING SERVICE .................   1,991,068             --       1,991,068       100%
                                                   -----------    -----------     -----------     -----
LEC BILLED PRODUCTS AND SERVICES COMPONENTS
"900" Entertainment Service royalties ............          --        486,406        (486,406)     -100%
Enhanced Services, principally voice mail ........          --        637,019        (637,019)     -100%
                                                   -----------    -----------     -----------     -----
TOTAL LEC BILLED PRODUCTS AND SERVICES                      --      1,123,425      (1,123,425)     -100%
                                                   -----------    -----------     -----------     -----
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other ...          --             --              --         0%
                                                   -----------    -----------     -----------     -----
TOTAL CONSOLIDATED NET REVENUE ................... $23,175,435    $10,754,097     $12,421,338       116%
                                                   ===========    ===========     ===========     =====
</TABLE>

     Net Revenue  increased  $12,421,338,  or 116%, to  $23,175,435  for the six
months ended May 31, 2002 from  $10,754,097 in the comparable prior year period.
The primary  component of the increase was attributable to an approximate  $11.6
million increase in the Company's E-commerce segment net revenues, combined with
an  increase  of  approximately  $2 million in net  revenue  from the  Company's
Off-line Marketing  services segment.  Such increases were partially offset by a
decrease of $1.1 million in the Company's LEC Billed Product and Services legacy
segment.  The E-commerce  segment revenue  increase  resulted from the Company's
increasing focus on generating  revenue from its current core business,  on-line
direct marketing.  The Company expects this segment to continue to represent the
substantial part of the Company's revenue in future fiscal periods.  The Company
is assessing the potential of an increased  emphasis of revenue  generation from
off-line,  conventional  direct  marketing  activities  and will  implement  the
strategy if deemed beneficial for the Company.  Currently,  the Company is using
its on-line  databases to enhance  third party  off-line  databases  through the
application  of  overlay  technology,  whereby  databases  are  appended  to one
another, effectively increasing the depth of consumer related information within
the appended database.

     The growth in the Company's  E-commerce segment was primarily  attributable
to  approximately  $13.5 million in revenue  generated from the segment's E-mail
marketing  program  sub-set.  This  represented a $7.9 million increase over the
prior year's $5.5 million in revenue generated from such segment's sub-set. This
substantial  increase of  approximately  142% over the prior  year's  comparable
period was  primarily  the result of the Company's  acquisition  of  significant
volumes of permission-based email records, extension of the quantity and quality
of third  party  (client)  offers  being  emailed to the  databases  and greater
efficiencies  in the  Company's  email  delivery  programs.  In the prior year's
comparable period,  specifically the first three months of the fiscal year ended
November


                                       25
<PAGE>


30, 2001,  the Company had been in the early stages of  developing  and carrying
out its  online  strategy.  The  sub-set  of E-mail  marketing  program  revenue
represented  approximately 58% of the Company's consolidated net revenue for the
six months ended May 31, 2002.

     During  the  three  months  ended May 31,  2002,  the  Company  experienced
problems  with the  delivery  of its email  promotional  offers.  Such  problems
reduced revenue and income from the E-Commerce sub-segment. The Company believes
that the significant  component of the email delivery problem is attributable to
Internet  Service  Providers  that  unilaterally  block  commercial  emails from
reaching  their  consumer  subscribers.  The Company has  addressed the issue by
deploying new  reinforced  delivery  platforms  with  increased  redundancy  and
expanded  diversification  using both internal and external emailing  resources.
Although  the Company  has  conceived  of a number of  programs to address  this
specific problem, there can be no assurance that any of these programs will work
effectively, or can be timely implemented.

     Any further  changes in the Internet  operating  landscape that  materially
hinders the Company's  current ability and/or cost to deliver  commercial  email
messages to the consumer  records in its databases,  and the consumer records in
the databases of its affiliates,  could  potentially  cause a material impact in
future net revenue and gross margin, and, therefore,  its profitability and cash
flows  could be  adversely  affected.  Various  state laws  exist,  and  federal
legislation is currently  pending,  that limit the Company's  ability to deliver
commercial  e-mail  messages to  consumers.  There are presently no federal laws
that regulate sending  unsolicited email. The pending federal bills and existing
state laws require that certain  "opt-out"  procedures be included in emails and
prohibit "false routing" or "fictitious  address"  information.  Existing state,
and pending federal,  laws require  functioning return e-mail addresses and that
valid postal  addresses be included by the senders of commercial email messages.
Some states  require an "ADV" label in the subject  line,  and  proscribe  false
header or misleading subject lines. Attorneys General and/or consumers are given
authority  to enforce the state  laws.  States with  legislation  affecting  the
sending  of  unsolicited   commercial  email  include:   California,   Colorado,
Connecticut,  Delaware,  Idaho, Illinois, Iowa, Louisiana,  Maryland,  Missouri,
Nevada, North Carolina, Ohio, Oklahoma,  Pennsylvania,  Rhode Island, Tennessee,
Utah, Virginia,  Washington and West Virginia.  If strict federal legislation is
subsequently  written  into  law,  with  its  terms  specifically  limiting  the
Company's ability to market its offers, the Company could potentially  realize a
material  adverse  impact  in future  fiscal  period  net  revenue  growth,  and
therefore, profitability and cash flows could be adversely affected.

     The Company's E-commerce segment's web site sub-set realized an increase in
revenues of $1.7 million,  or 70%,  when  comparing the current six months ended
May 31, 2002 ($4.2  million in revenue)  with the six months  ended May 31, 2001
($2.5 million in revenue).  This  increase is the result of the Company's  shift
from low priced "click through" revenue to higher generating registration,  lead
generation and on-line customer acquisition based revenue. The Company generates
a  significant  portion  of its  site  traffic  from  email  marketing.  SEE THE
PRECEDING  PARAGRAPH  FOR A  FURTHER  DISCUSSION  OF RECENT  BUSINESS  AND LEGAL
DEVELOPMENTS ATTRIBUTABLE TO EMAIL MARKETING.

     Additional   increases  in  the   Company's   consolidated   revenues  were
attributable  to new sub-sets  added to the  E-commerce  segment  during the six
months  ended May 31, 2002 when  compared to the six months  ended May 31, 2001.
The combined revenue  resulting from the new sub-sets  amounted to approximately
$1.4 million and is detailed as follows:  (a) $332,209 of such increase  relates
to the  Company's  majority-owned  subsidiary  (Montvale  Management  LLC)  that
provides  services under a net branch  agreement with licensed  mortgage banking
and brokerage  companies in the  acquisition of candidates for new mortgages and
the  refinancing  of existing  debt,  which  subsidiary  also  conducts the same
services  off-line and recorded  approximately  $1.9 million within its Off-line
Marketing Services segment; (b) $821,137 of such increase relates to the on-line
sales of jewelry and gifts by the Company's new  subsidiary,  ThanksMuch,  Inc.,
which was formed with the assets acquired from a closely held private company on
December  14,  2001,  all as more  fully  described  in Note 8 to the  financial
statements;  (c)  $165,108  of  such  increase  relates  to  the  Internet  game
development  revenues  generated by the Company's new subsidiary,  InfiKnowledge
ULC, which was formed with the assets acquired from a private  Canadian  company
on  December 6, 2001,  all as more fully  described  in Note 8 to the  financial
statements;  and (d) the balance of such increase, or $100,000, was attributable
to a web marketing,  design and development  contract  executed and completed by
the Company during the three months ended February 28, 2002.

