<PAGE>   1

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                       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, 2001

[ ]   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)

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

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

       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
15,722,592 (as of 07/13/01).

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<PAGE>   2

                                 TRAFFIX, INC.

                     INDEX TO QUARTERLY REPORT ON FORM 10-Q
               FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                           QUARTER ENDED MAY 31, 2001

                               ITEMS IN FORM 10-Q

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I      FINANCIAL INFORMATION
  Item 1.   Financial Statements........................................     2
  Item 2.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations.................................    12
  Item 3.   Quantitative and Qualitative Disclosures About Market
              Risk......................................................  None
PART II     OTHER INFORMATION
  Item 1.   Legal Proceedings...........................................  II-1
  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............................  II-1
SIGNATURES  ............................................................  II-3
</TABLE>

                                        1
<PAGE>   3

                         TRAFFIX, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                MAY 31,      NOVEMBER 30,
                                                                 2001            2000
                                                              -----------    ------------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 7,166,096    $ 4,551,344
  Marketable securities.....................................   31,108,084     38,676,890
  Accounts receivable, trade, net of allowance for doubtful
     accounts of $1,343,333 at May 31, 2001 and $795,024 at
     November 30, 2000......................................    5,580,929      4,354,588
  Deferred income taxes.....................................    2,060,135      2,095,026
  Due from related parties..................................      211,722        467,877
  Prepaid expenses and other current assets.................    2,539,775      1,508,547
                                                              -----------    -----------
          Total current assets..............................   48,666,741     51,654,272
Property and equipment, at cost, net of accumulated
  depreciation..............................................      839,432        512,958
Long-term investments, at cost..............................      114,000        565,051
Deferred income taxes.......................................       71,778         71,778
                                                              -----------    -----------
          Total assets......................................  $49,691,951    $52,804,059
                                                              ===========    ===========
LIABILITIES
Current liabilities:
  Accounts payable..........................................  $ 1,371,375    $ 2,091,331
  Accrued expenses..........................................    3,376,850      3,218,262
  Reserve for customer chargebacks..........................    1,209,564      1,225,040
  Due to related parties....................................      352,931      1,446,619
  Income taxes payable......................................           --      3,434,995
  Deferred income taxes.....................................       59,252         59,252
                                                              -----------    -----------
          Total current liabilities.........................    6,369,972     11,475,499
                                                              -----------    -----------
SHAREHOLDERS' EQUITY
Preferred stock -- $.001 par value; 1,000,000 shares
  authorized; none issued and outstanding...................           --             --
Common stock -- $.001 par value; authorized 50,000,000
  shares; issued and outstanding 15,719,091 shares and
  15,681,116 shares, respectively...........................       15,719         15,680
Additional paid-in capital..................................   39,277,522     39,208,992
Retained earnings...........................................    5,936,063      8,691,438
Accumulated other comprehensive income (loss)...............      294,575     (4,385,650)
Common stock held in treasury, at cost, 942,853 shares......   (2,201,900)    (2,201,900)
                                                              -----------    -----------
          Total shareholders' equity........................   43,321,979     41,328,560
                                                              -----------    -----------
          Total liabilities and shareholders' equity........  $49,691,951    $52,804,059
                                                              ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                        2
<PAGE>   4

                         TRAFFIX, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED             SIX MONTHS ENDED
                                         -------------------------    --------------------------
                                          MAY 31,        MAY 31,        MAY 31,        MAY 31,
                                            2001          2000           2001           2000
                                         ----------    -----------    -----------    -----------
                                                               (UNAUDITED)
<S>                                      <C>           <C>            <C>            <C>
Net revenue............................  $5,828,543    $ 7,220,864    $10,754,097    $ 9,919,510
Cost of sales..........................   1,647,737      1,364,105      2,625,602      1,663,081
                                         ----------    -----------    -----------    -----------
     Gross profit......................   4,180,806      5,856,759      8,128,495      8,256,429
Selling, general and administrative
  expenses.............................   3,057,357      2,735,401      6,112,648      5,077,988
                                         ----------    -----------    -----------    -----------
     Income from operations............   1,123,449      3,121,358      2,015,847      3,178,441
Other income (expense):
  Interest expense.....................          --             --             --           (300)
  Interest income and dividends........     494,309        583,154      1,144,261      1,176,451
  Realized (losses) gains on marketable
     securities........................      (1,776)       (38,336)        (1,776)       902,221
  Permanent impairment charges.........          --     (1,345,734)    (4,690,258)    (1,345,734)
  Gain on non-monetary cost basis
     exchange..........................          --        565,572             --        565,572
  Other non-operating income...........      79,883        324,734         88,350        671,941
                                         ----------    -----------    -----------    -----------
     Income (loss) before provision for
       income taxes....................   1,695,865      3,210,748     (1,443,576)     5,148,592
Provision for income taxes.............     680,381      1,303,889      1,311,799      2,080,025
                                         ----------    -----------    -----------    -----------
     Net income (loss).................  $1,015,484    $ 1,906,859    $(2,755,375)   $ 3,068,567
                                         ==========    ===========    ===========    ===========
Basic income (loss) per share (Note 3):
  Net income (loss)....................  $     0.07    $      0.13    $     (0.19)   $      0.21
                                         ----------    -----------    -----------    -----------
  Weighted average shares
     outstanding.......................  14,768,211     14,918,656     14,763,992     14,806,436
                                         ==========    ===========    ===========    ===========
Diluted income (loss) per share (Note
  3):
  Net income (loss)....................  $     0.07    $      0.12    $     (0.19)   $      0.20
                                         ----------    -----------    -----------    -----------
  Weighted average shares
     outstanding.......................  15,267,926     15,682,441     14,763,992     15,658,748
                                         ==========    ===========    ===========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                        3
<PAGE>   5

                         TRAFFIX, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                                              ------------------------------
                                                                 MAY 31,          MAY 31,
                                                                  2001             2000
                                                              -------------    -------------
                                                                       (UNAUDITED)
<S>                                                           <C>              <C>
Cash flows from operating activities:
  Net (loss) income.........................................  $  (2,755,375)   $   3,068,567
  Adjustments to reconcile net (loss) income to net cash
     (used in) provided by operating activities:
     Depreciation and amortization..........................        140,897          147,435
     Reserve for customer chargebacks.......................        (15,476)      (2,514,197)
     Provision for uncollectible accounts...................        548,309               --
     Gain on non-monetary cost-basis exchange...............             --         (565,572)
     Deferred income taxes..................................         34,891          814,935
     Realized (losses) gains on marketable securities.......         (1,776)         902,221
     Permanent impairment charges...........................      4,690,258        1,345,734
     Amortized discounts and premiums on marketable
       securities...........................................       (208,603)        (117,832)
     Changes in assets and liabilities of business:
       Accounts receivable..................................     (1,774,650)      (1,019,177)
       Prepaid expenses and other current assets............     (1,031,228)         355,270
       Accounts payable.....................................       (719,956)        (803,389)
       Income taxes payable.................................     (3,426,601)        (250,814)
       Due from/to related parties..........................       (837,533)          13,174
       Other, principally accrued expenses..................        158,588         (841,202)
                                                              -------------    -------------
          Net cash (used in) provided by operating
            activities......................................     (5,198,255)         535,153
                                                              -------------    -------------
Cash flows from investing activities:
  Purchases of securities...................................   (124,597,572)    (141,878,148)
  Proceeds from sales of securities.........................    132,866,774      138,029,231
  Capital expenditures......................................       (467,372)         (56,775)
  Purchases of long-term investments........................        (49,000)      (1,060,051)
                                                              -------------    -------------
          Net cash provided by (used in) investing
            activities......................................      7,752,830       (4,965,743)
                                                              -------------    -------------
Cash flows from financing activities:
  Proceeds from stock options exercised.....................         60,177          321,735
                                                              -------------    -------------
          Net cash provided by financing activities.........         60,177          321,735
                                                              -------------    -------------
  Net increase (decrease) in cash and cash equivalents......      2,614,752       (4,108,855)
  Cash and cash equivalents, beginning of period............      4,551,344        7,939,567
                                                              -------------    -------------
  Cash and cash equivalents, end of period..................  $   7,166,096    $   3,830,712
                                                              -------------    -------------
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                        4
<PAGE>   6

                         TRAFFIX, INC. AND SUBSIDIARIES

                         NOTES TO FINANCIAL STATEMENTS
                                  (UNAUDITED)

1. GENERAL

     The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, the unaudited consolidated
financial statements do not include certain information and note disclosures
normally required by generally accepted accounting principles. The accompanying
unaudited consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods presented. The accompanying unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 2000. The results of operations for the three and six months ended
May 31, 2001 are not necessarily indicative of the results to be expected for
the subsequent quarter ending August 31, 2001, or for the entire fiscal year
ending November 30, 2001. Certain prior year amounts in the unaudited
consolidated financial statements have been reclassified in accordance with
generally accepted accounting principles to conform with the current year
presentation.

