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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 August 31,
2001



|  |                                                                                          
|- | -----------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from
            to

Commission file number 0-27046

TRAFFIX, INC.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 22-3322277                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|One Blue Hill Plaza
	Pearl River, New York                      |  | 10965                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

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

Registrants former name:  Quintel
Communications, Inc.


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  
o

The number of shares outstanding of the
Registrants common stock is 14,142,210 (as of 10/12/01).



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TABLE OF CONTENTS



|                             |                                                                                               |  |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I FINANCIAL INFORMATION
|                             | Item 1. Financial Statements                                                                 
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II OTHER INFORMATION   
|                             | Item 1. Legal Proceedings                                                                    
|                             | Item 4. Submission of Matters to a Vote of Securityholders                                   
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  



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##### Table of Contents



TRAFFIX, INC.

INDEX TO QUARTERLY REPORT ON FORM
10-Q

FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION


QUARTER ENDED AUGUST 31, 2001


ITEMS IN FORM 10-Q

|           |          |                       |                                                                                        |      |      |      | 
|---------- | -------- | --------------------- | -------------------------------------------------------------------------------------- | ---- | ---- | ---- | 
|           |          |                       |                                                                                        | Page
|           |          |                       |                                                                                        |     
|Part I     |          | Financial Information |                                                                                        |      |      |     
|           | Item  1. |                       | Financial Statements                                                                   |      |      | 2    | 
|           | Item  2. |                       | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |      |      | 15   | 
|           | 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                                   |      |      | II-1 | 
|           | Item  5. |                       | Other Information                                                                      |      |      | None | 
|           | Item  6. |                       | Exhibits and Reports on Form 8-K                                                       |      |      | II-2 | 
|Signatures |          |                       |                                                                                        |      | II-4 |     

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TRAFFIX, INC. AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |            |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------------ | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                                                                                             |                                                                                                                                         | August 31,                                 |            | November 30,
|                                                                                                                                             |                                                                                                                                         | 2001                                       |            | 2000        
|                                                                                                                                             |                                                                                                                                         |                                            |            |             
|                                                                                                                                             |                                                                                                                                         | (Unaudited)                                |            |             
|Assets                                                                                                                                       |                                                                                                                                         |                                            |            |              |            |  |            |           
|Current assets:                                                                                                                              |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             | Cash and cash equivalents                                                                                                               |                                            | $          | 8,435,416    |            |  | $          | 4,551,344  |           
|                                                                                                                                             | Marketable securities                                                                                                                   |                                            |            | 25,118,142   |            |  |            | 38,676,890 |           
|                                                                                                                                             | Accounts receivable, trade, net of allowance for
	doubtful accounts of $1,833,505 at August 31, 2001 and
	$795,024 at November 30, 2000 |                                            |            | 7,299,777    |            |  |            | 4,354,588  |           
|                                                                                                                                             | Deferred income taxes                                                                                                                   |                                            |            | 5,066,526    |            |  |            | 2,095,026  |           
|                                                                                                                                             | Due from related parties                                                                                                                |                                            |            | 458,523      |            |  |            | 467,877    |           
|                                                                                                                                             | Prepaid expenses and other current assets                                                                                               |                                            |            | 1,128,134    |            |  |            | 1,508,547  |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total current assets                       |            |              | 47,506,518 |  |            |            | 51,654,272 | 
|Property and equipment, at cost, net of
	accumulated depreciation                                                                            |                                                                                                                                         |                                            | 820,746    |              |            |  | 512,958    |           
|Goodwill, net                                                                                                                                |                                                                                                                                         |                                            | 1,412,109  |              |            |  |           |           
|Long-term investments, at cost                                                                                                               |                                                                                                                                         |                                            | 114,000    |              |            |  | 565,051    |           
|Deferred income taxes                                                                                                                        |                                                                                                                                         |                                            | 71,778     |              |            |  | 71,778     |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total assets                               |            | $            | 49,925,151 |  |            | $          | 52,804,059 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|Liabilities                                                                                                                                  |                                                                                                                                         |                                            |            |              |            |  |            |           
|Current liabilities:                                                                                                                         |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             | Accounts payable                                                                                                                        |                                            | $          | 1,409,817    |            |  | $          | 2,091,331  |           
|                                                                                                                                             | Accrued expenses                                                                                                                        |                                            |            | 3,496,760    |            |  |            | 3,218,262  |           
|                                                                                                                                             | Reserve for customer chargebacks                                                                                                        |                                            |            | 1,240,121    |            |  |            | 1,225,040  |           
|                                                                                                                                             | Due to related parties                                                                                                                  |                                            |            | 577,657      |            |  |            | 1,446,619  |           
|                                                                                                                                             | Income taxes payable                                                                                                                    |                                            |            | 2,811,098    |            |  |            | 3,434,995  |           
|                                                                                                                                             | Deferred income taxes                                                                                                                   |                                            |            | 59,252       |            |  |            | 59,252     |           
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total current liabilities                  |            |              | 9,594,705  |  |            |            | 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 14,140,010
	shares and 15,681,116 shares, respectively |                                                                                                                                         |                                            | 14,140     |              |            |  | 15,680     |           
|Additional paid-in capital                                                                                                                   |                                                                                                                                         |                                            | 40,964,732 |              |            |  | 39,208,992 |           
|Retained earnings                                                                                                                            |                                                                                                                                         |                                            | 1,496,891  |              |            |  | 8,691,438  |           
|Accumulated other comprehensive income (loss)                                                                                                |                                                                                                                                         |                                            | 105,245    |              |            |  | (4,385,650 | )         
|Common stock held in treasury, at cost, 956,903
	shares and 942,853 shares, respectively                                                     |                                                                                                                                         |                                            | (2,250,562 | )            |            |  | (2,201,900 | )         
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total shareholders equity                 |            |              | 40,330,446 |  |            |            | 41,328,560 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           
|                                                                                                                                             |                                                                                                                                         | Total liabilities and shareholders equity |            | $            | 49,925,151 |  |            | $          | 52,804,059 | 
|                                                                                                                                             |                                                                                                                                         |                                            |            |              |            |  |            |           