     The  increases  in  revenues  from the  Company's  E-commerce  segment  and
Off-line  Marketing  Services  segment  were  partially  offset by a decrease of
$1,123,425  in revenues  from the  Company's  LEC Billed  Products  and Services
segment. A portion of the decrease, or $486,406, resulted from the expiration in
the prior year's three months  ended  February 28, 2001,  of certain  agreements
pursuant to which the Company  had been paid a royalty  fee (with  virtually  no
corresponding  costs) to refrain  from  conducting,  marketing,  advertising  or
promoting certain LEC Billed Products and Services. The six months ended May 31,
2002, did not include any revenue related to these services and the Company does
not anticipate re-entering that market. The balance of the decrease in


                                       26
<PAGE>


LEC Billed Product and Service segment revenue,  or $637,019,  resulted from the
Company's elimination of billing voice mail services under its contract with the
service bureau  Federal  Transtel,  Inc.  ("FTT") in October 2001. FTT has since
filed for protection under the United States Bankruptcy Code.

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

     The Company's cost of revenues during the six months ended May 31, 2002 and
May 31, 2001 are comprised of (1) direct and indirect marketing costs associated
with the (a) contact and  identification  strategies,  (b)  procurement  and (c)
retention  of consumers  for its  databases,  including  direct  response  email
marketing  costs,  data  purchases,  promotional  costs and premium  fulfillment
costs, and (2) the related  contingent-based prize indemnification  expense, and
LEC segment related billing and collection fees, and customer service costs.

     The Company's 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, 2002 and May 31, 2001 are set forth below:

   CONSOLIDATED COST OF SALES, BY SEGMENT, BY COMPONENT

<TABLE>
<CAPTION>
                                                                FOR THE
                                                           SIX MONTHS ENDED
                                                      ---------------------------      CHANGE        CHANGE
                                                        MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                   <C>            <C>             <C>               <C>
E-COMMERCE
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Email marketing and related delivery costs ........... $2,587,026     $1,126,857      $1,460,169       130%
Data purchases and premium costs .....................  3,723,449      1,101,007       2,622,442       238%
Promotional, creative and other costs ................     84,619         50,154          34,465        69%
                                                       ----------     ----------      ----------     -----
TOTAL E-COMMERCE ADVERTISING ......................... $6,395,094     $2,278,018      $4,117,076       181%
                                                       ----------     ----------      ----------     -----
SERVICE BUREAU FEES
Contingent based prize indemnification costs ......... $  185,391     $  206,626      $  (21,235)      -10%
                                                       ----------     ----------      ----------     -----
TOTAL E-COMMERCE COST OF SALES ....................... $6,580,485     $2,484,644      $4,095,841       165%
                                                       ----------     ----------      ----------     -----
OFF-LINE MARKETING SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing, direct mail and related costs ......... $  181,330     $   21,739      $  159,591       734%
Premium fulfillment costs ............................ $       --     $    7,564      $   (7,564)     -100%
                                                       ----------     ----------      ----------     -----
TOTAL OFF-LINE MARKETING COST OF SALES ............... $  181,330     $   29,303      $  152,027       519%
                                                       ----------     ----------      ----------     -----
LEC BILLED PRODUCTS AND SERVICES
SERVICE BUREAU FEES
Billing and collection fees .......................... $       --     $  111,655      $ (111,655)     -100%
                                                       ----------     ----------      ----------     -----
TOTAL LEC BILLED COST OF SALES ....................... $       --     $  111,655      $ (111,655)     -100%
                                                       ----------     ----------      ----------     -----
TOTAL COST OF SALES .................................. $6,761,815     $2,625,602      $4,136,213       158%
                                                       ==========     ==========      ==========     =====
</TABLE>

     Cost of sales on a consolidated  basis  increased  $4,136,213,  or 158%, to
$6,671,815  for  the six  months  ended  May 31,  2002  from  $2,625,602  in the
comparable prior year period.

     On a  segmental  level,  the  Company's  E-commerce  segment  cost of sales
increased, on a net basis,  approximately $4.1 million, or 165%, to $6.6 million
during the six months ended May 31, 2002, when compared to $2.5 million incurred
in the prior year's  comparable  period.  The Company's  continuing  strategy of
generating  revenues primarily from direct marketing campaigns delivered on-line
was the significant factor contributing to


                                       27
<PAGE>


this  increase.  The  Company  realized  marketing  costs for email  delivery of
approximately $2.6 million in the six months ended May 31, 2002, representing an
increase of $1.5 million,  or 130%, when compared to approximately  $1.1 million
in email  delivery  costs  incurred in the prior year's  comparable  period.  In
December 2001, the Company  acquired the assets of a  Canadian-based  technology
company (InfiKnowledge). The Company continues to expect that the integration of
the acquired  assets,  technology  and human  resources  into its operations and
email  delivery  platform will continue to reduce the unitary costs of its email
promotions  and serve to preserve  and/or  improve  operating  margins.  SEE THE
PRECEDING "NET REVENUE" SECTION FOR A FURTHER  DISCUSSION OF RECENT BUSINESS AND
LEGAL DEVELOPMENTS ATTRIBUTABLE TO EMAIL MARKETING.

     The Company realized costs of approximately $2.6 million for data purchases
necessary to build and maintain its marketing  databases and approximately  $1.1
million for premium costs related to redemption  obligations  for certain of its
marketing  program offers.  These costs  represent an increase of  approximately
$2.6 million,  or 238%,  over data purchase costs of $1.1 million during the six
months ended May 31, 2001. In the prior fiscal  year's  comparable  period,  the
Company had immaterial costs relative to redemption obligations.

     The  Company  uses  the  services  of  an  agency  for  the   provision  of
indemnification  coverage in the event the GroupLotto  site produces a winner in
one of its free on-line lottery games.  The costs  attributable to the provision
of such indemnification  coverage decreased  approximately $21,000, or 10%, when
compared  with the prior fiscal  period ended May 31, 2001.  The reason for this
decrease  was due to an  approximate  12%  decrease  in the games  played at the
Company's GroupLotto.com website.

     The Company's Off-line Marketing Services segment's cost of sales increased
$152,027,  or 519%, to $181,330,  when compared to $29,303 during the six months
ended  May  31,  2001.   The  increase  was   attributable   to  the   Company's
majority-owned-subsidiary  (Montvale  Management LLC), which was inactive during
the six months ended May 31, 2001.

     The balance of the decrease in cost of goods sold relates to the LEC Billed
Product and Service  segment and  amounted  to a  reduction  of  $111,655.  This
reduction resulted from the Company's elimination of billing voice mail services
under its contract with the service bureau  Federal  Transtel,  Inc.  ("FTT") in
October  2001.  FTT has since  filed for  protection  under  the  United  States
Bankruptcy Code.