2. SIGNIFICANT ACCOUNTING POLICIES

  Revenue Recognition

     The Company currently earns the most significant portion of revenue from
its E-commerce segment pursuant to marketing agreements with marketing partners
and corporate customers (collectively, "Corporate Customers"). The provisions of
each agreement determine the type and timing of revenue to be recorded. The
Company generates its E-commerce revenue from the following five 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 GroupLotto.com website), (2) delivery of
pre-qualified consumer data to our Corporate Customers as a result of consumers'
responses to targeted questions and surveys (e.g., an affirmative response to a
question on a GroupLotto.com game banner relating to saving money on long
distance service), (3) 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 GroupLotto.com
registration page to receive on-line promotions from our Corporate Customers),
(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 application on-line
for a credit card), and (5) rentals and sales of copies of specific segments of
its databases to Corporate Customers for their proprietary marketing and
database enhancements. The Company invoices its customers in accordance with the
terms of the underlying agreement, and the related marketing activity delivered
and/or marketing service provided. Revenue is recognized at the time the
marketing activity is delivered, or service is provided (normally, either daily
or weekly), net of estimated contractually specified data qualification
allowances, when applicable. Such data qualification allowances may include
duplications, invalid addresses, age restrictions and other allowances. In
accordance with newly developing revenue recognition pronouncements,
specifically Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101") issued in December 1999, and in accordance with the
Company's historical accounting policies and reporting practices, the Company
records all related obligations associated with the related net revenue at its
point of recognition. The Company adopted SAB 101 during the three months ended
February 28, 2001; such adoption did not materially impact financial position or
results of operations. The obligations, previously mentioned, include costs
payable to other on-line, as well as off-line, advertisers for registered user
acquisitions, fee sharing costs under partner agreements, e-mail message
delivery costs, contingent based prize indemnification coverage (for potential
free on-line lottery winners) and all other variable costs directly associated
with completing the Company's obligations relative to the revenue

                                        5
<PAGE>   7
                         TRAFFIX, INC. AND SUBSIDIARIES

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

recognized. Such revenue recognition is also subject to provisions based on the
probability of collection. In cases where the Company receives advances prior to
fulfilling its obligations relative thereon, such revenue is deferred until the
obligation is fulfilled. At May 31, 2001, the Company's accrued expenses
included approximately $661,000 of deferred revenue relating to such advances;
at November 30, 2000 deferred revenue included in accrued expenses was
approximately $692,000. With respect to the concept of capitalization and
amortization of marketing costs, the Company's policy is to expense, as a cost
of sale, customer acquisition costs, and all other related marketing costs, at
the time the obligation or expense is incurred.

     Revenues from the Company's off-line customer acquisition services (which
were inactive during the three and six month periods ended May 31, 2001),
historically consisted primarily of residential long distance customer
acquisition programs, and are 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 be required to provide to the customer certain products
and services (fulfillment liability), such as prepaid cellular telephones and/or
other premiums. These costs are estimated and accrued, as a component of
marketing expense, at the time the associated revenues are recognized. At May
31, 2001 and November 30, 2000, accrued expenses included approximately $738,000
and $746,000 of such costs, respectively. This estimation is adjusted by actual
amounts experienced in subsequent periods.

     Revenue from the Company's LEC Billed Product and Service segment (the
Company has not marketed such services since November 1998), consists of various
enhanced telephone services, principally voice mail services that are recognized
net of an estimated provision for customer chargebacks (which includes refunds
and credits). 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 when the Company's incurred chargebacks
vary from the amounts previously estimated.

  Transactions with Major Customers

     During the three and six months ended May 31, 2001 the Company had four
customers in its E-commerce segment who in combination accounted for
approximately 48.3% and 47.5% of consolidated net revenues during the periods,
respectively, and approximately 36% of consolidated net accounts receivable as
of May 31, 2001. The Company did not conduct business with these customers in
the prior year's comparable period and the related consolidated accounts
receivable from such companies were negligible at November 30, 2000.

     During the prior fiscal year's three and six month periods ended May 31,
2000 the Company's Off-line Customer Acquisition Service segment's primary
marketing partner accounted for approximately 52% and 47% of net revenues,
respectively; the three and six months ended May 31, 2001 did not include
revenue from such partner. In the prior fiscal year ended November 30, 2000, the
Company executed settlement, termination and release agreements with such
marketing partner. Under the termination agreement, certain amounts were placed
in escrow to secure the potential liability to such marketing partner arising
under a legal proceeding commenced in Minnesota against that marketing partner
in September of 2000. The Company has not been named in this action. Amounts
remaining in escrow are included in the Company's accounts receivable, and were
approximately $635,000 at May 31, 2001 and $611,000 at November 30, 2000. (See
"Transactions with Major Customers" which follows "Management's Discussion and
Analysis of Financial Condition".)

                                        6
<PAGE>   8
                         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,
                                             2001         2000         2001         2000
                                          ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>
DENOMINATOR:
  Denominator for basic earnings per
     share -- weighted average shares...  14,768,211   14,918,656   14,763,992   14,806,436
Effect of dilutive securities:
  Stock options.........................     499,715      763,785           --      852,312
                                          ----------   ----------   ----------   ----------
  Denominator for diluted earnings per
     share -- adjusted weighted average
     shares.............................  15,267,926   15,682,441   14,763,992   15,658,748
                                          ==========   ==========   ==========   ==========
</TABLE>

Options and warrants to purchase 887,146 and 353,146 shares of common stock for
the three months ended May 31, 2001 and 2000, respectively, and 2,369,081 and
247,233 for the six months ended May 31, 2001 and 2000, 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, a company's source
of comprehensive income (loss) would ordinarily include the after tax net
unrealized gains and (losses) on available-for-sale securities. Based on the
presence of unrealized capital losses (such capital losses' deferred tax assets
have been fully devalued at February 28, 2001 and November 30, 2000), in excess
of the current three and six month period unrealized gains, a full credit was
taken against the estimated deferred tax liability attributable to the
unrealized gains arising in the three and six month periods ended May 31, 2001.
At November 30, 2000 and February 28, 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,
                                          2001         2000          2001          2000
                                       ----------   -----------   -----------   -----------
<S>                                    <C>          <C>           <C>           <C>
Net income (loss)....................  $1,015,484   $ 1,906,859   $(2,755,375)  $ 3,068,567
Other comprehensive income (loss),
  net of tax:
Unrealized gain (loss) from
  available-for-sale securities,
  arising during the periods
  indicated, net of income taxes of
  $-0- and $1,000,828, $-0- and
  $2,829,248, respectively...........     266,683    (1,501,242)      430,480    (2,743,872)
Less: reclassification adjustment for
  loss realized in net (loss)........          --            --     4,190,207            --
                                       ----------   -----------   -----------   -----------
Comprehensive income.................  $1,282,167   $   405,617   $ 1,865,312   $   324,695
                                       ==========   ===========   ===========   ===========
</TABLE>

                                        7
<PAGE>   9
                         TRAFFIX, INC. AND SUBSIDIARIES

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

5. ADVERTISING EXPENSES

     Currently the material portion of the Company's advertising expenses is
comprised of (1) costs associated with the transmission of e-mail
advertisements, (2) costs associated with on-line customer acquisition data, and
(3) e-mail program promotional and creative development costs. Such costs are
charged to operations (1) at the time of the e-mail transmission, (2) upon
receipt of the qualified customer acquisition 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 fiscal years prior to December 1, 2000,
advertising expense had consisted of television broadcast media and related
production costs, outbound and inbound telemarketing, direct-mailings, and print
media. During the fiscal year ended November 30, 2000, the Company began to
concentrate its efforts in the Internet direct marketing sector and as such
moved away from these previous methods of advertising.

     To the extent payments are made for consumer data or on-line media in
advance of the fulfillment of such obligation, the Company expenses such
pre-payments ratably over the shorter of the contract period or to the extent of
actual fulfillment. Total advertising and marketing expenses, included in the
cost of sales, for the three months ended May 31, 2001 and 2000 were
approximately $1,494,000 and $1,102,000, respectively, and the six months ended
May 31, 2001 and 2000 were approximately $2,307,000 and $1,297,000,
respectively. Included in prepaid expenses and other current assets at May 31,
2001 and November 30, 2000, were approximately $947,000 and $655,000,
respectively relating to the unamortized portion of marketing agreement
prepayments.

6. MARKETABLE SECURITIES AND LONG TERM INVESTMENTS, AT COST

     During the six months ended May 31, 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 (the
historical carrying values of such securities were reduced to their related
closing prices effective at February 28, 2001) and related recognized losses
reflected in the six months ended May 31, 2001, are as follows; (1) My Points,
Inc. (Nasdaq:MYPT), $2,553,778, (2) SkyMall, Inc. (Nasdaq:SKYM), $1,386,429, and
(3) Predict It, Inc. (Nasdaq:PRIT.OB), $250,000. The Company has 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
evaluation as of April 1, 2001 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
six month period ended May 31, 2001 (specifically 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.

     On May 14, 2001, SKYM announced that it had entered into a merger agreement
under which Gemstar-TV Guide International, Inc. (Nasdaq:GMST) intends to
acquire all of the common stock of SKYM for cash and GMST common stock with the
combined consideration approximating $3.00. This represents an approximate 60%
premium over the post "permanent impairment charge" share cost basis and an
approximate 43% discount to the SKYM cost basis prior to the "permanent
impairment charge". As of July 9, 2001 the Company has liquidated its entire
position in SKYM in the open market at prices ranging between $2.83 and $2.90
per share.

     On June 4, 2001, United New Ventures, an affiliate of UAL Corp. (NYSE:UAL)
announced that it intends to acquire all of the common stock of MYPT in a cash
tender offer of $2.60 a share. The Company anticipates it will tender all of its
MYPT shares held prior to the tender's expiration. This tender offer price
represents an approximate 138% premium over the MPYT post "permanent impairment
charge" share cost basis and an approximate 89% discount to the MYPT cost basis
prior to the "permanent impairment charge".
                                        8
<PAGE>   10
                         TRAFFIX, INC. AND SUBSIDIARIES

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

     During the fiscal year ended November 30, 2000, the Company had invested
approximately $500,000 in a private company, and carried the investment under
the cost method. After continued review of such investment, and the investment's
consistent failure to achieve significant goals set forth in its business and
financing plans, such investment fell within the Company's impairment evaluation
criteria. According to the above analysis the Company's impairment loss for the
three months ended February 28, 2001 amounted to $500,051, and is included as a
component of other income (expense) "Permanent impairment charges" for the six
months ended May 31, 2001. During the three months ended May 31, 2001 this
entity effectively wound down operations and ceased doing business.