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

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TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(LOSS)

|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |            |            | 
|----------------------------------------- | ------------------------------------------------- | ---------------------------------------- | --------- | ----------------- | --------- | ---------- | --------- | ---------- | --------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                          |                                                   |                                          |           |                  
|                                          |                                                   | Three Months Ended                       |           | Nine Months Ended
|                                          |                                                   |                                          |           |                  
|                                          |                                                   | August 31,                               |           | August 31,        |           | August 31, |           | August 31,
|                                          |                                                   | 2001                                     |           | 2000              |           | 2001       |           | 2000      
|                                          |                                                   |                                          |           |                   |           |            |           |           
|                                          |                                                   |                                         
|                                          |                                                   | (Unaudited)                             
|Net revenue                               |                                                   | $                                        | 7,404,820 |                   |           | $          | 7,862,386 |            |           | $ | 18,158,917 |            |            | $ | 17,781,896 |           
|Cost of sales                             |                                                   |                                          | 2,281,715 |                   |           |            | 2,382,127 |            |           |   | 4,907,317  |            |            |   | 4,045,208  |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          |                                                   | Gross profit                             |           |                   | 5,123,105 |            |           |            | 5,480,259 |   |            |            | 13,251,600 |   |            |            | 13,736,688 | 
|Selling expenses                          |                                                   |                                          | 663,549   |                   |           |            | 590,100   |            |           |   | 1,653,635  |            |            |   | 793,541    |           
|General and administrative expenses       |                                                   |                                          | 2,954,674 |                   |           |            | 2,958,922 |            |           |   | 8,077,236  |            |            |   | 7,833,469  |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          |                                                   | Income from operations                   |           |                   | 1,504,882 |            |           |            | 1,931,237 |   |            |            | 3,520,729  |   |            |            | 5,109,678  | 
|Other income (expense):                   |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          | Interest expense                                  |                                          |           |                  |           |            |           | (150,000   | )         |   |            |           |            |   |            | (150,300   | )         
|                                          | Interest income and dividends                     |                                          |           | 353,645           |           |            |           | 641,324    |           |   |            | 1,497,906  |            |   |            | 1,817,775  |           
|                                          | Realized (losses) gains on marketable
	securities |                                          |           | 405,837           |           |            |           | (10,040    | )         |   |            | 404,061    |            |   |            | 892,181    |           
|                                          | Permanent impairment charges                      |                                          |           |                  |           |            |           | (335,000   | )         |   |            | (4,690,258 | )          |   |            | (1,680,734 | )         
|                                          | Gain on non-monetary cost basis exchange          |                                          |           |                  |           |            |           |           |           |   |            |           |            |   |            | 565,572    |           
|                                          | Other non-operating income (expense)              |                                          |           | (4,060            | )         |            |           | 539,230    |           |   |            | 84,290     |            |   |            | 1,211,171  |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          |                                                   | Income before provision for income taxes |           |                   | 2,260,304 |            |           |            | 2,616,751 |   |            |            | 816,728    |   |            |            | 7,765,343  | 
|Provision for income taxes                |                                                   |                                          | 797,312   |                   |           |            | 1,055,151 |            |           |   | 2,109,111  |            |            |   | 3,135,176  |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          |                                                   | Net income (loss)                        |           | $                 | 1,462,992 |            |           | $          | 1,561,600 |   |            | $          | (1,292,383 | ) |            | $          | 4,630,167  | 
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|Basic income (loss) per share (Note 3):   |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          | Net income (loss)                                 |                                          | $         | 0.10              |           |            | $         | 0.11       |           |   | $          | (0.09      | )          |   | $          | 0.31       |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          | Weighted average shares outstanding               |                                          |           | 13,966,939        |           |            |           | 14,851,353 |           |   |            | 14,497,515 |            |   |            | 14,821,463 |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|Diluted income (loss) per share (Note 3): |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          | Net income (loss)                                 |                                          | $         | 0.10              |           |            | $         | 0.10       |           |   | $          | (0.09      | )          |   | $          | 0.29       |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           
|                                          | Weighted average shares outstanding               |                                          |           | 14,729,475        |           |            |           | 15,436,632 |           |   |            | 14,497,515 |            |   |            | 15,824,160 |           
|                                          |                                                   |                                          |           |                   |           |            |           |            |           |   |            |            |            |   |            |           