     The Company's gross profit in terms of dollars,  on a segmental  basis, and
the Company's gross profit percentage, on a segmental basis, for each of the six
month periods ended May 31, 2002 and 2001 are set forth below:

   CONSOLIDATED GROSS PROFIT, BY SEGMENT

<TABLE>
<CAPTION>
                                              FOR THE PERIODS:
                                              SIX MONTHS ENDED
                                         ---------------------------      CHANGE        CHANGE
                                           MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                            2002            2001            $$$           %%%
                                         -----------     -----------    -----------     -------
<S>                                      <C>             <C>             <C>              <C>
E-commerce                               $14,603,882     $7,146,028      $7,457,854       104%
Customer Acquisition services              1,809,738        (29,303)      1,839,041       100%
LEC Billed products and services                  --      1,011,770      (1,011,770)     -100%
                                         -----------     ----------      ----------     -----
CONSOLIDATED TOTALS                      $16,413,620     $8,128,495      $8,285,125       102%
                                         ===========     ==========      ==========     =====
</TABLE>



                                       28
<PAGE>


   CONSOLIDATED GROSS PROFIT PERCENTAGES, BY SEGMENT

<TABLE>
<CAPTION>
                                                 FOR THE PERIODS:
                                                 SIX MONTHS ENDED           ABSOLUTE      RELATIVE
                                            ---------------------------    PERCENTAGE    PERCENTAGE
                                              MAY 31,         MAY 31,        CHANGE        CHANGE
                                               2002            2001         INC (DEC)     INC (DEC)
                                            -----------     -----------    -----------     -------
<S>                                            <C>             <C>             <C>           <C>
E-commerce ..................................  68.9%           74.2%          -5.3%         -7.1%
Customer Acquisition services ...............  90.9%            0.0%          90.9%        100.0%
LEC Billed products and services ............   0.0%           90.1%         -90.1%       -100.0%
                                               ----            ----          -----        ------
CONSOLIDATED GROSS PROFIT PERCENTAGE ........  70.8%           75.6%          -4.8%         -6.3%
                                               ====            ====          =====        ======
</TABLE>

     Consolidated  Gross Profit  Percentage  ("Gross Margin") as a percentage of
net  revenue was 70.8%  during the six months  ended May 31,  2002,  compared to
75.6% in the prior year's  comparable  fiscal period,  representing  an absolute
percentage  point decrease of 4.8%, or a 6.3% decline on a relative  basis. On a
segmental basis, the Company's  E-commerce segment accounted for the majority of
the decrease in margin when compared to the comparable prior fiscal period.  The
7.1% absolute  percentage point decrease  resulted from the Company's  increased
costs  associated with data  purchases,  which are fully expensed at the time of
receipt.  The Company  anticipates  that this  expensing  policy could provide a
margin  improvement  benefit in future  fiscal  periods  through  the  continued
marketing to such acquired data. An additional factor contributing to the slight
decline  in  the  gross  margin  percentage  is  attributable  to the  costs  of
fulfillment  obligations  related  to the  Company's  marketing  program  offers
conducted for a long distance service  provider.  Such costs  approximated  $1.1
million in the six months ended May 31, 2002. During the prior year's comparable
period, the Company did not have a marketing program that generated  significant
fulfillment  costs.  Changes in the gross margins  generated  from the Company's
Off-line  Marketing  Services  segment  and LEC  Product  and  Services  segment
primarily offset each other in terms of percentage changes.

     The Company's Selling Expenses and General and Administrative  Expenses for
each of the six months ended May 31, 2002 and May 31, 2001 are  presented,  on a
segmental  basis,  and with the  components of the individual  segments,  in the
tables set forth below:

<TABLE>
<CAPTION>
                                                  FOR THE PERIODS:
                                                  SIX MONTHS ENDED
                                             ---------------------------      CHANGE        CHANGE
                                               MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                2002            2001            $$$           %%%
                                             -----------     -----------    -----------     -------
<S>                                           <C>            <C>             <C>              <C>
E-COMMERCE
Fee share commissions ....................... $2,649,369     $  409,635      $2,239,734       547%
Other commissions ...........................    954,105             --         954,105       100%
Selling salaries and related expenses .......    824,367        640,274         184,093        29%
Occupancy and equipment costs ...............     11,715         11,105             610         5%
Travel and entertainment ....................    166,890        107,850          59,040        55%
                                             -----------     ----------      ----------     -----
TOTAL SELLING-- E-COMMERCE SEGMENT .......... $4,606,446     $1,168,864      $3,437,582       294%
                                             -----------     ----------      ----------     -----
OFF-LINE MARKETING SERVICES
Fee share commissions ....................... $       --     $       --      $       --         0%
Other commissions ...........................         --             --              --         0%
Selling salaries and related expenses .......    847,120             --         847,120       100%
Occupancy and equipment costs ...............     45,889             --          45,889       100%
Travel and entertainment ....................     17,859             --          17,859       100%
                                             -----------     ----------      ----------     -----
TOTAL SELLING-- OFF-LINE SEGMENT ............ $  910,868     $       --      $  910,868       100%
                                             -----------     ----------      ----------     -----
CONSOLIDATED TOTALS ......................... $5,517,314     $1,168,864      $4,348,450       372%
                                             ===========     ==========      ==========     =====
</TABLE>


                                       29
<PAGE>


     Selling  expenses on a  consolidated  basis  increased  approximately  $4.3
million,  or 372%, from $1.2 million during the six months ended May 31, 2001 to
$5.5  million  during  the six  months  ended May 31,  2002.  The  increase  was
primarily  attributable to the Company's E-commerce segment, with an increase of
approximately $3.4 million,  and increases of approximately  $911,000 in selling
expenses in the Company's Off-line Marketing Services segment.

     The significant  factors  contributing to the increase in selling  expenses
were (a) increased fee share  commissions  incurred in the Company's  E-commerce
segment of approximately  $2.2 million (see below for a detailed  description of
this expense  category);  and (b) increased selling based compensation and other
related selling costs combined ($184,093 and $59,650, respectively) arising from
the expansion of the E-commerce segment's sales force and selling activities.

     Regarding  the  increase in fee share  commissions,  during the fiscal year
ended  November 30,  2001,  the Company  significantly  expanded the practice of
marketing  promotional offers on behalf of its marketing clients  ("Clients") to
third party databases on a fee share commission  basis. The fee share commission
relationship   generally  arises  after  the  Company  concludes  a  contractual
arrangement  with a Client  pursuant to which the  Company  modifies or develops
the:(i) copy, (ii) offer form and (iii)  promotional  materials for the Client's
product or service. The Company then tests the promotion,  and agrees to deliver
a  minimum  level  of new  customers,  and/or  targeted  leads  to  the  Client.
Simultaneously with the execution of these contractual arrangements, the Company
often obtains the rights from the Client to market their promotions to a list of
third  parties  with whom the Company has  marketing  relationships  (the "Third
Parties").  The Company enters into contracts with each Third Party with whom it
intends to market Client  promotions.  The terms of these  agreements  generally
provide that the Third Party has the right to (i) approve the creative materials
for each promotion,  (ii) approve the timing of each promotion's mailing,  (iii)
terminate  the contract on short  notice,  and (iv) reject any promotion for any
reason.  Each  agreement also restricts the third party from doing business with
the client  other than through the Company for the period of time covered by the
agreement, and sets forth the terms of the Third Party's compensation.  Payments
are  performance  based only and are either fixed fees paid for each customer or
lead,  generated for the Client,  or a revenue share that is a percentage of the
revenue  generated (after deduction for certain direct costs) by the Company for
marketing that offer to the Third Party  database.  The Company  utilizes unique
Universal  Resource Locater identifier links ("URLs") when promotions are mailed
to the Third  Party  database.  It is the unique  URL's  that form the  tracking
mechanism by which the Client reports results to the Company, and the Company is
able to account for revenue generated under the fee share arrangement with Third
Parties.

     Selling expenses within the Company's  Off-line  Marketing Services segment
increased  $910,868,  or 100%,  when  compared  to the prior  year's  comparable
period.  The Company  expects that in the remaining  quarters of the fiscal year
ended November 30, 2002, it will realize an increase in this  segment's  selling
expenses  based on the  anticipated  expansion of the operations of its majority
owned subsidiary,  Montvale Management LLC, which conducts business off-line, as
well as on-line,  as a net branch for licensed  mortgage  banking and  brokerage
companies.