     In January 2000, of the prior fiscal year, the Company increased its cost
based long-term investment in itarget.com, Inc. ("itarget" at that time was a
privately held company that specialized in on-line permission based e-mail
marketing and consumer data information services). The increased investment was
made pursuant to a stock swap agreement that required the Company to issue
229,862 of its common shares in exchange for 42,372 newly issued Series B,
convertible preferred shares of itarget. The Company's share issuance increased
the cost based carrying value of itarget by $1,616,206. This cost based
investment increase was a noncash investing activity. The Company had originally
invested $500,000 in November 1999. On March 29, 2000, itarget.com, Inc. merged
with Cybergold, Inc., (at that time a public company that traded as
Nasdaq:CGLD). Pursuant to the merger, the Company received Cybergold shares in
exchange for its itarget.com, Inc. shares. This merger event caused the
previously classified long-term investment (cost based) in itarget.com Inc. to
be transferred to the available-for-sale marketable security classification. As
a result of such merger, and associated asset reclassification, the Company
recognized a non-monetary, pre-tax gain of approximately $566,000 during the six
months ended May 31, 2000 on the new accounting basis of the Cybergold, Inc.
shares. This non-cash item is included as a component of other income (expense),
"Gain on non-monetary cost basis exchange" for the three and six months periods
ended May 31, 2000.

     During the six months ended May 31, 2000, the Company sold 240,000 shares
of its investment in SkyMall, Inc.(Nasdaq:SKYM) at an average price of $9.17 per
share, yielding total proceeds to the Company of approximately $2.2 million, and
a corresponding gain of approximately $941,000. This gain is included in the
Company's other income (expense) "Realized (losses) gains on marketable
securities" (net of losses of $38,336 incurred in the three months ended May 31,
2000) for the six months ended May 31, 2000.

7. SEGMENT INFORMATION

     The Company's reportable operating segments are aligned into three
fundamental areas: (1) E-commerce billed to the Company's Corporate Customers
for on-line marketing and data sales (E-commerce Segment, this Segment is the
Company's primary operating Segment in the current fiscal year ending November
30, 2001), (2) Off-line Customer Acquisition services for traditional off-line
direct marketing programs (with such Corporate Customers having consisted
primarily of long distance carriers, wireless carriers and other service
providing businesses)(this segment has been primarily inactive during fiscal
2001 and did not generate revenue during the three and six month periods ended
May 31, 2001) (Off-line Customer Acquisition Services Segment) and (3) Products
and Services billed to consumers, on behalf of the Company, by Local Exchange
Carriers (LEC Billed Products and Services Segment). The balance of the
Company's operations, individually immaterial 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 each segment's (a) gross profit and (b) EBITDA which is net income
excluding (i) special charges, (ii) interest expense, (iii) interest and
dividend income, (iv) realized net (losses) gains on marketable securities, (v)
long-lived asset impairment charges, (vi) gains on non-monetary cost basis
exchanges, (vii) other non-operating income (loss), (viii) minority interest
income (loss), (ix) depreciation, (x) amortization and (xi) income taxes,
forming the primary measurement criteria. The organization shares a
                                        9
<PAGE>   11
                         TRAFFIX, INC. AND SUBSIDIARIES

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

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 with all other overhead costs
being included in the "Corporate and other" classification. 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. Summarized financial information by
business segment is as follows:

  Segment Data -- Net Revenue

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED           SIX MONTHS ENDED
                                           ------------------------    -------------------------
                                            MAY 31,       MAY 31,        MAY 31,       MAY 31,
                                              2001          2000          2001           2000
                                           ----------    ----------    -----------    ----------
<S>                                        <C>           <C>           <C>            <C>
For the periods:
E-commerce...............................  $5,510,106    $1,164,361    $ 9,630,672    $1,213,678
Off-line Customer Acquisition Services...          --     3,759,941             --     4,679,723
LEC Billed Products and Services.........     318,437     2,296,562      1,123,425     4,006,037
Corporate and other......................          --            --             --        20,072
                                           ----------    ----------    -----------    ----------
     Consolidated totals.................  $5,828,543    $7,220,864    $10,754,097    $9,919,510
                                           ==========    ==========    ===========    ==========
</TABLE>

  Segment Data -- Gross Profit

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED           SIX MONTHS ENDED
                                            ------------------------    ------------------------
                                             MAY 31,       MAY 31,       MAY 31,       MAY 31,
                                               2001          2000          2001          2000
                                            ----------    ----------    ----------    ----------
<S>                                         <C>           <C>           <C>           <C>
For the periods:
E-commerce................................  $3,933,121    $ (787,751)   $7,146,028    $ (867,416)
Off-line Customer Acquisition Services....     (16,176)    4,402,927       (29,303)    5,239,195
LEC Billed Products and Services..........     263,861     2,248,251     1,011,770     3,864,578
Corporate and other.......................          --        (6,668)           --        20,072
                                            ----------    ----------    ----------    ----------
     Consolidated totals..................  $4,180,806    $5,856,759    $8,128,495    $8,256,429
                                            ==========    ==========    ==========    ==========
</TABLE>

  Segment Data -- EBITDA

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED             SIX MONTHS ENDED
                                         -------------------------    --------------------------
                                          MAY 31,        MAY 31,        MAY 31,        MAY 31,
                                            2001          2000           2001           2000
                                         ----------    -----------    -----------    -----------
<S>                                      <C>           <C>            <C>            <C>
For the periods:
E-commerce.............................  $1,884,156    $(2,371,377)   $ 3,122,787    $(3,374,142)
Off-line Customer Acquisition
  Services.............................    (102,881)     4,435,016       (237,949)     4,887,107
LEC Billed Products and Services.......     167,195      1,853,645        833,981      3,373,096
Corporate and other....................    (745,917)      (721,887)    (1,562,075)    (1,560,185)
                                         ----------    -----------    -----------    -----------
     Consolidated totals...............  $1,202,553    $ 3,195,397    $ 2,156,744    $ 3,325,876
                                         ==========    ===========    ===========    ===========
</TABLE>

                                        10
<PAGE>   12
                         TRAFFIX, INC. AND SUBSIDIARIES

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

  Segment Data -- Depreciation and Amortization

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED      SIX MONTHS ENDED
                                                    ------------------    --------------------
                                                    MAY 31,    MAY 31,    MAY 31,     MAY 31,
                                                     2001       2000        2001        2000
                                                    -------    -------    --------    --------
<S>                                                 <C>        <C>        <C>         <C>
For the periods:
E-commerce........................................  $19,503    $28,149    $ 25,937    $ 55,662
Off-line Customer Acquisition Services............       --         --          --          --
LEC Billed Products and Services..................       --         --          --          --
Corporate and other...............................   59,601     45,887     114,960      91,773
                                                    -------    -------    --------    --------
     Consolidated totals..........................  $79,104    $74,036    $140,897    $147,435
                                                    =======    =======    ========    ========
</TABLE>

9. LITIGATION

  Talk.com

     On or about October 25, 2000, the Company instituted proceedings before the
American Arbitration Association against Talk.com Holding Corp. ("Talk") (Case
No. 13Y 180 01000 00), seeking money damages to be determined during the
proceedings, but believed to amount to at least $7 million, and other relief.

     The relief sought arises from Talk's October 2000 termination of a series
of agreements entered into between the Company and Talk between April and
September 2000 (the "Talk Agreements"), pursuant to which the Company provided
marketing services to Talk directed at the acquisition of residential long
distance customers for Talk. The Talk Agreements obligated Talk to pay the
Company fees for successful customer acquisitions on Talk's behalf. Talk has
denied that the Company is entitled to the relief sought because Talk claims
that it rightfully terminated the Talk Agreements; and it has asserted a
counterclaim seeking to recover expenses it has or will incur in the amount of
$880,000, and a refund from the Company of approximately $6.75 million due to
the Company's alleged breaches of the Talk Agreements. The arbitration commenced
in June 2001, and a decision of the arbitrators is expected in the fall of 2001.
The Company believes that there is no merit to Talk's counterclaims, and has and
intends to continue to vigorously defend against them in the arbitration.

  Class Action

     On May 30, 2001, the parties to the Class Action entered into a Stipulation
of Settlement to settle the Class Action. Under the terms of the Stipulation,
the Company's insurers have paid into escrow an aggregate of $3.2 million in
settlement of the Action. The settlement is subject to a number of
contingencies, including the final approval of the District Court, and the entry
of an Order and Final Judgment by the District Court. By Order dated June 13,
2001, the District Court gave preliminary approval to the proposed settlement,
subject to notice to class members, and a hearing for final approval, which the
District Court has scheduled for September 21, 2001. There can be no assurance
that the District Court will finally approve the Settlement.

                                        11
<PAGE>   13

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

     During the fiscal year ended November 30, 2000 ("Fiscal 2000"), Traffix,
Inc., formerly known as Quintel Communications, Inc. (the "Company"),
implemented its strategy of migrating and expanding its direct marketing
activities to the Internet. This included the launching of the website,
www.GroupLotto.com, which is the Company's on-line "data engine", that offers an
Internet user the ability to participate in a free on-line lottery in exchange
for the user providing certain consumer data and granting the Company the right
to market with respect to such data. As a result of this Internet emphasis, the
Company's E-commerce segment revenue increased to approximately $5.5 and $9.6
million during the three and six month periods ended May 31, 2001, respectively,
from approximately $1,164,000 and $1,214,000 during the respective three and six
month periods ended May 31, 2000. During the three and six month periods ended
May 31, 2001, the Company also continued to generate residual revenue from one
of its historical income sources, LEC Billed products and services ($318,437 and
$1,123,425, respectively). A significant portion of the LEC Billed products and
services revenue ($486,406) was earned in the three months ended February 28,
2001, and was attributable to royalty payments made to the Company by Access
Resource Services, Inc. ("ARS"), pursuant to the terms of a series of agreements
between the Company and ARS in 1999 (the "Transaction Agreements"). The
Transaction Agreements provided, in part, that ARS would make royalty payments
to the Company through January 16, 2001 in consideration for the Company's
undertaking to refrain from offering certain telephone entertainment services.
During the three months ended May 31, 2001 and for future quarters, the Company
will no longer realize revenue from the Transaction Agreements in accordance
with their January 16, 2001 expiration date.