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TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |              |            |            |            |  
|------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ---------- | ---------- | ---------- | ------------ | ---------- | ---------- | ---------- | -
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | Nine Months Ended                                         
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | August 31, 2001                                            |                                           | August 31, 2000                                     
|                                      |                                                                                       |                                                            |                                           |                                                     
|                                      |                                                                                       |                                                           
|                                      |                                                                                       | (Unaudited)                                               
|Cash flows from operating activities: |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      | Net (loss) income                                                                     |                                                            | $                                         | (1,292,383                                           | )          |            | $          | 4,630,167    |           
|                                      | Adjustments to reconcile net (loss) income
	to net cash used in operating activities: |                                                            |                                           |                                                      |            |            |            |              |           
|                                      |                                                                                       | Depreciation and amortization                              |                                           |                                                      | 272,916    |            |            |              | 228,604    |           
|                                      |                                                                                       | Reserve for customer chargebacks                           |                                           |                                                      | 15,081     |            |            |              | (3,702,102 | )         
|                                      |                                                                                       | Provision for uncollectible accounts                       |                                           |                                                      | 1,038,481  |            |            |              |           |           
|                                      |                                                                                       | Gain on non-monetary cost-basis exchange                   |                                           |                                                      |           |            |            |              | (565,572   | )         
|                                      |                                                                                       | Deferred income taxes                                      |                                           |                                                      | (2,971,500 | )          |            |              | 778,595    |           
|                                      |                                                                                       | Compensation expense related to options                    |                                           |                                                      | 116,218    |            |            |              |           |           
|                                      |                                                                                       | Realized gains on marketable securities                    |                                           |                                                      | (404,061   | )          |            |              | (892,181   | )         
|                                      |                                                                                       | Permanent impairment charges                               |                                           |                                                      | 4,690,258  |            |            |              | 1,680,734  |           
|                                      |                                                                                       | Amortized discounts and premiums on marketable
	securities |                                           |                                                      | (302,995   | )          |            |              | 138,190    |           
|                                      |                                                                                       | Changes in assets and liabilities of business:             |                                           |                                                      |            |            |            |              |            |           
|                                      |                                                                                       |                                                            | Accounts receivable                       |                                                      |            | (3,983,670 | )          |              |            | (1,810,165 | )         
|                                      |                                                                                       |                                                            | Prepaid expenses and other current assets |                                                      |            | 380,413    |            |              |            | (306,958   | )         
|                                      |                                                                                       |                                                            | Accounts payable                          |                                                      |            | (681,514   | )          |              |            | (516,869   | )         
|                                      |                                                                                       |                                                            | Income taxes payable                      |                                                      |            | (534,856   | )          |              |            | (1,494,698 | )         
|                                      |                                                                                       |                                                            | Due from/to related parties               |                                                      |            | (859,608   | )          |              |            | 266,931    |           
|                                      |                                                                                       |                                                            | Other, principally accrued expenses       |                                                      |            | 278,498    |            |              |            | (795,530   | )         
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      |                                                                                       |                                                            |                                           | Net cash used in operating activities                |            |            | (4,238,722 | )            |            |            | (2,360,854 | )
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|Cash flows from investing activities: |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      | Purchases of securities                                                               |                                                            |                                           | (173,426,992                                         | )          |            |            | (240,699,070 | )         
|                                      | Proceeds from sales of securities                                                     |                                                            |                                           | 187,993,483                                          |            |            |            | 240,860,163  |           
|                                      | Capital expenditures                                                                  |                                                            |                                           | (546,968                                             | )          |            |            | (179,953     | )         
|                                      | Purchases of long-term investments                                                    |                                                            |                                           | (49,000                                              | )          |            |            | (1,060,051   | )         
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      |                                                                                       |                                                            |                                           | Net cash provided by (used in) investing
	activities |            |            | 13,970,523 |              |            |            | (1,078,911 | )
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|Cash flows from financing activities: |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      | Purchase of common stock                                                              |                                                            |                                           | (6,048,662                                           | )          |            |            | (747,051     | )         
|                                      | Proceeds from stock options exercised                                                 |                                                            |                                           | 200,933                                              |            |            |            | 321,735      |           
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      |                                                                                       |                                                            |                                           | Net cash used in financing activities                |            |            | (5,847,729 | )            |            |            | (425,316   | )
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      | Net increase (decrease) in cash and cash
	equivalents                                 |                                                            |                                           | 3,884,072                                            |            |            |            | (3,865,081   | )         
|                                      | Cash and cash equivalents, beginning of period                                        |                                                            |                                           | 4,551,344                                            |            |            |            | 7,939,567    |           
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             
|                                      | Cash and cash equivalents, end of period                                              |                                                            | $                                         | 8,435,416                                            |            |            | $          | 4,074,486    |           
|                                      |                                                                                       |                                                            |                                           |                                                      |            |            |            |             