                                       30
<PAGE>


   CONSOLIDATED GENERAL AND ADMINISTRATIVE EXPENSES, BY SEGMENT, BY COMPONENT

<TABLE>
<CAPTION>
                                                    FOR THE PERIODS:
                                                    SIX MONTHS ENDED
                                               ---------------------------      CHANGE        CHANGE
                                                 MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                  2002            2001            $$$           %%%
                                               -----------     -----------    -----------     -------
<S>                                             <C>            <C>             <C>             <C>
E-COMMERCE
Compensation costs and related expenses ....... $2,249,340     $1,001,434      $1,247,906       125%
Professional fees .............................    832,257        319,590         512,667       160%
Insurance costs ...............................    231,861        196,608          35,253        18%
Occupancy and equipment costs .................    150,099        114,672          35,427        31%
Site development, maintenance and
   modifications ..............................    507,179      1,022,303        (515,124)      -50%
All other G&A expenses ........................    781,385        225,707         555,678       246%
                                                ----------     ----------      ----------     -----
TOTAL G&A-- E-COMMERCE SEGMENT ................ $4,752,121     $2,880,314      $1,871,807        65%
                                                ----------     ----------      ----------     -----
OFF-LINE MARKETING SERVICES
Compensation costs and related expenses ....... $       --     $   89,171      $  (89,171)     -100%
Professional fees .............................     23,404             --          23,404       100%
Insurance costs ...............................      2,355         65,536         (63,181)      -96%
Occupancy and equipment costs .................         --         14,334         (14,334)     -100%
All other G&A expenses ........................    592,417         39,605         552,812      1396%
                                                ----------     ----------      ----------     -----
TOTAL G&A-- OFF-LINE SEGMENT .................. $  618,176     $  208,646      $  409,530       196%
                                                ----------     ----------      ----------     -----

<CAPTION>
                                                    FOR THE PERIODS:
                                                    SIX MONTHS ENDED
                                               ---------------------------      CHANGE        CHANGE
                                                 MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                  2002            2001            $$$           %%%
                                               -----------     -----------    -----------     -------
<S>                                             <C>            <C>             <C>             <C>
LEC BILLED PRODUCTS AND SERVICES
Compensation costs and related expenses ....... $       --     $   88,896      $  (88,896)     -100%
Insurance costs ...............................         --         65,536         (65,536)     -100%
Occupancy and equipment costs .................         --         14,334         (14,334)     -100%
All other G&A expenses ........................         --          9,023          (9,023)     -100%
                                                ----------     ----------      ----------     -----
TOTAL G&A-- LEC SEGMENT ....................... $       --     $  177,789      $ (177,789)     -100%
                                                ----------     ----------      ----------     -----
CORPORATE AND OTHER
Compensation costs and related expenses ....... $1,095,754       $930,554      $  165,200        18%
Professional fees .............................    498,973        545,597         (46,624)       -9%
Insurance costs ...............................    235,384          1,298         234,086       100%
All other G&A expenses ........................    350,063        199,586         150,477        75%
                                                ----------     ----------      ----------     -----
TOTAL G&A-- CORPORATE AND OTHER ............... $2,180,174     $1,677,035      $  503,139        30%
                                                ----------     ----------      ----------     -----
CONSOLIDATED TOTALS ........................... $7,550,471     $4,943,784      $2,606,687        53%
                                                ==========     ==========      ==========     =====
</TABLE>

     General  and  Administrative  expenses  ("G&A")  on  a  consolidated  basis
increased approximately $2.6 million, or 53%, when comparing G&A of $4.9 million
from the six months  ended May 31, 2001 to G&A of $7.6 million  incurred  during
the six months ended May 31, 2002. The net increase was  attributable to (a) the
Company's  E-commerce  segment  (approximately  $1.9  million,  or 72% of  total
increase),   with  such  increase  related  to  increased   compensation  costs,
professional  fees and  other  G&A,  offset by a decline  in  maintenance  costs
associated  with the  Company's  web sites,  all  required  to support  the 120%
increase in revenues  generated by such segment  during the six months ended May
31, 2002, (b) the Company's Off-line  Marketing Services segment  (approximately
$409,530, or 16% of total increase), with such increase related to G&A necessary
to support the  segments  growth in revenues  from $ -0- in fiscal  2001's first
quarter to  approximately  $1,991,068  during the six months ended May 31, 2002,
and (c) other corporate overhead (approximately $503,139, or 19% of total


                                       31
<PAGE>


increase) not  specifically  identifiable to the Company's  operating  segments,
with  such  cost  increase   including  (i)  directors  and  officers  liability
insurance,  (ii)  professional  fees incurred in the defense of actions  arising
from  legacy   operations,   and  (iii)  other   non-allocable  G&A  aggregating
approximately  $337,939.  These overhead  increases  were slightly  offset by an
approximate  $177,789  decrease  in  overhead   attributable  to  the  Company's
currently inactive LEC Billed Product and Services segment.

OTHER INCOME (EXPENSE)

     The  Company's  components  of "Other  income(expense)"  for the six months
ended May 31, 2002 and 2001 are set forth below:

   CONSOLIDATED OTHER INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                                           FOR THE PERIODS:
                                                           SIX MONTHS ENDED
                                                      ---------------------------      CHANGE        CHANGE
                                                        MAY 31,         MAY 31,       INC (DEC)     INC (DEC)
                                                         2002            2001            $$$           %%%
                                                      -----------     -----------    -----------     -------
<S>                                                   <C>            <C>             <C>               <C>
OTHER INCOME (EXPENSE):
Interest expense .................................... $   (19,768)   $        --     $   (19,768)      100%
Interest income and dividends .......................     393,599      1,144,261        (750,662)      -66%
Net gains(losses) on sale of marketable securities ..      83,157         (1,776)         84,933       100%
Permanent impairment charges                                   --     (4,690,258)      4,690,258      -100%
Other non-operating income:
   Talk.com Arbitration Settlement ..................   2,314,121             --       2,314,121       100%
   P.M.Thomas Arbitration Settlement ................  (2,275,582)            --      (2,275,582)      100%
   Residual revenues from terminated
   Programs .........................................          --         88,350         (88,350)     -100%
   Other miscellaneous (expense) ....................      71,563             --          71,563       100%
   Liquidation proceeds on prior year
     impairment loss ................................     125,000             --         125,000       100%
Minority interest (income) loss .....................    (130,949)            --        (130,949)     -100%
                                                      -----------    -----------     -----------     -----
TOTAL CONSOLIDATED OTHER INCOME (EXPENSE) ........... $   561,141    $(3,459,423)    $ 4,020,564      -116%
                                                      ===========    ===========     ===========     =====
</TABLE>

     Consolidated  Other  Income  increased   approximately  $4  million,   from
approximately  ($3,459,423)  in expense for the six months ended May 31, 2001 to
approximately $561,000 of income for the six months ended May 31, 2002.