     Historically, the Company had primarily been engaged in the direct
marketing of various telecommunications products and services (LEC Billed
Products and Services Segment). It had also provided customer acquisition
products and services to long distance and wireless carriers (Off-line Customer
Acquisition Services Segment). In the offering of these products and services,
the Company utilized conventional off-line marketing channels including
television, telemarketing, direct mail and print advertising. Its revenues were
generated primarily through fees paid for customer acquisitions and, in certain
cases, through the payment of ongoing commissions earned under revenue sharing
arrangements with the respective carriers.

     During the fourth quarter of Fiscal 2000, the Company changed its name to
Traffix, Inc. from Quintel Communications, Inc. This change was made to better
depict the Company's business of generating and directing consumer traffic for
both on-line and off-line businesses.

     Traffix, Inc. is a database marketing and management company that utilizes
the GroupLotto.com website and its databases to generate revenue from direct
marketing related activities, primarily over the Internet. Such on-line
databases, both proprietary and partnered, contain information (such as postal
addresses, phone numbers and birth dates) on over 18 million on-line consumers,
and the Company has permission to market to all of these consumers.
Additionally, the Company continues to maintain its historical off-line database
of approximately 49 million consumers.

     The Company generates revenue from three main sources. First, it generates
revenue when consumers register for and play the free on-line lottery at the
GroupLotto website. The Company is paid by its Corporate Customers when players
click-thru to, register for, answer questions for, or subscribe for a Corporate
                                        12
<PAGE>   14

Customer's promotion or product. This activity forms the "GroupLotto Site" net
revenue subset of the Company's E-commerce segment. Second, the Company has and
continues to accumulate a large list of consumer data, such as e-mail addresses,
postal addresses and telephone numbers, from individuals who have granted the
Company permission to market to them. The Company uses this consumer database to
send, via e-mail, offers and promotions to these individuals on behalf of its
Corporate Customers. The Company also sends certain of these on-line offers and
promotions to the databases of third party marketing affiliates on a revenue
share or fixed price basis. The Company is then paid by its Corporate Customer
for sales or leads generated for these offers (cost-per-acquisition or "cpa"),
and also on a traditional cost-per-thousand ("cpm") of e-mails sent basis. This
activity forms the "E-mail" net revenue subset of the Company's E-commerce
segment. Third, the Company rents (for one time usage) its databases, sells
copies of specific segments of its databases, or sells data that was created on
a customized basis for a Corporate Customer (e.g., answers to certain targeted
questions), to third parties for direct marketing by on-line, telemarketing or
regular mail channels. This activity forms the "Data sales" net revenue subset
of the Company's E-commerce segment.

     The combination of these on-line activities represented approximately 95%,
or $5.5 million, of the Company's net revenues during the three months ended May
31, 2001, when compared to approximately 16%, or $1.16 million, of the Company's
net revenue during the comparable prior year's three month period. The
combination of these on-line activities represented approximately 90%, or $9.6
million, of the Company's net revenues during the six months ended May 31, 2001,
when compared to approximately 12%, or $1.21 million, of the Company's net
revenue during the comparable prior year's six month period. During the separate
three month periods ended August 31, 2000, November 30, 2000 and February 28,
2001, the Company's E-commerce segment accounted for the following percentages
of net revenues (%), and net revenues ($), respectively: 42%, or $3.3 million;
66%, or $5.4 million (which included approximately $3.4 million in revenue
earned from Talk.com, as discussed in greater detail in Part II, Other
Information, Item 1, "Legal Proceedings"); and 84%, or $4.1 million.

     The Company's expansion in, and dependence on, its on-line direct marketing
efforts, coupled with the continued unproven reliability and profitability, and
potential seasonality, of the E-commerce marketplace, in conjunction with the
Company's initial E-commerce segment operating losses incurred in Fiscal 2000,
should all be considered when referring to the Company's current three and six
month results, as well as its prior historical results, in evaluating the
potential for the Company's future operations, cash flows, and financial
position.

     In facilitating the execution of the expansion of the Company's direct
marketing activities into the Internet, in Fiscal 1999 and 2000, the Company
created a portfolio of strategic marketing partnerships with Internet-based
companies, E-commerce retailers and off-line product and service providers. The
Company believes such companies were looking to expand their customer reach by
way of the Internet through the use of the Company's direct marketing skills. In
certain cases, when entering into marketing partnerships with another entity,
the Company also simultaneously took an equity position in such company. Certain
of these investments, which were carried as "available-for-sale" securities in
the Company's audited financial statements for the year ended November 30, 2000,
have suffered severe declines in their respective market values, with such
declines having been reflected in the shareholders' equity section thereof as
"Other Comprehensive Losses" as of November 30, 2000. During the six months
ended May 31, 2001 (specifically within the three months ended February 28,
2001), the Company realized "other than temporary" declines in this portfolio of
marketable securities, and made a corresponding reclassification adjustment
reducing "Other Comprehensive (Loss)" (a balance sheet contra equity account),
and reflecting an approximate $4.2 million charge as a component of "Permanent
impairment charges" (an income statement account). The reclassification
mentioned above did not affect the Company's book value per share. During the
six months ended May 31, 2001 (specifically within the three month period ended
February 28, 2001), the Company recorded an approximate $500,000 loss
attributable to an impairment of a long-term investment. This long-term asset
write-down was included as a component of "Permanent impairment charges" for the
three month period ended February 28, 2001, and the six month period ended May
31, 2001, with the Company's book value being negatively impacted to the extent
of the loss at the time of the write-down.

                                        13
<PAGE>   15

BASIS OF PRESENTATION

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

SEGMENT INFORMATION

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

     The Company's reportable operating segments are aligned into three
fundamental areas: (1) E-commerce billed to the Company's Corporate Customers
for online marketing and data (E-commerce Segment), (2) Off-line Customer
Acquisition Services for traditional off-line direct marketing programs (with
such customer having consisted primarily of long distance carriers, wireless
carriers and other service providing businesses), for which no revenue was
generated during the three month and six month periods ended May 31, 2001
(Off-line Customer Acquisition Services Segment), and (3) Products and Services
billed to consumers, on behalf of the Company, by Local Exchange Carriers (LEC
Billed Products and Services Segment). The balance of the Company's operations,
immaterial both 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 each
segment's (a) gross profit and (b) EBITDA, which is net income excluding (i)
special charges, (ii) interest expense, (iii) interest and dividend income, (iv)
realized net (losses) gains on marketable securities, (v) long-lived asset
impairment charges, (vi) gains on non-monetary cost basis exchanges, (vii) other
non-operating income (loss), (viii) minority interest income (loss), (ix)
depreciation, (x) amortization and (xi) income taxes, forming the primary
measurement criteria. The organization shares a common workforce and office
headquarters, which precludes an allocation of all overhead components. Overhead
items that are specifically identifiable to a particular segment are applied to
such segment and all other overhead costs are included in Corporate and other.

RESULTS OF OPERATIONS

     The following is a discussion of the financial condition and results of
operations of the Company for the three and six-month periods ended May 31, 2001
and May 31, 2000, respectively. It should be read in conjunction with the
Company's Form 10-K as filed for the year ended November 30, 2000, the Notes
thereto and other financial information included elsewhere in this report.

THREE MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000

     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, 2001 and May 31, 2000, are detailed in the following tables:

  Segment Data -- Net revenues, by segment component

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED
                                                   -------------------------     CHANGE       CHANGE
                                                    MAY 31,       MAY 31,       INC(DEC)     INC(DEC)
                                                      2001          2000           $$$         %%%
                                                   ----------   ------------   -----------   --------
<S>                                                <C>          <C>            <C>           <C>
E-COMMERCE
GroupLotto Site..................................  $1,404,383    $  697,207    $   707,176       10%
E-mail...........................................   2,897,310            --      2,897,310      100%
</TABLE>

                                        14
<PAGE>   16

<TABLE>
<CAPTION>
                                                      THREE MONTHS ENDED
                                                   -------------------------     CHANGE       CHANGE
                                                    MAY 31,       MAY 31,       INC(DEC)     INC(DEC)
                                                      2001          2000           $$$         %%%
                                                   ----------   ------------   -----------   --------
<S>                                                <C>          <C>            <C>           <C>
Data sales.......................................   1,208,413       467,153        741,260      159%
                                                   ----------    ----------    -----------     ----
Total E-commerce.................................   5,510,106     1,164,360      4,345,746      373%
                                                   ----------    ----------    -----------     ----

OFF-LINE CUSTOMER ACQUISITION SERVICES COMPONENTS
Long distance customer acquisitions..............          --       245,787       (245,787)    (100)%
Long distance usage commissions..................          --     3,509,813     (3,509,813)    (100)%
Other customer acquisition services..............          --         4,341         (4,341)    (100)%
                                                   ----------    ----------    -----------     ----
Total Off-line Customer Acquisition Services.....          --     3,759,941     (3,759,941)    (100)%
                                                   ----------    ----------    -----------     ----

LEC BILLED PRODUCTS AND SERVICES COMPONENTS
"900" Entertainment Service termination
  royalties......................................          --       728,095       (728,095)    (100)%
Club 900 Products................................          --      (257,053)       257,053      100%
Enhanced Services, principally voice mail........     318,437     1,766,666     (1,448,229)     (82)%
Telephone number list rentals....................                    58,855        (58,855)    (100)%
                                                   ----------    ----------    -----------     ----
Total LEC Billed Products and Services...........     318,437     2,296,563     (1,978,126)     (86)%
                                                   ----------    ----------    -----------     ----

CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other...          --            --             --        0%
                                                   ----------    ----------    -----------     ----
TOTAL CONSOLIDATED NET REVENUE...................  $5,828,543    $7,220,864    $(1,392,321)     (19)%
                                                   ==========    ==========    ===========     ====
</TABLE>

     Net Revenue decreased $1,392,321, or 19%, to $5,585,543 for the three
months ended May 31, 2001 from $7,220,864 in the comparable prior year period.
The primary components of this decrease were attributable to the Company's
Off-line Customer Acquisition services segment ($3.76 million) and LEC Billed
Products and Services segment ($1.98 million). During the three months ended May
31, 2001, the aforementioned segment revenue decreases were offset by increases
of approximately $4.3 million in net revenues from the Company's E-commerce
Segment.