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##### Table of Contents



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 nine months ended
August 31, 2001 are not necessarily indicative of the
results to be expected for the subsequent quarter and 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 six 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 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), (3) delivery of pre-qualified
consumer data to our Corporate Customers as a result of
consumers responses to targeted questions and surveys
(e.g., receiving free gifts for your children), (4) delivery of
a sale or completed application for our Corporate Customers
products or services (e.g., a consumer who responds to a Traffix
e-mail promotion on behalf of a Corporate Customer by completing
an application on-line for a credit card or a term-life
insurance product), (5) generating revenue from any of the
foregoing categories by placing our Corporate Customers
offers on the media of third parties with whom we have a
marketing relationship on a revenue share basis, and
(6) 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

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


lottery winners) and all other variable costs
directly associated with completing the Companys
obligations relative to the revenue 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
August 31, 2001, the Companys accrued expenses
included approximately $540,000 of deferred revenue relating to
such advances; at November 30, 2000 deferred revenue
included in accrued expenses was approximately $692,000. With
respect to capitalization and amortization of marketing costs,
the Companys policy has been to expense, as a cost of
sale, database acquisition costs, and all other related
marketing costs, at the time the obligation or expense is
incurred. During the three months ended August 31, 2001,
the Company purchased a database for approximately $146,000.
Based on the Companys previous experience with such bulk
data acquisitions, it has been determined that a basic database
generates revenue for a minimum of three to nine months. Based
on this experience, the Company has capitalized the cost of this
database acquisition and is amortizing such acquisition over the
four-month period August 1, 2001 to November 30, 2001
on the straight-line basis. In the three months ended
August 31, 2001, the Company recognized approximately
$37,000 of such amortization. The unamortized balance of
approximately $109,000 at August 31, 2001 will be expensed
in the Companys fourth quarter ending November 30,
2001. The Company expects to continue to purchase databases in
bulk and, depending on the nature of the data content (e.g.,
whether the database is basic or has extensive depth of data
fields), will determine the appropriate amortization period to
be applied.