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

     (a) a decrease in interest and dividend  income of  approximately  $751,000
resulting  from  significant  decreases  in  the  interest  rates  available  on
short-term commercial paper during the six months ended May 31, 2002;

     (b) an increase in gains  realized  through sales of marketable  securities
approximating $85,000 in the six months ended May 31, 2002;

     (c) during  the six months  ended May 31,  2002 the  Company  did not incur
losses from asset impairments,  yet during the six months ended May 31, 2001 the
Company realized losses,  through a permanent impairment,  of approximately $4.1
million on marketable  securities  resulting  from  significant  declines in the
values of such marketable  equity  securities  held in the Company's  investment
portfolio,   and  these   losses  were  deemed  to  be  other  than   temporary.
Additionally,  during the six months ended May 31, 2001, the Company  realized a
permanent  impairment of $500,051 on a long-term  investment  that  subsequently
discontinued its operations in the third quar-


                                       32
<PAGE>


ter of fiscal 2001. As of the May 31, 2002 balance  sheet date,  the Company has
significantly  reduced its  exposure to market  fluctuations  in its  investment
portfolio  by limiting the contents of such  portfolio  to  approximately  $21.9
million in high grade, short term,  commercial paper and auction rate securities
(with yields  ranging from 1.98% to 2.32%,  with  maturities of 30 to 180 days),
with  approximately  $1 million in high risk  investments,  consisting of common
stock equities and real estate investment trust equities;

     (d) an increase of $125,000  attributable to liquidation  proceeds received
from a prior year long-term  investment that was entirely written off through an
impairment charge in the fiscal year ended November 30, 2000; and

     (e) the six  months  ended May 31,  2002  included  the  final  installment
related  to the  Talk.com  arbitration  victory  ($2.3  million)  awarded to the
Company in November 2001,  offset by $2.3 million award granted to the claimants
in the Phillip Michael Thomas arbitration. See "Part II -- Legal Proceedings."

PROVISION FOR INCOME TAXES

     The Company's  effective  income tax rate is a result of the combination of
federal income taxes at statutory rates, and state taxes, subject to the effects
of  valuation  allowances  taken  against the  "realizability"  of deferred  tax
assets. The Company recorded income tax expense of $1,352,010 for the six months
ended May 31, 2002 on pre-tax income of $3,468,470. This equates to an effective
tax  rate of  approximately  39%.  This  effective  tax  rate is less  than  the
Company's  historically  recognized  tax rate due to the  realization in the six
months ended May 31, 2002, of previously devalued deferred tax assets related to
capital losses, coupled with the effect of interim period tax allocation. In the
prior  comparable  period  the  Company  had  recorded  income  tax  expense  of
$1,311,799  for  the  six  months  ended  May  31,  2001  on a  pre-tax  loss of
approximately $1,443,576.  This effective tax rate relationship is the result of
the Company  taking a full valuation  allowance  during the six months ended May
31, 2001,  against the future tax benefits  attributable  to the loss carryovers
arising from permanent  impairment  charges of $4,690,258  incurred  during such
period. This deferred tax asset valuation allowance has been recorded during the
six months of the fiscal year ended  November  30,  2001,  due to the absence of
appreciated  capital gain property  (available  for the potential  generation of
capital  gain  income)  to  offset  the  net  capital  losses  generated  by the
impairment charges.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's financial and liquidity position remained strong as exhibited
by the Company's cash, cash equivalents,  short-term  marketable  securities and
marketable  equity  securities of  approximately  $41.9 million at May 31, 2002.
Cash, cash equivalents,  short-term  marketable securities and equity securities
were  approximately  $38.1  million at  November  30,  2001.  This  increase  of
approximately  $3.8  million  was the  result  of the  Company's  collection  of
approximately   $2.5  million  from  the  final   installment  on  the  Talk.com
arbitration  award and cash flows  generated  from the  Company's  operating and
financing  activities,  offset by  approximately  $1 million  used in  investing
activities (principally capital expenditures of $1,190,098).

     Trade accounts  receivable,  as a percentage of net revenues was 69% at May
31, 2002. The Company's days-sales-outstanding ("DSO") in accounts receivable at
May 31, 2002 were 63 and 59 days for the three and six month  periods  ended May
31,  2002,  respectively,  compared  to 88 and 94 days  during the prior  year's
comparable periods,  respectively.  The decrease in the DSO for the three months
ended May 31, 2002 when compared to the prior year's comparable  periods and the
first quarter of Fiscal 2002 (70 days),  relates to shortened collection periods
on  the  outstanding  accounts   receivables  from  the  Company's   significant
customers, as well as the balance of its customer base.

     The majority of the Company's  customers are extended  30-day credit terms.
The Company continually monitors customer adherence to such terms and constantly
strives to improve the effectiveness of its collection  efforts with the goal of
achieving a DSO in the 40-day  range.  Future  fiscal  periods might not reflect
this goal of a 40-day DSO, and might  exceed the 63 and 59-day DSO's  recognized
during the three and six-month periods ended May 31, 2002.


                                       33
<PAGE>


     Cash provided by financing  activities  during the six months ended May 31,
2002  amounted to  $694,406,  and  included  approximately  $580,000 in proceeds
generated  by the  exercise of the  Company's  stock  options and  approximately
$114,000  in  proceeds  (net of related  costs and income  taxes)  related to an
insider trading action brought against a former non-management insider, pursuant
to which such insider was required to return his deemed insider trading gains to
the Company.

     The  Company  announced  on June  19,  2002,  that its  Board of  Directors
authorized a stock  repurchase  plan. Under such plan, the Company is authorized
to buy back up to two million shares of its outstanding  common stock. As of the
date of this report, the Company has acquired approximately 380,000 shares at an
average  price  of  approximately  $3.97  per  share,  for  a  total  outlay  of
approximately $1.5 million.

     Historically,  the Company's  primary cash  requirements  have been used to
fund the cost of advertising and promotion,  with  additional  funds having been
used in the  purchasing  of  equipment  and  services  in  connection  with  the
commencement of new business lines and further  development of businesses  being
test  marketed.  During the fiscal year ended  November  30,  2000,  the Company
executed its on-line direct marketing  strategy.  The Company's future plans and
business strategy continue to call for its Internet based E-commerce  segment to
be its primary operating focus, with such segment  generating a material portion
of  future  revenues.  If the  Company's  online  activities  fail  to  generate
sufficient revenue,  then the continuation of the Company's on-line growth could
have a material adverse impact on the Company's capital and liquidity  resources
relating to  possible  expenditures  for (a)  marketing  campaigns,  (b) product
development  costs, (c) site development and maintenance and related  technology
based costs, (d) potential on-line, 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.  During the six
months ended May 31, 2002, the Company  expended  approximately  $1.2 million in
capital expenditures to support its E-commerce activities.

     In December  2001,  the Company  acquired the assets of a private  Canadian
based Internet  technology  company.  The Company believes that this acquisition
will  decrease  certain  costs  relative to its reliance on third parties in the
provision  of  emailing  services  and  other  Internet  hosting  services.  The
realization of those proposed cost savings require  capital  expenditures by the
newly formed entity, with the funding of such expenditures being provided by the
Company. To date, such capital expenditures approximated $1 million.

     During  the  three  months  ended May 31,  2002,  the  Company  experienced
problems  with the  delivery  of its email  promotional  offers.  Such  problems
reduced  revenue  and  income  from  the  E-Commerce  sub-segment.  The  Company
currently believes that the significant  component of the email delivery problem
is attributable to Internet Service Providers that unilaterally block commercial
emails from reaching their consumer  subscribers.  The Company has addressed the
issue by deploying new reinforced  delivery platforms with increased  redundancy
and  expanded   diversification   using  both  internal  and  external  emailing
resources. Although the Company has conceived of a number of programs to address
this specific problem, there can be no assurance that any of these programs will
work effectively, or can be timely implemented.