     See "Transactions with Major Customers and Termination of Economic
Dependence", "Prior Year Transactions Impacting Current and Future Fiscal
Periods", and "Service Bureaus and Local Exchange Carriers" following the
"Liquidity and Capital Resources" section for a detailed discussion of the
decrease as it relates to the Off-line Customer Acquisition Services Segment and
the LEC Billed Products and Services Segment.

     The Company's cost of revenues during the three months ended May 31, 2001
and May 31, 2000 were comprised of (1) direct and indirect marketing costs
associated with the procurement and retention of consumers for its databases,
including direct response e-mail marketing costs, promotional costs and premium
fulfillment costs, and (2) the related contingent-based prize indemnification
expense, billing fees, collection fees, and customer service costs. In the
fiscal periods prior to November 30, 1999, the Company's cost of revenues were
offset by net revenue generated from certain premium offerings made in
conjunction with the Company's marketing of other products and services. The
Company terminated the marketing of these products and services in conjunction
with the Transaction Agreements, all as more fully described in "-- Prior Year
Transactions Impacting Current and Future Fiscal Periods". All such residual
revenue from those premium offerings have been reflected in the Company's other
income (expense) section pursuant to the termination of the related long
distance customer acquisition marketing program at November 30, 1999. For the
three months ended May 31, 2001, such revenues included in "Other non-operating
income" were approximately $80,000, compared to approximately $325,000 for the
prior year's comparable period.

                                        15
<PAGE>   17

     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, 2001 and May 31, 2000 are presented in the following tables:

  Consolidated Cost of Sales, by Segment, by Component

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED
                                                  ------------------------     CHANGE      CHANGE
                                                   MAY 31,       MAY 31,      INC(DEC)    INC(DEC)
                                                     2001          2000         $$$         %%%
                                                  ----------    ----------   ----------   --------
<S>                                               <C>           <C>          <C>          <C>
E-COMMERCE
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
E-mail marketing and related delivery costs.....  $  699,695    $   63,693   $  636,002      999%
Customer procurement costs......................     747,755     1,666,862     (919,107)     (55)%
Promotional and creative development costs......      30,404        53,526      (23,122)     (43)%
                                                  ----------    ----------   ----------     ----
     Total E-commerce Advertising...............  $1,477,854    $1,784,081   $ (306,227)     (17)%
                                                  ----------    ----------   ----------     ----

SERVICE BUREAU FEES
Contingent based prize indemnification costs....  $   99,131    $  168,030      (68,899)     (41)%
                                                  ----------    ----------   ----------     ----
     Total E-commerce Cost of Sales.............  $1,576,985    $1,952,111   $ (375,126)     (19)%
                                                  ----------    ----------   ----------     ----

OFF-LINE CUSTOMER ACQUISITION SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing and related costs.................  $   16,176    $   80,120   $  (63,944)     (80)%
Premium fulfillment costs.......................          --      (723,106)     723,106      100%
                                                  ----------    ----------   ----------     ----
     Total Off-line Acquisition Cost of Sales...  $   16,176    $ (642,986)  $  659,162     103%
                                                  ----------    ----------   ----------     ----

LEC BILLED PRODUCTS AND SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing and related costs.................  $       --    $  (38,853)  $   38,853     100%
Premium fulfillment costs.......................          --          (300)         300     100%
                                                  ----------    ----------   ----------     ----
     Total LEC-Billed Advertising...............  $       --    $  (39,153)  $   39,153     100%
                                                  ----------    ----------   ----------     ----

SERVICE BUREAU FEES
Billing and collection fees.....................  $   54,576    $   94,133      (39,557)     (42)%
                                                  ----------    ----------   ----------     ----
     Total LEC-Billed Cost of Sales.............  $   54,576    $   54,980   $     (404)      (1)%
                                                  ----------    ----------   ----------     ----
          Total Cost of Sales...................  $1,647,737    $1,364,105   $  283,632       21%
                                                  ==========    ==========   ==========     ====
</TABLE>

     Cost of sales increased $283,632, or 21%, to $1,647,737 for the three
months ended May 31, 2001 from $1,364,105 in the comparable prior year period.
The increase is the result of two offsetting factors. The primary reason for the
increase in cost of sales from quarter-to-quarter was attributable to the
write-off in the quarter ended May 31, 2000 of approximately $723,000 of expired
fulfillment obligations (relating to estimated costs of unredeemed premiums
offered in the long distance customer acquisition programs), which caused a
negative cost of revenue during that period. The three-month period ended May
31, 2001 did not have a comparable expired fulfillment obligation adjustment.
This increase in cost of sales was partially offset because during the three
months ended May 31, 2001, the cost of sales from the Company's E-commerce
segment decreased by approximately $375,000. This decrease in cost of sales in
the E-commerce segment occurred because the costs of acquiring consumer data
decreased substantially when compared to the prior year's comparable quarter as
a result of market conditions (resulting primarily from the failure of numerous
Internet companies) and improved buying strategies implemented by the Company.
These E-commerce savings were partially offset by increased E-mail marketing and
delivery expenditures (due to the delivery of

                                        16
<PAGE>   18

substantially higher volumes of e-mail marketing) during the three months ended
May 31, 2001 when compared to the three months ended May 31, 2000.

     During the three months ended May 31, 2001, the Company e-mailed
approximately 598 million promotional pieces compared to approximately 5 million
promotional pieces being mailed in the prior year's comparable period. The
Company's subsidiary, GroupLotto.com, acquired approximately 7.4 million members
in its database, including approximately 1.2 million new registered players,
during the three months ended May 31, 2001, compared to approximately 4 million
members acquired, including approximately 217,000 new registered players, in the
prior year's comparable period. Consolidated service bureau fees decreased by
approximately $69,000, or 31%. The primary factor contributing to this decrease
was due to reduced pricing terms negotiated by the Company for the
contingent-based prize indemnification coverage related to GroupLotto.com's free
on-line lottery.

     The Company's selling, general and administrative expenses ("SG&A") are
principally comprised of (i) compensation costs and related expenses for
executive, sales, 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) marketing partner profit
participation commissions and all other general and miscellaneous corporate
expense items.

     The Company's SG&A expenses for the three months ended May 31, 2001 and May
31, 2000 are presented, on a segmental basis, and with disclosure of the
components of the individual segments, below:

  Consolidated -- Selling, General and Administrative Expenses

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED
                                              ------------------------    CHANGE --    CHANGE --
                                               MAY 31,       MAY 31,      INC(DEC)     INC(DEC)
                                                 2001          2000          $$$          %%%
                                              ----------    ----------    ---------    ---------
<S>                                           <C>           <C>           <C>          <C>
E-COMMERCE
Compensation costs and related expenses.....  $  911,007    $  319,411    $ 591,596       185%
Professional fees...........................     197,471       158,024       39,447        25%
Insurance costs.............................     134,744        38,441       96,303       251%
Occupancy and equipment costs...............      68,319        18,501       49,818       269%
Site development, maintenance and
  modifications.............................     406,145       832,725     (426,580)      (51)%
All other corporate level expense...........     350,782       244,676      106,106        43%
                                              ----------    ----------    ---------      ----
     Total SG&A -- E-commerce segment.......  $2,068,468    $1,611,778    $ 456,690        28%
                                              ==========    ==========    =========      ====
OFF-LINE CUSTOMER ACQUISITION SERVICES
Compensation costs and related expenses.....  $   49,404    $   87,029    $ (37,625)      (43)%
Professional fees...........................          --       (16,133)      16,133       100%
Insurance costs.............................       3,672        49,840      (46,168)      (93)%
Occupancy and equipment costs...............       7,702        26,601      (18,899)      (71)%
All other corporate level expense...........      25,927      (179,426)     205,353       114%
                                              ----------    ----------    ---------      ----
     Total SG&A -- Off-line segment.........  $   86,705    $  (32,089)   $ 118,794       370%
                                              ==========    ==========    =========      ====
</TABLE>

                                        17
<PAGE>   19

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED
                                              ------------------------    CHANGE --    CHANGE --
                                               MAY 31,       MAY 31,      INC(DEC)     INC(DEC)
                                                 2001          2000          $$$          %%%
                                              ----------    ----------    ---------    ---------
<S>                                           <C>           <C>           <C>          <C>
LEC BILLED PRODUCTS AND SERVICES
Compensation costs and related expenses.....  $   49,272    $  312,834    $(263,562)      (84)%
Professional fees...........................          --         1,257       (1,257)     (100)%
Insurance costs.............................      34,604        54,432      (19,828)      (36)%
Occupancy and equipment costs...............       7,702        25,858      (18,156)      (70)%
All other corporate level expense...........       5,088           225        4,863      2161%
                                              ----------    ----------    ---------      ----
     Total SG&A -- LEC segment..............  $   96,666    $  394,606    $(297,940)      (76)%
                                              ==========    ==========    =========      ====
CORPORATE AND OTHER
Compensation costs and related expenses.....  $  370,619    $  383,016    $ (12,397)       (3)%
Professional fees...........................     349,171       239,649      109,522        46%
Insurance costs.............................         453            --          453       100%
Occupancy and equipment costs...............          --         1,985       (1,985)     (100)%
All other corporate level expense...........      85,275       136,456      (51,181)      (38)%
                                              ----------    ----------    ---------      ----
     Total SG&A -- Corporate and other......  $  805,518    $  761,106    $  44,412         6%
                                              ==========    ==========    =========      ====
     Consolidated Totals....................  $3,057,357    $2,735,401    $ 321,956        12%
                                              ==========    ==========    =========      ====
</TABLE>

     SG&A expenses increased $321,956, or 12%, to $3,057,357 for the three
months ended May 31, 2001 from $2,735,401 in the comparable prior year period.
This increase in the Company's SG&A expenses (in terms of absolute dollars) is
partially attributable to the Company's expansion of its E-commerce activities.
More importantly, in terms of percentage relationships, the Company's net
revenue from its E-commerce Segment grew 373%, or approximately $4.3 million
compared to the prior year's comparable quarter; however, the E-commerce
segment's corresponding SG&A expenses increased by only 28%, or approximately
$457,000 compared to the prior year's comparable quarter. The E-commerce
segment's SG&A increase was partially offset by decreases realized in the
Company's LEC Billed Product and Services Segment, with such segment's expense
decreases directly correlating to the significant decline in such segment's
activity during the three months ended May 31, 2001.