Revenues from the Companys off-line
customer acquisition services (which were inactive during the
three and nine month periods ended August 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 marketing premiums.
These costs are estimated and accrued, as a component of
marketing expense, at the time the associated revenues are
recognized. At August 31, 2001 and November 30, 2000,
accrued expenses included approximately $736,000 and $746,000 of
such costs, respectively. This estimation is adjusted by actual
amounts experienced in subsequent periods. As of August 31,
2001, the approximate $736,000 accrued expense is funded to the
extent of approximately $640,000 by an escrow account managed by
a major financial institution. The Company has incurred
deminimis customer redemption requests against the
accrued liability, and is pursuing recovery of the funds held in
escrow. Any escrow recovered will be recognized as other
non-operating income at the time of receipt.

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 refunds and credits
subsequently granted to customers (customer
chargebacks). Since the provision for customer chargebacks
was established prior to the periods in which chargebacks are
actually expended, the Companys revenues are adjusted in
later periods when the Companys incurred chargebacks vary
from the amounts previously estimated. See Subsequent Events
Note for additional disclosure relative to the LEC Billed
Product and Service segments net assets at August 31,
2001.

Transactions
with Major Customers

During the three and nine months ended
August 31, 2001, the Company had four customers in its
E-commerce segment who in combination accounted for
approximately 50.6% and 47.4% of consolidated net revenues
during the periods, respectively, and approximately 30.8% of
consolidated net accounts receivable as of August 31, 2001.
For the three months ended August 31, 2001, each of the
four customers referenced above had related net revenues that
exceeded 10% of the Companys consolidated net revenue for
such period. Of the

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


balance of the Companys customer base of
approximately 60 customers, no single customer had net revenues
that equaled, or exceeded, 10% of consolidated net revenues for
the three months ended August 31, 2001. The Company did not
conduct business with the above referenced 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 latter part of the month of September
2001, the Company was notified through a publicly issued press
release that MatchLogic, a subsidiary of Excite@Home
(Nasdaq:ATHMQ), was winding down its operations and anticipated
the completion of the closure by the end of December 2001.
MatchLogic was one of the Companys significant customers
in both the three and nine-month periods ended August 31,
2001. As of October 12, 2001 the Company collected the
MatchLogic trade accounts receivable balance from
August 31, 2001. The Company also billed and collected for
services rendered to MatchLogic for September 2001, as of
October 12, 2001. Currently, the Company does not
anticipate providing services to MatchLogic and correspondingly
does not anticipate the recording and collection of revenue from
such Company subsequent to September 30, 2001. See
Subsequent Event Note for additional disclosures relative to
this matter.

During the prior fiscal years three and
nine month periods ended August 31, 2000, the
Companys Off-line Customer Acquisition Service
segments primary marketing partner (Nasdaq:TALK) accounted
for approximately 47% and 21% of consolidated net revenues,
respectively; the three and nine months ended August 31,
2001 did not include revenue from such marketing partner. In the
fourth quarter of the fiscal year ended November 30, 2000,
this customer terminated the agreement and the Company has sued
such customer; the case is currently pending a decision before
the American Arbitration Association. The Company has not
recognized any income relative to the purported premature
termination, and if any monetary award is granted from this
legal proceeding and subsequently collected, the Company expects
to recognize such proceeds as other non-operating income at the
time of receipt.

Relative to a marketing agreement that the
Company had with another long distance carrier in a prior year,
the Company executed settlement, termination and release
agreements with such partner in the fiscal year ended
November 30, 2000. Under the termination agreement, certain
amounts were placed in escrow to secure the potential
indemnification 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 $640,000 at August 31, 2001 and $611,000 at
November 30, 2000. The Company is pursuing recovery of the
funds held in escrow. Any recovered escrow funds will be
recognized as other non-operating income at the time of receipt.
(See Transactions with Major Customers which follows
Managements Discussion and Analysis of Financial
Condition.)