     Any further  changes in the Internet  operating  landscape that  materially
hinders the Company's  current ability and/or cost to deliver  commercial  email
messages to the consumer  records in its databases,  and the consumer records in
the databases of its affiliates,  could  potentially  cause a material impact in
future fiscal period net revenue growth and gross margin,  and,  therefore,  its
profitability  and cash flows could be adversely  affected.  Various  state laws
exist, and federal  legislation is currently  pending,  that limit the Company's
ability to deliver commercial e-mail messages to consumers.  There are presently
no federal laws that regulate  sending  unsolicited  email.  The pending federal
bills and  existing  state laws require that  certain  "opt-out"  procedures  be
included  in  emails  and  prohibit  "false  routing"  or  "fictitious  address"
information.  Existing  state,  and pending  federal,  laws require  functioning
return  e-mail  addresses  and that valid  postal  addresses  be included by the
senders of commercial email messages.  Some states require an "ADV" label in the
subject line, and proscribe false header or misleading subject lines.  Attorneys
General and/or  consumers are given authority to enforce the state laws.  States
with legislation affecting the sending of unsolicited  commercial email include:
California,  Colorado, Connecticut,  Delaware, Idaho, Illinois, Iowa, Louisiana,
Maryland, Missouri, Nevada, North Carolina, Ohio, Oklahoma,  Pennsylvania, Rhode
Island,  Tennessee,  Utah,  Virginia,  Washington and West  Virginia.  If strict
federal   legislation  is   subsequently   written  into  law,  with  its  terms
specifically  limiting the Company's  ability to market its offers,  the Company
could potentially  realize a material adverse impact in future fiscal period net
revenue growth,  and therefore,  profitability and cash flows could be adversely
affected.

     Should the business climate,  Internet operating  environment or technology
environment change significantly,  the Company could be faced with circumstances
that would limit or prevent its utilization of these capital expenditures.


                                       34
<PAGE>


     The Company expended  approximately  $200,000 in cash for the Infiknowledge
asset acquisition (net of cash received of approximately  $63,000).  The Company
is also required to expend an additional $200,000 on December 6, 2002, regarding
the final cash installment related to the InfiKnowledge asset acquisition.

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

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

     On June 3, 2002,  the American  Arbitration  Association  rendered an award
approximating $2.3 million for the benefit of the Claimants,  in the arbitration
entitled PHILIP MICHAEL THOMAS,  PMT PRODUCTIONS  INC., KAYE PORTER  MANAGEMENT,
RMI  ENTERTAINMENT,   INC.,  MILLENNIUM   TELEMEDIA,   INC.,  CLAIMANTS  V.  NEW
LAUDERDALE,  LLC D/B/A CALLING CARD CO., PSYCHIC READERS NETWORK, INC. D/B/A PRN
TELECOMMUNICATIONS,  AND QUINTEL  ENTERTAINMENT,  INC. (NO.  131400004900).  The
arbitrator  awarded  claimants  approximately  $1.48  million in  damages,  plus
interest  at nine  percent  (9%) from  January 1, 1996 and  January 1, 1997,  or
approximately  $785,000.  Other  miscellaneous  costs of the award  approximated
$8,800.

     The Company has accrued and recorded this award as a non-operating  expense
at May 31, 2002, and for the three months ended May 31, 2002,  respectively,  as
it results  from a segment of the  Company's  business  in which it is no longer
active.

     The claimants in the  arbitration  have filed a motion in an action pending
in the Circuit Court,  Broward County,  Florida (Thomas et al v. New Lauderdale,
LLC et al, Case No.  98-12259-07)  (the  "Action"),  to confirm  the award.  The
respondents in the arbitration  have also filed a motion to vacate and\or adjust
the award.  In addition,  the plaintiffs in the Action have filed a motion to be
relieved from a stay of those  proceedings in order to pursue claims against the
defendants  in the  Action  which they  contend  have not been  resolved  by the
arbitration,  including claims for punitive damages against the Company, as well
as the  individual  defendants.  The  Company  has  indemnified  the  individual
defendants in the Action;  believes that the arbitration  award finally resolves
all claims;  and intends  vigorously to defend against the  plaintiffs'  claims.
Depending upon the results of the foregoing, the Company expects to disburse the
amount accrued for the award rendered in the arbitration sometime in its quarter
ending August 31, 2002.

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

TRANSACTIONS WITH MAJOR CUSTOMERS

     During the three and six months  ended May 31,  2002,  the Company had five
major customers in its E-commerce  segment,  which in combination  accounted for
approximately $5.5 million and $12.9 million of consoli-


                                       35
<PAGE>


dated net revenue,  respectively,  or 51% and 56% of consolidated  net revenues,
respectively.  Approximately $5.1 million,  or 69%, of consolidated net accounts
receivable was  attributable to such major customers as of May 31, 2002. For the
three and six months ended May 31, 2002,  two of the five  customers  referenced
above had related net revenues  that  equaled or exceeded  10% of the  Company's
consolidated  net revenue for such period.  The five major customers  referenced
above  accounted  for  22%,  9%,  8%,  8% and 4% of  consolidated  net  revenue,
respectively,  for the three months ended May 31, 2002, and 26%, 10%, 9%, 7% and
4% of consolidated net revenue,  respectively,  for the six months ended May 31,
2002. Of the  remaining  approximate  100 active  customers in the three and six
months ended May 31, 2002, no other single customer had net revenue that equaled
or exceeded 4% of consolidated net revenue.

     During the three and six months  ended May 31,  2001,  the Company had four
customers  in its  E-commerce  segment  which,  in  combination,  accounted  for
approximately  48.3% and 47.5% of consolidated net revenues,  respectively,  and
approximately 36% of consolidated net accounts receivable as of May 31, 2001.

CRITICAL ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION

     In  accordance   with  the  Securities  and  Exchange   Commission's   (the
"Commission") Release Nos. 33-8040; 34-45149; and FR-60 issued in December 2001,
referencing the Commission's  statement  "regarding the selection and disclosure
by public companies of critical accounting policies and practices",  the Company
has set  forth  below  what it  believes  to be the  most  pervasive  accounting
policies  and  estimates  that  could have a  material  effect on the  Company's
results  of  operations  and  cash  flows  if  general  business  conditions  or
individual customer financial circumstances change in an adverse way relative to
the policies and estimates used in the attached  financial  statements or in any
"forward looking" statements contained herein.

FACTORS THAT COULD EFFECT FUTURE RESULTS

   REVENUE RECOGNITION, VARIABLE COSTS AND BAD DEBTS

     The Company  currently  earns the most  significant  portion of its revenue
from the  E-commerce  segment  pursuant to marketing  agreements  with marketing
partners and corporate  customers  (collectively,  "Corporate  Customers").  The
provisions  of each  agreement  determine  the type and  timing of revenue to be
recorded. The Company invoices its customers in accordance with the terms of the
underlying  agreement.  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,  age restrictions and
allowances,  and are  recorded as contra  revenue.  The  Company's  revenues are
adjusted in later fiscal periods if the Company's  actual  allowances  vary from
amounts  previously  estimated.   Historically,   the  variance  between  actual
allowances and previously  estimated  allowances has been immaterial.  If events
were to occur  that  would  cause the  Company's  actual  allowances  (which are
recorded as offsets against gross revenue,  as  contra-revenues,  in arriving at
reported net revenue) to vary significantly from those originally  estimated and
reflected  in the  financial  statements,  the  Company  could  suffer  material
deterioration  in future  fiscal  period  gross  margins,  and,  therefore,  our
profitability and cash flows could be adversely affected.