     The Company's components of "Other income (expense)" for the three months
ended May 31, 2001 and May 31, 2000 are presented below:

  Consolidated Other Income (Expense)

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                                              -----------------------    CHANGE --     CHANGE --
                                              MAY 31,       MAY 31,       INC(DEC)     INC(DEC)
                                                2001         2000           $$$           %%%
                                              --------    -----------    ----------    ---------
<S>                                           <C>         <C>            <C>           <C>
OTHER INCOME (EXPENSE):
Interest income and dividends...............  $494,309    $   583,154    $  (88,845)      (15)%
Net (losses) gains on sale of marketable
  securities................................    (1,776)       (38,336)       36,560        95%
Permanent impairment charges................        --     (1,345,734)    1,345,734       100%
Gain on non-monetary cost basis exchange....        --        565,572      (565,572)     (100)%
Other non-operating income:
  Residual revenues from terminated
     programs...............................    79,883        324,734      (244,851)      (75)%
                                              --------    -----------    ----------      ----
     Total Consolidated Other Income
       (Expense)............................  $572,416    $    89,390    $  483,026       540%
                                              ========    ===========    ==========      ====
</TABLE>

                                        18
<PAGE>   20

     During the three months ended May 31, 2001, the Company's interest and
dividend income decreased by $88,845, or 15%, when compared with the comparable
prior period. This decline is the result of decreases in interest rates offered
on short-term commercial paper and auction rate securities, both of which have
historically formed the primary components of the Company's investment
portfolio.

     During the three month period ended May 31, 2000, the Company evaluated its
long-term investments and determined that several investments made in privately
held companies were impaired. A long-lived asset impairment write down
(resulting from the Company's continuing evaluation of the related long-lived
assets' cash flows and future economic potential) of approximately $1,105,000
was charged to the three month period ended May 31, 2000 for the impaired
long-lived assets. During the three months ended May 31, 2000, the Company also
charged approximately $241,000 to operations, which related to the impairment of
capitalized software costs. The three months ended May 31, 2001 were not
impacted by asset impairment write-downs. During the three months ended May 31,
2000, the Company recognized a non-monetary gain when a privately held (cost
basis asset) investment was acquired by a public company in a merger
transaction. This non-monetary gain amounted to approximately $566,000.

     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's effective tax rate was approximately 40% for the
three-month periods ended May 31, 2001 and 2000, respectively.

SIX MONTHS ENDED MAY 31, 2001 AND MAY 31, 2000

     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, 2001 and May 31, 2000, 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)
                                               2001           2000           $$$          %%%
                                            -----------    ----------    -----------    --------
<S>                                         <C>            <C>           <C>            <C>
E-COMMERCE
GroupLotto Site...........................  $ 2,491,927    $  746,525    $ 1,745,402       234%
E-mail....................................    5,556,433            --      5,556,433       100%
Data sales................................    1,582,312       467,153      1,115,159       239%
                                            -----------    ----------    -----------      ----
     Total E-commerce.....................    9,630,672     1,213,678      8,416,994       694%
                                            ===========    ==========    ===========      ====
OFF-LINE CUSTOMER ACQUISITION SERVICES
  COMPONENTS
Long distance customer acquisitions.......           --       288,233       (288,233)     (100)%
Long distance usage commissions...........           --     4,387,149     (4,387,149)     (100)%
Other customer acquisition services.......           --         4,341         (4,341)     (100)%
                                            -----------    ----------    -----------      ----
     Total Off-line Customer Acquisition
       Services...........................           --     4,679,723     (4,679,723)     (100)%
                                            ===========    ==========    ===========      ====
LEC BILLED PRODUCTS AND SERVICES
  COMPONENTS
"900" Entertainment Service termination
  royalties...............................      486,406     1,488,196     (1,001,790)      (67)%
Club 900 Products.........................           --      (105,734)       105,734       100%
Enhanced Services, principally voice
  mail....................................      637,019     2,558,052     (1,921,033)      (75)%
Telephone number list rentals.............           --        65,523        (65,523)     (100)%
                                            -----------    ----------    -----------      ----
     Total LEC Billed Products and
       Services...........................    1,123,425     4,006,037     (2,882,612)      (72)%
                                            ===========    ==========    ===========      ====
</TABLE>

                                        19
<PAGE>   21

<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED
                                            -------------------------      CHANGE        CHANGE
                                              MAY 31,       MAY 31,       INC(DEC)      INC(DEC)
                                               2001           2000           $$$          %%%
                                            -----------    ----------    -----------    --------
<S>                                         <C>            <C>           <C>            <C>
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and
  other...................................           --        20,072        (20,072)     (100)%
                                            -----------    ----------    -----------      ----
     Total Consolidated Net Revenue.......  $10,754,097    $9,919,510    $   834,587         8%
                                            ===========    ==========    ===========      ====
</TABLE>

     Net Revenue increased $834,587, or 8%, to $10,754,097 for the six months
ended May 31, 2001 from $9,919,510 in the comparable prior year period. This
increase was attributable to the Company's E-commerce Segment, which recognized
an increase in net revenues of approximately $8.4 million resulting from the
Company's increased emphasis on generating revenue from on-line consumer based
direct marketing. The E-commerce Segment's increase was offset by decreases in
the Company's Off-line Customer Acquisition Services Segment ($4.7 million) and
LEC Billed Products and Services Segment ($2.9 million). See "Transactions with
Major Customers and Termination of Economic Dependence", "Prior Year
Transactions Impacting Current and Future Fiscal Periods", and "Service Bureaus
and Local Exchange Carriers" following the "Liquidity and Capital Resources"
section for a detailed discussion of the decrease as it relates to the Off-line
Customer Acquisition Services Segment and the LEC Billed Products and Services
Segment.

     In the fiscal periods prior to November 30, 1999, the Company's cost of
revenues were offset by net revenue generated from certain premium offerings
made in conjunction with the Company's marketing of other products and services.
The Company terminated the marketing of these products and services in
conjunction with the Transaction Agreements, all as more fully described in
"-- Prior Year Transactions Impacting Current and Future Fiscal Periods". All
such residual revenue from those premium offerings have been reflected in the
Company's other income (expense) section pursuant to the termination of the
related long distance customer acquisition marketing program at November 30,
1999. For the six months ended May 31, 2001, such revenues included in "Other
non-operating income" were approximately $88,000, compared to approximately
$672,000 for the prior year's comparable period.

     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, 2001 and May 31, 2000 are presented below:

  Consolidated Cost of Sales, by Segment, by Component

<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED
                                              ------------------------      CHANGE       CHANGE
                                               MAY 31,       MAY 31,       INC(DEC)     INC(DEC)
                                                 2001          2000          $$$          %%%
                                              ----------    ----------    ----------    --------
<S>                                           <C>           <C>           <C>           <C>
E-COMMERCE
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
E-mail marketing and related delivery
  costs.....................................  $1,126,857    $   66,304    $1,060,553      1600%
Customer procurement costs..................   1,101,007     1,666,862      (565,855)      (34)%
Promotional and creative development
  costs.....................................      50,154       166,797      (116,643)      (70)%
                                              ----------    ----------    ----------      ----
     Total E-commerce Advertising...........  $2,278,018    $1,899,963    $  378,055        20%
                                              ==========    ==========    ==========      ====
SERVICE BUREAU FEES
Contingent based prize indemnification
  costs.....................................  $  206,626    $  181,131    $   25,495        14%
                                              ----------    ----------    ----------      ----
     Total E-commerce Cost of Sales.........  $2,484,644    $2,081,094    $  403,550        19%
                                              ==========    ==========    ==========      ====
OFF-LINE CUSTOMER ACQUISITION SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing and related costs.............  $   21,739    $   90,644    $  (68,905)      (76)%
Premium fulfillment costs...................       7,564      (650,116)      657,680       101%
                                              ----------    ----------    ----------      ----
     Total Off-line Acquisition Cost of
       Sales................................  $   29,303    $ (559,472)   $  588,775      (105)%
                                              ==========    ==========    ==========      ====
</TABLE>

                                        20
<PAGE>   22

<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED
                                              ------------------------      CHANGE       CHANGE
                                               MAY 31,       MAY 31,       INC(DEC)     INC(DEC)
                                                 2001          2000          $$$          %%%
                                              ----------    ----------    ----------    --------
<S>                                           <C>           <C>           <C>           <C>
LEC BILLED PRODUCTS AND SERVICES
ADVERTISING, PROMOTION AND FULFILLMENT COSTS
Telemarketing and related costs.............  $       --    $  (45,463)   $   45,463       100%
Premium fulfillment costs...................          --         1,608        (1,608)     (100)%
                                              ----------    ----------    ----------      ----
     Total LEC Billed Advertising...........  $       --    $  (43,855)   $   43,855       100%
                                              ==========    ==========    ==========      ====
SERVICE BUREAU FEES
Billing and collection fees.................  $  111,655    $  185,314    $  (73,659)      (40)%
                                              ----------    ----------    ----------      ----
     Total LEC Billed Cost of Sales.........  $  111,655    $  141,459    $  (29,804)      (21)%
                                              ==========    ==========    ==========      ====
     Total Cost of Sales....................  $2,625,602    $1,663,081    $  962,521        58%
                                              ==========    ==========    ==========      ====
</TABLE>

     Cost of revenues increased $962,521, or 58%, to $2,625,602 for the six
months ended May 31, 2001 from $1,663,081 in the comparable prior year period.
The increase is directly attributable to the significant increase in the
Company's E-commerce activities when compared to the prior comparable period.
During the six months ended May 31, 2001, the Company e-mailed approximately 988
million promotional pieces compared to approximately 5 million mailed in the
prior year's comparable period. The Company's subsidiary, GroupLotto.com,
acquired approximately 11 million members in its database, including
approximately 1.9 new registered players during the six months ended May 31,
2001, compared to approximately 4.1 million members acquired, including
approximately 298,000 new registered players, in the prior year's comparable
period.