Selling Agreements

The selling expenses portion of
SG&A has been separately identified in the Companys
Consolidated Statement of Income. This line item captures
traditional selling expenses such as selling salaries, travel
and entertainment. In addition, this line item includes costs
associated with the Companys program of promoting its
Corporate Customers offers on the media of the
Companys third party marketing partners (e.g., third party
websites and databases). Generally, the Company incurs these
expenses on a revenue-share basis whereby (a) the third
party marketing partners market an offer on behalf of the
Company, (b) the Company in turn is paid by its Corporate
Customer, and (c) then the Company pays each marketing
partner a percentage (the revenue share) of the gross revenue
actually generated from promoting the offer on such marketing
partners media. For the three and nine month periods
ending August 31, 2001, selling expenses were $663,549 and
$1,653,635, respectively, and for the three and nine month
periods ended August 31, 2000, selling expenses were
$590,100 and $793,541, respectively. These amounts are included
in the Companys

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


SG&A tables set forth in the section
Managements Discussion and Analysis of Financial Condition
and Results of Operations. As the Company expands its program of
marketing on third party media, the Company anticipates that
these selling expenses will continue to grow as a function of
gross revenue.

3.  Earnings Per Share

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

|                               |                                                                                |                    |  |                   |  |            |  |            |  |  |  |            |  |  |  |            | 
|------------------------------ | ------------------------------------------------------------------------------ | ------------------ |  | ----------------- |  | ---------- |  | ---------- |  |  |  | ---------- |  |  |  | ---------- | 
|                               |                                                                                |                    |  |                  
|                               |                                                                                | Three Months Ended |  | Nine Months Ended
|                               |                                                                                |                    |  |                  
|                               |                                                                                | August 31,         |  | August 31,        |  | August 31, |  | August 31,
|                               |                                                                                | 2001               |  | 2000              |  | 2001       |  | 2000      
|                               |                                                                                |                    |  |                   |  |            |  |           
|Denominator:                   |                                                                                |                    |  |                   |  |            |  |            |  |  |  |            |  |  |  |           
|                               | Denominator for basic earnings per
	share  weighted average shares            |                    |  | 13,966,939        |  |            |  | 14,851,353 |  |  |  | 14,497,515 |  |  |  | 14,821,463 | 
|Effect of dilutive securities: |                                                                                |                    |  |                   |  |            |  |            |  |  |  |            |  |  |  |           
|                               | Stock options                                                                  |                    |  | 762,536           |  |            |  | 585,279    |  |  |  |           |  |  |  | 1,002,697  | 
|                               |                                                                                |                    |  |                   |  |            |  |            |  |  |  |            |  |  |  |           
|                               | Denominator for diluted earnings per
	share  adjusted weighted average shares |                    |  | 14,729,475        |  |            |  | 15,436,632 |  |  |  | 14,497,515 |  |  |  | 15,824,160 | 
|                               |                                                                                |                    |  |                   |  |            |  |            |  |  |  |            |  |  |  |           

Options to purchase 881,500 and 721,896 shares of
common stock for the three months ended August 31, 2001 and
2000, respectively, and 858,613 and 413,033 for the nine months
ended August 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 the 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
nine 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 nine month periods
ended August 31, 2001. At November 30, 2000 and
February 28, 2001, full valuation allowances were taken
against the estimated deferred tax assets

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


attributable to the unrealized losses based on
the absence of other appreciated capital gain property. The
components of comprehensive income (loss) are presented
below:

|                                                                                                                                                                                |  |                    |           |                   |  |            |           |            |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ---------- | --------- | ---------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                |  |                    |           |                  
|                                                                                                                                                                                |  | Three Months Ended |           | Nine Months Ended
|                                                                                                                                                                                |  |                    |           |                  
|                                                                                                                                                                                |  | August 31,         |           | August 31,        |  | August 31, |           | August 31,
|                                                                                                                                                                                |  | 2001               |           | 2000              |  | 2001       |           | 2000      
|                                                                                                                                                                                |  |                    |           |                   |  |            |           |           
|Net income (loss)                                                                                                                                                               |  | $                  | 1,462,992 |                   |  | $          | 1,561,600 |            |  | $ | (1,292,383 | ) |  | $ | 4,630,167  |  
|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 $241,713, $-0- and
	$1,587,535, respectively |  |                    | 17,874    |                   |  |            | 362,570   |            |  |   | 241,150    |   |  |   | (2,380,882 | )
|Less: reclassification adjustment for loss
	realized in net income                                                                                                              |  |                    |          |                   |  |            |          |            |  |   | 4,190,207  |   |  |   |           |  
|Add: reclassification adjustment for gain
	realized in net income                                                                                                               |  |                    | (405,837  | )                 |  |            |          |            |  |   | (404,061   | ) |  |   |           |  
|                                                                                                                                                                                |  |                    |           |                   |  |            |           |            |  |   |            |   |  |   |            |  
|Comprehensive income                                                                                                                                                            |  | $                  | 1,075,029 |                   |  | $          | 1,924,170 |            |  | $ | 2,734,913  |   |  | $ | 2,249,285  |  
|                                                                                                                                                                                |  |                    |           |                   |  |            |           |            |  |   |            |   |  |   |            |  