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

     Should the Internet  operating  landscape  affecting the Company  adversely
change  resulting in (a) higher costs of acquiring  consumer data and registered
users for the  Company's  websites;  (b) higher costs of acquiring  data for our
marketing  partners,  compromising such marketing  partners' ability to maintain
adequate  databases to allow for continued  third party database use agreements;
(c) the Company's fiscal 2002 InfiKnowledge  asset acquisition failing to reduce
the cost of the  Company's  email  delivery  activities,  or the  Company  being
required to depend


                                       36
<PAGE>


on third party emailing  service bureaus to provide an increased  portion of its
commercial  email  delivery  at a  cost  in  excess  of  anticipated  internally
generated  costs,  or other third party  influence on the  Company's  ability to
deliver  email  message to the records in its  databases,  or the records in its
marketing  affiliates'  databases;  (d) the  Company's  contingent  based  prize
indemnification  premiums  for  indemnification  coverage  increasing  due to an
increase in the number of prize winners at the site, or other currently  unknown
factors;  (e) the Company's accruals for fulfillment  obligations arising out of
its  promotions  proving to be less than the  actual  redemptions  processed  in
subsequent fiscal periods; or (f) unpredictable technology changes or commercial
technology  applications;  then,  if any one,  or a  combination,  of the  above
factors were to  materialize  in subsequent  fiscal  periods,  the Company could
suffer material  deterioration  in future fiscal period revenue growth and gross
margins,  and,  therefore,  our  profitability and cash flows could be adversely
affected to a material extent.

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

   CONTINUATION OF MAJOR CUSTOMERS AND PROSPECTS OF MAJORITY-OWNED SUBSIDIARY

     During the three and six months  ended May 31,  2002,  the Company had five
major customers in its E-commerce  segment,  which in combination  accounted for
approximately  $5.5  million  and $12.9  million of  consolidated  net  revenue,
respectively,  or  51%  and  56% of  consolidated  net  revenues,  respectively.
Approximately $5.1 million,  or 69%, of consolidated net accounts receivable was
attributable  to such major  customers as of May 31, 2002. For the three and six
months  ended  May 31,  2002,  two of the five  customers  referenced  above had
related net revenues that equaled or exceeded 10% of the Company's  consolidated
net revenue for such period. The five major customers referenced above accounted
for 22%, 9%, 8%, 8% and 4% of consolidated  net revenue,  respectively,  for the
three months ended May 31, 2002, and 26%, 10%, 9%, 7% and 4% of consolidated net
revenue,  respectively,  for the six months ended May 31, 2002. Of the remaining
approximate 100 active customers in the three and six months ended May 31, 2002,
no other  single  customer  had net  revenue  that  equaled  or  exceeded  4% of
consolidated net revenue.

     All five of the  major  customers  discussed  above  continued  to  conduct
business with the Company at the date of this report.  Should the Company not be
able to continue  its  relationships  with these  companies  on  equivalent,  or
similarly  favorable  terms,  or replace any of these companies with other third
parties on similar revenue and gross margin  generating terms, the Company could
suffer material  deterioration  in future fiscal period revenue growth and gross
margins  and,  therefore,  our  profitability  and cash flows would be adversely
affected.  Our  potential  decreased  profitability  relative  to such  possible
failure to continue current relationships, or our inability to replace them with
new relationships,  could be partially  mitigated by the execution of reductions
in our workforce and other  downsizing cost reducing  measures.  It is not known
how rapidly the Company could respond with such reductions, if at all.

     During the three and six-month  periods  ended May 31, 2002,  the Company's
51%   majority-owned   subsidiary,    Montvale   Management   LLC,   contributed
approximately  $1.4 and  $2.2  million,  or 12.8%  and  9.7%,  respectively,  of
consolidated net revenues.  The subsidiary  became active in Fiscal 2001 (in the
Company's fourth quarter).  The subsidiary  generates revenue by operating under
net  branch  agreements,   whereby  it  originates   residential  mortgages  and
refinancings for licensed  mortgage  banking and brokerage  companies under such
net branch agreement.  The subsidiary business activity increased in Fiscal 2001
as a result of reduced mortgage and refinance loan interest rates, and increased
government funds for low-income homebuyers. The Company's future busi-


                                       37
<PAGE>


ness  plans  and  operating  assumptions  anticipate  that the  subsidiary  will
contribute an  increasing  amount of revenue to the Company in terms of absolute
dollars,  and in terms of  percentage of total  revenues and  operating  income,
during the balance of the fiscal year ending November 30, 2002. Such assumptions
are  subject to the  continuation  of the  current  interest  rate  market,  the
continued  acceptance  by the general  public of off-line  and online  marketing
promotions for mortgage and mortgage related products and the continued  ability
of the  independently  operated  majority-owned  subsidiary to hire and maintain
competent staff and management  personnel,  trained in the specific field of net
branch  operations.  The Company can make no  assurance  that it will realize an
increased  contribution of revenue and related  profits from the  majority-owned
subsidiary in future fiscal periods.

     The Company's  revenues and profitability from operations have historically
varied. Our revenues,  cost of providing  revenues,  profit margins and overhead
expenses have varied  historically among segments,  as well as on a consolidated
basis.  The revenue  allocation  among our segments in future  periods will most
probably  be  different  than our  current  revenue  allocation  due to  several
factors,  including  consumer  tastes and potential  regulatory  issues that may
exist in future periods and other currently  unknown factors that could restrict
the Company's  revenue  generating  cycle or cost  structure.  Therefore,  it is
difficult to predict  revenue and gross margin  trends.  Actual trends may cause
the Company to adjust its  operating  emphasis,  which could result in continued
period-to-period   fluctuations   in  the  Company's   results  of   operations.
Historically,  the  Company  has had to react to rapid  changes in the  business
environment  within  which it  operates.  Management  responded  to these  rapid
changes as deemed  appropriate  at the time of change,  and as  dictated  by the
nature of such changes.  Management's  reaction to such changes  covered a broad
range of business related  adjustments,  ranging from product mix  repositioning
and staff reductions, to entire business model overhauls. Based on the Company's
current operations and marketing  methods,  as well as the still emerging status
of the Internet  marketing  environment,  it is possible that  management  could
institute  significant  changes to the Company's  business  model in response to
unforeseen rapid changes in future fiscal periods.

   IMPAIRMENT  OF  GOODWILL, OTHER  INTANGIBLES  AND INVESTMENT PORTFOLIOS COULD
IMPACT NET INCOME

     The Company  carries  Goodwill and other  Intangibles  on its balance sheet
arising from current and prior year  acquisitions.  The Company must review,  at
least annually, such Goodwill and other Intangibles for any asset impairment. If
the review of the Company's Goodwill and Intangibles related to the subsidiaries
organized to acquire such assets  determine that such assets are impaired,  then
the Company will be required to recognize an impairment  charge on such Goodwill
necessary  to reduce the carrying  value of the  Goodwill to its net  realizable
value.  Should events occur that would give rise to such impairment  charge, the
Company  would  recognize   decreased   profitability  to  the  extent  of  such
adjustment.  Cash flows would not be directly affected by the impairment charge,
but cash flows  would,  most likely,  be  adversely  affected as a result of the
facts and circumstances that created the impairment charge.

     The  Company  maintains  an  investment  portfolio  that  is  managed  by a
prominent financial  institution.  The portfolio includes  high-grade  corporate
commercial paper and auction rate securities,  equity  securities of real estate
investment trusts ("REITs") and common stock equities, all of which are held for
varying periods of time, pursuant to maturity dates, market conditions and other
factors.  The values of our  investments in the common stock of  publicly-traded
companies,  which as of May 31, 2002 amounted to approximately  $1 million,  are
subject to significant market price volatility, in addition to the potential for
business failure at the company level.  Moreover,  due to the economic  downturn
and  difficulties  that may be faced by some of the  companies  in which we have
investments,  our investment  portfolio could be further impaired by the failure
of  such  companies  in  fulfilling  their  responsibility  of  adhering  to the
repayment of principal upon maturity.