     The Company's SG&A expenses for the six months ended May 31, 2001 and May
31, 2000 are presented, on a segmental basis, and with disclosure of the
components of the individual segments, below:

  Segment Data -- Selling, General and Administrative Expenses

<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED
                                               -----------------------   CHANGE --    CHANGE --
                                                MAY 31,      MAY 31,      INC(DEC)    INC(DEC)
                                                  2001         2000         $$$          %%%
                                               ----------   ----------   ----------   ---------
<S>                                            <C>          <C>          <C>          <C>
E-COMMERCE
Compensation costs and related expenses......  $1,641,708   $  547,886   $1,093,822      200%
Professional fees............................     319,590      163,243      156,347       96%
Insurance costs..............................     196,608      101,471       95,137       94%
Occupancy and equipment costs................     125,777       47,495       78,282      165%
Site development, maintenance and
  modifications..............................   1,022,303    1,390,239     (367,936)     (26)%
All other SG&A expenses......................     743,192      312,054      431,138      138%
                                               ----------   ----------   ----------     ----
     Total SG&A -- E-commerce segment........  $4,049,178   $2,562,388   $1,486,790       58%
                                               ==========   ==========   ==========     ====
OFF-LINE CUSTOMER ACQUISITION SERVICES
Compensation costs and related expenses......  $   89,171   $  327,779   $ (238,608)     (73)%
Professional fees............................          --       35,284      (35,284)    (100)%
Insurance costs..............................      65,536       95,265      (29,729)     (31)%
Occupancy and equipment costs................      14,334       47,496      (33,162)     (70)%
All other SG&A expenses......................      39,605     (153,736)     193,341      126%
                                               ----------   ----------   ----------     ----
     Total SG&A -- Off-line segment..........  $  208,646   $  352,088   $ (143,442)     (41)%
                                               ==========   ==========   ==========     ====
</TABLE>

                                        21
<PAGE>   23

<TABLE>
<CAPTION>
                                                  SIX MONTHS ENDED
                                               -----------------------   CHANGE --    CHANGE --
                                                MAY 31,      MAY 31,      INC(DEC)    INC(DEC)
                                                  2001         2000         $$$          %%%
                                               ----------   ----------   ----------   ---------
<S>                                            <C>          <C>          <C>          <C>
LEC BILLED PRODUCTS AND SERVICES
Compensation costs and related expenses......  $   88,896   $  327,775   $ (238,879)     (73)%
Professional fees............................          --        3,818       (3,818)    (100)%
Insurance costs..............................      65,536      101,470      (35,934)     (35)%
Occupancy and equipment costs................      14,334       47,495      (33,161)     (70)%
All other SG&A expenses......................       9,023       10,924       (1,901)     (17)%
                                               ----------   ----------   ----------     ----
     Total SG&A -- LEC segment...............  $  177,789   $  491,482   $ (313,693)     (64)%
                                               ==========   ==========   ==========     ====
CORPORATE AND OTHER
Compensation costs and related expenses......  $  930,554   $  788,329   $  142,225       18%
Professional fees............................     545,597      532,144       13,453        3%
Insurance costs..............................       1,298           --        1,298      100%
Occupancy and equipment costs................          --        7,940       (7,940)    (100)%
All other SG&A expenses......................     199,586      343,617     (144,031)     (42)%
                                               ----------   ----------   ----------     ----
     Total SG&A -- Corporate and other.......  $1,677,035   $1,672,030   $    5,005        0%
                                               ==========   ==========   ==========     ====
     Consolidated Totals.....................  $6,112,648   $5,077,988   $1,034,660       20%
                                               ==========   ==========   ==========     ====
</TABLE>

     SG&A expenses increased $1,034,660, or 20%, to $6,112,648 for the six
months ended May 31, 2001 from $5,077,988 in the comparable prior year period.
The increase in SG&A is primarily attributable to the Company's expansion of its
E-commerce activities. As detailed above, E-commerce SG&A increased
approximately $1.5 million for the six months ended May 31, 2001 over the six
months ended May 31, 2000. Such increase principally resulted from a rise in
E-commerce Segment expenses necessary to support the Company's increased on-line
marketing activities. The E-commerce segment's SG&A increase was partially
offset by decreases realized in the Company's (a) Off-line Customer Acquisition
Services Segment and (b) LEC Billed Product and Services Segment, with such
segments' expense decreases directly correlating to the significant decline in
such segments' activity during the six months ended May 31, 2001.

     The Company's components of "Other income (expense)" for the six months
ended May 31, 2001 and May 31, 2000 are presented below:

  Consolidated Other Income (Expense)

<TABLE>
<CAPTION>
                                                SIX MONTHS ENDED
                                           --------------------------     CHANGE --     CHANGE --
                                             MAY 31,        MAY 31,       INC(DEC)      INC(DEC)
                                              2001           2000            $$$           %%%
                                           -----------    -----------    -----------    ---------
<S>                                        <C>            <C>            <C>            <C>
OTHER INCOME (EXPENSE):
Interest expense.........................
Interest income and dividends............  $ 1,144,261    $ 1,176,451    $   (32,190)       (3)%
Net (losses) gains on sale of marketable
  securities.............................       (1,776)       902,221       (903,997)     (100)%
Permanent impairment charges.............   (4,690,258)    (1,345,734)    (3,344,524)      249%
Gain on non-monetary cost basis
  exchange...............................           --        565,572       (565,572)     (100)%
Other non-operating income:
  Residual revenues from terminated
     programs............................       88,350        671,941       (583,591)      (87)%
                                           -----------    -----------    -----------      ----
     Total Consolidated Other Income
       (Expense).........................  $(3,459,423)   $ 1,970,451    $(5,429,874)     (276)%
                                           ===========    ===========    ===========      ====
</TABLE>

                                        22
<PAGE>   24

     During the six months ended May 31, 2001 (specifically within the three
months ended February 28, 2001), the Company recognized losses due to what the
Company believes to be "other than temporary" declines in the value of its
marketable security portfolio. These securities had "mark-to-market" valuation
adjustments in previous quarters, with such adjustments being classified in
"other comprehensive income (loss)" (a contra equity account on the Company's
balance sheet) pursuant to their "available-for-sale" classification. Such
non-cash pretax recognized losses amounted to $4,190,207 during the six months
ended May 31, 2001.

     The Company evaluated its long-term investments during the six months ended
May 31, 2001 (specifically within the quarter ended February 28, 2001 and during
the period March 1, 2001 to April 1, 2001) and determined that an investment
made in a privately held company during Fiscal 2000 was impaired. A long-lived
asset impairment write down, related to this continuing evaluation, of $500,051
was charged to the six months ended May 31, 2001. During the three months ended
May 31, 2001 this entity effectively wound down operations and ceased doing
business.

     During the six months ended May 31, 2000, the Company disposed of
approximately 240,000 shares of SkyMall, Inc. (Nasdaq:SKYM) and recorded a
recognized gain of approximately $941,000.

     In the six month period ended May 31, 2000 the Company evaluated its
long-term investments and determined that several investments made in privately
held companies were impaired. A long-lived asset impairment write down
(resulting from the Company's continuing evaluation of the related long-lived
assets' cash flows and future economic potential) of approximately $1,105,000
was charged to the six month period ended May 31, 2000 for the impaired
long-lived assets. During the six months ended May 31, 2000, the Company also
charged approximately $241,000 to operations, which related to the impairment of
capitalized software costs.

     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 $1,311,799 during the
six-month period ended May 31, 2001 on a pre-tax loss of $1,443,576 million.
This tax expense is due to the Company taking full valuation allowances against
the future tax benefits attributable to permanent impairment charges from (a)
capital losses generated from losses recognized on marketable securities, and
(b) a "long-lived asset impairment" charge, both taken during the six months
ended May 31, 2001. The Company's effective tax rate was approximately 40% for
the six-month period ended May 31, 2000. Such deferred tax asset valuation
allowance was taken at May 31, 2001 due to the absence of any appreciated
capital gain property (available for the potential generation of capital gain
income) to offset the capital losses realized in the six months ended May 31,
2001.

LIQUIDITY AND CAPITAL RESOURCES

     At May 31, 2001, the Company had cash and cash equivalents of approximately
$7.2 million, reflecting an increase of approximately $2.6 million, compared to
the $4.6 million in cash and cash equivalents held at November 30, 2000. At May
31, 2001 the Company had marketable securities of $31.1 million compared to
$38.7 million at November 30, 2000.

     During the six months ended May 31, 2001, net cash used in operating
activities was approximately $5.2 million. The significant components resulting
in this use of cash were from: (i) payments of federal income taxes, (ii)
increases in accounts receivable, attributable to net revenues generated by the
Company from its E-commerce segment, (iii) payments on amounts due to related
parties, and (iv) payments on trade payables.