5.  Advertising Expenses

Currently, the material portion of the
Companys advertising expense 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
(a) at the time of the e-mail transmission, (b) upon
receipt of the qualified customer acquisition data, and
(c) 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-mailing costs, 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, on-line media or prepayments for emailing costs, in
advance of the fulfillment of such obligations, 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 August 31, 2001 and 2000
were approximately $2,150,000 and $1,780,000, respectively, and
the nine months ended August 31, 2001 and 2000 were
approximately $4,460,000 and $3,077,000, respectively.

Included in prepaid expenses and other current
assets at August 31, 2001 and November 30, 2000, were
approximately $863,000 and $655,000, respectively relating to
the unamortized portion of prepayments related to a marketing
agreement, and an email delivery contract.

Included in unamortized marketing costs at
August 31, 2001 was $600,000 in prepaid email delivery
costs, with such services to be provided by MatchLogic (a
subsidiary of Nasdaq:ATHMQ). The governing agreement was
originally for a term of one year, covering the period
June 1, 2001 to May 31, 2002. The original contract
email delivery prepayment of $800,000 was made in May 2001. The
Company has amortized $200,000 (25% of the initial balance over
the expired portion of the contract term) during the three
months ended August 31, 2001. Such amortization expense
exceeded the actual costs incurred based on actual fulfillment
during the three months ended August 31, 2001. Based on
notification through a publicly

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


issued press release in the latter part of
September 2001, Excite@Home (Nasdaq:ATHMQ) intends to
wind down MatchLogics operations and anticipates the
completion of the closure by December 31, 2001, the Company
has reset its amortization period for the unamortized portion of
the prepaid marketing agreement. As such, the remaining balance
of $600,000 at August 31, 2001 will be amortized ratably
over the four-month period of September 1, 2001 to
December 31, 2001, or more rapidly if MatchLogic fulfills
its delivery commitment at a rate that exceeds the anticipated
straight-line amortization. The Company is actively pursuing
alternatives with MatchLogic, and its parent ATHMQ (e.g., refund
of prepayment, database acquisition, other marketing benefits,
or legal action) to replace, or preserve, the terms of the
original agreement shortened by MatchLogics closure. See
Subsequent Event Note for additional disclosure relative to this
matter.

6.  Marketable Securities and Long Term
Investments, at Cost

During the nine months ended August 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 nine months ended August 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 nine month period ended
August 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 nine months ended
August 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) intended 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. During the three months ended August 31, 2001
the Company liquidated its entire position in SKYM in the open
market at prices ranging between $2.83 and $2.90 per share and
correspondingly recorded an approximate capital gain of $180,000
during such period.

On June 4, 2001, United New Ventures, an
affiliate of UAL Corp. (NYSE:UAL) announced that it intended to
acquire all of the common stock of MYPT in a cash tender offer
of $2.60 a share. The Company has tendered all of its MYPT
shares held during the three months ended August 31, 2001
and correspondingly recorded an approximate $224,000 capital
gain during such period. This tender offer price represented an
approximate 138% premium over the MYPT post permanent
impairment charge share cost basis and an approximate 89%
discount to the MYPT cost basis prior to the permanent
impairment charge. 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 nine months ended August 31, 2001. During the prior
quarters three months ended May 31, 2001 this entity
effectively wound down operations and ceased doing business.

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


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 nine months ended
August 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 nine months ended August 31, 2000.