   POTENTIAL OF FEDERAL, AND/OR STATE ENACTED LEGISLATION

     Various state laws exist,  and federal  legislation  is currently  pending,
that limit the  Company's  ability  to deliver  commercial  e-mail  messages  to
consumers. There are presently no federal laws that regulate sending unsolicited
email.  The pending  federal bills and existing  state laws require that certain
"opt-out"  procedures  be included  in emails and  prohibit  "false  routing" or
"fictitious  address"  information.  Existing state, and pending  federal,  laws
require  functioning  return e-mail addresses and that valid postal addresses be
included by the senders of commercial  email  messages.  Some states  require an
"ADV"  label in the subject  line,  and  proscribe  false  header or  misleading
subject lines. Attorneys General and/or consumers are given authority to enforce
the state laws.  States with  legislation  affecting the sending of  unsolicited
commercial email include: California,  Colorado,  Connecticut,  Delaware, Idaho,
Illinois,  Iowa, Louisiana,  Maryland,  Missouri,  Nevada, North Carolina, Ohio,
Oklahoma,  Pennsylvania, Rhode Island, Tennessee, Utah, Virginia, Washington and
West Virginia.  If strict federal legislation is subsequently  written into law,
with its terms specifically limiting the Company's ability to market its offers,
the Company could potentially realize a material adverse impact in future fiscal
period net revenue growth, and therefore,  profitability and cash flows could be
adversely affected.

                                       38
<PAGE>


                                     PART II

                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     1. NANCY  GAREN-- On or about  October 16,  2001,  Nancy  Garen,  author of
"Tarot Made Easy", commenced an action against a series of defendants, including
the Company,  in the United States  District  Court for the Central  District of
California,  entitled NANCY GAREN V. STEVEN L. FEDER, PETER L. STOLZ,  THOMAS H.
LINDSEY,  GALACTIC TELCOM, INC., ACCESS RESOURCE SERVICES, INC., PSYCHIC READERS
NETWORK,  INC. D/B/A MISS CLEO, OSHUN 5  COMMUNICATIONS,  INC., CIRCLE OF LIGHT,
INC.,  CENTRAL  TALK  MANAGEMENT,   INC.,   TRAFFIX,   INC.,  WEKARE  READERS  &
INTERPRETERS,  INC.,  WEST  CORPORATION,  AND DOES 1  THROUGH  10  (EDCV  01-790
(VAP-SGLx)).  Plaintiff  alleges  that  defendants  are liable  for a  copyright
infringement,   contributory   copyright   infringement,   vicarious   copyright
infringement,  unfair competition,  contributory  federal unfair competition and
state  statutory  and common  law unfair  competition,  and  further  requests a
constructive  trust,  a temporary  restraining  order,  and damages from alleged
infringement of a copyright or, alternatively, statutory damages for each act of
infringement  in "an amount provided by law in excess of  $250,000,000",  all as
the same may have arisen from the  defendants'  marketing  of tarot card reading
and other psychic services. The Company does not believe that there is any merit
to Ms.  Garen's  claims as they relate to the Company,  has denied the claims in
its answer to the  complaint,  and  intends  vigorously  to defend  against  the
claims.

     2. MAVIES WINGLER -- On or about May 9, 2001,  Mavies Wingler  commenced an
action  against Group Lotto,  Inc.  ("GLI"),  a  wholly-owned  subsidiary of the
Company, in the Circuit Court of Logan County, West Virginia. Ms. Wingler claims
to have picked the winning  numbers  entitling  her to $10  million.  On June 8,
2001,  the action was  removed to the United  States  District  Court,  Southern
District of West Virginia,  and is entitled WINGLER V. GROUPLOTTO,  INC., Docket
Number 2:01 -- CV -- 518. The action is in the discovery stage. The Company does
not  believe  that  there  is any  merit to Ms.  Wingler's  claim,  and  intends
vigorously  to  defend  against  it.  The  Company  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.

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

     4.  PHILIP  MICHAEL  THOMAS--  On June 3, 2002,  the  American  Arbitration
Association  rendered  an  award  in  the  sum  of  approximately  $2.3  million
(inclusive of interest) in favor of the Claimants,  in the arbitration  entitled
PHILIP  MICHAEL  THOMAS,  PMT  PRODUCTIONS  INC.,  KAYE PORTER  MANAGEMENT,  RMI
ENTERTAINMENT,  INC., MILLENNIUM  TELEMEDIA,  INC., CLAIMANTS V. NEW LAUDERDALE,
LLC  D/B/A  CALLING  CARD  CO.,   PSYCHIC  READERS   NETWORK,   INC.  D/B/A  PRN
TELECOMMUNICATIONS,   AND  QUINTEL   ENTERTAINMENT,   INC.,   RESPONDENTS   (NO.
131400004900).  The award  consists of  approximately  $1.48 million in damages,
plus  interest at nine percent (9%) from January 1, 1996 and January 1, 1997, or
approximately  $785,000.  The award also denied Claimants'  punitive damages and
all other claims asserted in the arbitration.

     The Claimants in the  arbitration  have filed a motion in an action pending
in the Circuit Court,  Broward County,  Florida (Thomas et al v. New Lauderdale,
LLC et al, Case No. 98-12259-07) (the "Action"), to confirm the award.


                                       39
<PAGE>


The  Respondents  in the  arbitration  have also filed a motion to vacate and\or
modify the award. In addition,  the plaintiffs in the Action have filed a motion
to be  relieved  from a stay of those  proceedings  in order  to  pursue  claims
against the  defendants  in the Action which they contend have not been resolved
by the arbitration, including claims for punitive damages against the Company as
well as the individual  defendants.  The Company has  indemnified the individual
defendants in the Action;  believes that the arbitration  award finally resolves
all claims;  and intends  vigorously to defend against the  plaintiffs'  further
pursuit of claims in the Action.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (A) EXHIBITS.

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

----------
(1)  Filed as an Exhibit to the  Company's  Registration  Statement on Form 8-A,
     dated October 23, 1995, and incorporated herein by reference.
(2)  Filed as an Exhibit to the Company's  Quarterly Report on Form 10-Q for the
     fiscal quarter ended August 31, 1998, and incorporated herein by reference.
(3)  Filed as an Exhibit to the  Company's  Registration  Statement  on Form S-1
     (the "S-1  Registration  Statement"),  dated  September  6, 1995  (File No.
     33-96632), and incorporated herein by reference.

     (B) REPORTS ON FORM 8-K.

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


                           FORWARD LOOKING INFORMATION

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






                                       40
<PAGE>


                                   SIGNATURES


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

                                           TRAFFIX, INC.


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

Date: July 15, 2002

                                           By: /s/         DANIEL HARVEY
                                               --------------------------------
                                                           Daniel Harvey
                                                      Chief Financial Officer
                                                   (Principal Financial Officer)

Date: July 15, 2002






                                       41
<PAGE>


                                  EXHIBIT INDEX


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

----------
(1)  Filed as an Exhibit to the  Company's  Registration  Statement on Form 8-A,
     dated October 23, 1995, and incorporated herein by reference.
(2)  Filed as an Exhibit to the Company's  Quarterly Report on Form 10-Q for the
     fiscal quarter ended August 31, 1998, and incorporated herein by reference.
(3)  Filed as an Exhibit to the  Company's  Registration  Statement on Form S-1,
     dated September 6, 1995 (File No.  33-96632),  and  incorporated  herein by
     reference.





                                       42