     On March 20, 2001, the Company made a $5 million partial payment against a
tentative settlement with the Internal Revenue Service ("IRS") based upon the
current status of tax audits covering the tax years January 1, 1996 to December
31, 1999. This payment was made to reduce the Company's interest expense related
to the final settlement, which is expected to be reached in the current fiscal
year. The Company currently anticipates it will expend approximately $1 million
in additional funds upon settlement of the tax audits. The IRS adjustment had
been factored into the Company's tax accrual and corresponding earnings in a

                                        23
<PAGE>   25

prior fiscal year. Therefore, the Company does not expect to recognize a future
impact on earnings for these payments.

     During the six months ended May 31, 2001, approximately $7.8 million of net
cash was provided by investing activities, resulting from approximately $8.3
million provided by net proceeds from the sale of investments in short term,
high-grade commercial paper and auction rate securities, offset by cash outflows
for capital expenditures of approximately $467,000 and long-term investments of
$49,000.

     Cash provided by financing activities during the six months ended May 31,
2001 amounted to $60,177, all of which was provided by the exercise of the
Company's stock options.

     Historically, the Company's primary cash requirements have been 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 currently 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 management's intention being for such segment to
supply a material portion of future revenues. If the Company's on-line
activities fail to generate sufficient revenue, then the continuation of the
Company's on-line growth could have an impact on the Company's capital and
liquidity resources relating to possible expenditures for (a) marketing
campaigns, (b) product development costs, (c) site development and maintenance,
and related technology based costs, (d) potential on-line business acquisitions,
or (e) other unexpected costs. During the six months ended May 31, 2001, the
Company expended approximately $467,000 in capital expenditures to support its
E-commerce activities.

     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, in a significantly decreasing degree, to the Company's cash
flows and net income in subsequent fiscal periods, as was the case during the
six months ended May 31, 2001. This should be considered when using the
Company's historical results in evaluating future operations, cash flows and
financial position. Nevertheless, the Company continues to explore opportunities
to offer other LEC Billed Products and Services in the future, if determined to
be in the best interests of the Company.

     Under currently proposed operating plans and assumptions, management
believes that projected cash flows from operations and available cash resources
will be sufficient to satisfy the Company's anticipated cash requirements for at
least the next twelve months. Currently, the Company does not have any material
long-term obligations, nor does the Company intend to incur any long-term
obligations in the near future. As the Company seeks to extend its reach into
the E-commerce arena, as well as identify new and other consumer oriented
products and services, the Company may use existing cash reserves, long-term
financing (if appropriate), or other means to finance such diversification. See
"Forward Looking Information May Prove Inaccurate".

PRIOR YEAR TRANSACTIONS IMPACTING CURRENT AND FUTURE FISCAL PERIODS

     In June 1999, the Company entered into the "Transaction Agreements",
including the Agreement Regarding 900 Pay-Per-Call Psychic Services (the "900
Agreement"), dated as of May 26, 1999, by and between the Company and ARS,
pursuant to which the Company agreed to refrain until January 17, 2001 from
conducting, marketing, advertising or promoting certain "stand alone" 900
Pay-Per-Call Psychic Services described in the 900 Agreement (the "900 Psychic
Services") directly or indirectly through any affiliate. In addition, the
Company agreed to cease the conduct of the media buying operation which it
conducted under the name "Quintel Media" and ARS agreed to assume responsibility
for the "Quintel Media" employees and for the lease of the premises used by
"Quintel Media" in Fort Lauderdale, Florida, and to acquire the computer
equipment and other furniture, fixtures and leasehold improvements used by
"Quintel Media" at such premises.

     In consideration for the Company's acceptance of the terms of the 900
Agreement, ARS and any of its affiliates offering 900 Pay-Per-Call Psychic
Services and/or membership club services, agreed to pay to the

                                        24
<PAGE>   26

Company certain royalty fees ("900" Entertainment Service termination royalties,
included in the Company's LEC Billed Products and Services Segment) relative to
such service offerings. ARS was required to pay such royalty fees from and after
the consummation of the transactions contemplated by the Transaction Agreements,
and until January 16, 2001. For the six months ended May 31, 2001 and May 31,
2000, these royalties amounted to approximately $486,000 and $1,488,000, or 5%
and 15%, respectively, of the Company's net revenues. As of May 31, 2001, the
Company has received all funds due under this arrangement and will no longer
recognize revenue or cash flows from this activity in future fiscal periods.

TRANSACTIONS WITH MAJOR CUSTOMERS

     During the six months ended May 31, 2001, the Company had four customers
within its E-commerce segment who, in combination, accounted for approximately
47.5% of consolidated net revenues during the six-month period ended May 31,
2001, and approximately 36% of consolidated net accounts receivable as of May
31, 2001. The Company did not conduct business with these customers in the prior
year's comparable period and the related consolidated accounts receivable from
such companies were negligible at November 30, 2000.

     During the six months ended May 31, 2000, the Company derived approximately
47% of net revenues from one major customer in its Off-line Customer Acquisition
Services Segment. During the fiscal year ended November 30, 2000, the Company
derived approximately 53% of its revenues from two major customers (see below).
In the years ended November 30, 1999 and 1998, the Company had derived
approximately 72% and 20%, respectively, of its revenue from one major customer.
As at November 30, 2000, the Company had either terminated, or had been
terminated, from providing services to such major customers. Accounts receivable
from these major customers were approximately $635,000 and $611,000 at May 31,
2001 and November 30, 2000, respectively.

     During the fiscal year ended November 30, 2000, the Company generated its
Off-Line Customer Acquisition revenue exclusively from long distance customer
acquisition agreements with two long distance providers, Qwest Communications
and Talk.com.

     The Company provided marketing services to the long distance carrier LCI
International Telecom Corp., d/b/a Qwest Communications Services ("Qwest"),
primarily through outbound telemarketing and broadcast media, directed at the
acquisition of residential long distance customers for Qwest. In addition to
commissions paid to the Company for its successful customer acquisitions on
behalf of Qwest, the Company also received a portion of Qwest's net revenues
earned from such acquired customers' residential long distance usage. This
marketing arrangement with Qwest was terminated in Fiscal 2000 through the
execution of settlement, termination and release agreements. The Company does
not expect to receive any further revenue from Qwest.

     The Company entered into a series of agreements with Talk.com Holding Corp.
("Talk") during the fiscal year ended November 30, 2000, pursuant to which the
Company provided marketing services to Talk directed at the acquisition of
residential long distance customers for Talk. Such agreements obligated Talk to
pay the Company fees for its successful customer acquisitions on behalf of Talk.
In October 2000, Talk terminated its agreements with the Company and,
accordingly, the Company no longer realizes any continuing revenues therefrom.
The Company has commenced legal proceedings to contest what it believes to be
Talk's wrongful termination of its agreements with the Company. See "Legal
Proceedings".

SERVICE BUREAUS AND LOCAL EXCHANGE CARRIERS

     In November 1998, three of the LECs, Ameritech Corp., Bell Atlantic Corp.
and SBC Communications, Inc., refused to bill customers for enhanced services
provided by the Company. This was a result of what the LECs claim was excessive
complaints by customers for "cramming" (unauthorized charges billed to a
customer's phone bill) against the Company and its affiliates. This billing
cessation effectively prevented the Company from selling its enhanced services
in those areas serviced by such LECs.

                                        25
<PAGE>   27

     As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continued
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Transtel, whereby Transtel provided the billing services
previously provided by BIC. In effect, between the termination of the BIC
billing service arrangement and the commencement of billing under the agreement
with Transtel (approximately two months), the Company was unable to bill for any
enhanced services provided. The Company continues to bill an attriting customer
base relative to these enhanced services resulting in net revenues of
approximately $637,000 and $2,558,000, for the six months ended May 31, 2001 and
May 31, 2000, respectively. The Company expects this decrease in enhanced
services revenue to continue, and does not expect such revenues from those
customers to contribute materially to future fiscal periods.

                                        26
<PAGE>   28

                                    PART II
                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

  Talk.com

     On or about October 25, 2000, the Company instituted proceedings before the
American Arbitration Association against Talk.com Holding Corp. ("Talk") (Case
No. 13Y 180 01000 00), seeking money damages to be determined during the
proceedings, but believed to amount to at least $7 million, and other relief.
The relief sought arises from Talk's October 2000 termination of a series of
agreements entered into between the Company and Talk between April and September
2000 (the "Talk Agreements"), pursuant to which the Company provided marketing
services to Talk directed at the acquisition of residential long distance
customers for Talk. The Talk Agreements obligated Talk to pay the Company fees
for successful customer acquisitions on Talk's behalf. Talk has denied that the
Company is entitled to the relief sought because Talk claims that it rightfully
terminated the Talk Agreements; and it has asserted a counterclaim seeking to
recover expenses it has or will incur in the amount of $880,000, and a refund
from the Company of approximately $6.75 million due to the Company's alleged
breaches of the Talk Agreements. The arbitration commenced in June 2001, and a
decision of the arbitrators is expected in the fall of 2001. The Company
believes that there is no merit to Talk's counterclaims, and has and intends to
continue to vigorously defend against them in the arbitration.

  Class Action

     On May 30, 2001, the parties to the Class Action entered into a Stipulation
of Settlement to settle the Class Action. Under the terms of the Stipulation,
the Company's insurers have paid into escrow an aggregate of $3.2 million in
settlement of the Action. The settlement is subject to a number of
contingencies, including the final approval of the District Court, and the entry
of an Order and Final Judgment by the District Court. By Order dated June 13,
2001, the District Court gave preliminary approval to the proposed settlement,
subject to notice to class members, and a hearing for final approval, which the
District Court has scheduled for September 21, 2001. There can be no assurance
that the District Court will finally approve the Settlement.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S>      <C>
 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)
</TABLE>

---------------
(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, 2001.

                                       II-1
<PAGE>   29

                          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.

                                       II-2
<PAGE>   30

                                   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, CEO and President
                                               (Principal Executive Officer)

Date: July 16, 2001

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

Date: July 16, 2001

                                       II-3