During the nine months ended August 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 nine months
ended August 31, 2000.

7.  Subsequent Events

Excite@Home (Nasdaq:ATHMQ) announced in a
September 2001 press release that it intends to wind down its
MatchLogic subsidiarys operations, with the anticipation
of completing the closure by December 31, 2001. On
September 28, 2001, Excite@Home and MatchLogic filed for
bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. The Company had entered into marketing, data
sale and email delivery agreements with MatchLogic, with such
agreements having an original term covering the period
June 1, 2001 to May 31, 2002. The email delivery
contract, pursuant to which MatchLogic was to email the
Companys offers to MatchLogics databases, called for
a prepayment of $800,000. Such payment was made in May 2001. The
Company has reset its amortization period for the unamortized
portion of the prepaid email delivery agreement in terms of the
anticipated closure of MatchLogic. As such, the remaining
balance of $600,000 at August 31, 2001 will be amortized
ratably over the four-month period of September 1, 2001 to
December 31, 2001, or more rapidly if MatchLogic fulfills
its delivery commitment at a rate that exceeds the anticipated
straight-line amortization.

Additionally, MatchLogic was one of the
Companys significant customers in both the three and
nine-month periods ended August 31, 2001. As of
October 12, 2001, the Company had collected the MatchLogic
trade accounts receivable balance from August 31, 2001. The
Company also billed and collected for services rendered to
MatchLogic for September 2001. The original marketing agreement
that related to this revenue stream included a minimum sale
commitment by MatchLogic, under which MatchLogic guaranteed to
purchase $825,000, on a quarterly basis, of data from the
Company.

Currently, the Company does not anticipate
providing data to MatchLogic and, correspondingly, does not
anticipate the recording and collection of revenue attributable
to such sales commitment subsequent to September 30, 2001.
The Company intends to use all resources at its disposal to
replace, or preserve, the terms of the original agreements,
shortened by MatchLogics closure, including seeking a
refund of payment,

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NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


database acquisition or rental, legal action or
other marketing arrangements with MatchLogics parent,
Excite@Home.

On October 1, 2001 the Company filed an
action in the United States District Court, Southern District of
New York entitled Traffix, Inc. f/k/a Quintel Entertainment,
Inc. v. Federal Transtel, Inc.(FTT) and
Daniel Nishrie, Docket No. 01 Civ. 8807 (the
Action). Federal Transtel (FTT) provided and
continues to provide billing and collection services for the
Company. Such services currently relate to a declining base of
voice mail customers acquired in a previous fiscal year, with
the applicable revenue being included in the Companys LEC
Billed Product and Service segment. During the three and nine
month periods ended August 31, 2001, $201,368 and $838,387,
or 2.7% and 4.5%, of net revenue, respectively, are reported in
the Companys filing relative to FTTs voice mail
billing and collection services.

In the Action, the Company seeks to recover
approximately $2.1 million relative to FTTs voice
mail billing and collection services. This amount is included in
the Companys balance sheet caption Accounts
receivable trade, net of allowance for doubtful accounts,
with such amount being offset by $1,169,108, which is the
significant portion of the Companys current liability
balance sheet caption Reserve for customer
chargebacks. The Company believes that the amounts claimed
in the Action are collectible; therefore no allowance for
uncollectibility was taken against such asset at August 31,
2001. See Liquidity and Capital Resources in the
Managements Discussion and Analysis of Financial Condition
and Results of Operations section for a discussion of how the
above impacts the analysis of the Companys Days
Sales Outstanding.

In a related action, Quintel Communications,
Inc. v. Federal Transtel, Inc., Southern District of New
York, Docket No. 00 Civ. 3803, the Company brought suit in a
prior fiscal year to recover approximately $1 million the
Company believed were wrongfully withheld by FTT in connection
with FTTs billing and collection services for a membership
club that the Company ceased operating in June 1999. The
Company has been granted summary judgment on liability, and a
hearing to determine the exact amount of damages to be awarded
to the Company is currently scheduled for October 23 and
24, 2001. At August 31, 2001, the Company has not recorded
a receivable associated with this related action, it had
expensed the amounts involved in a prior year; therefore the
Company is treating this action as a gain
contingency, with any potential recovery received by being
reflected as other non-operating income at the time of receipt.

8.  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 generated 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
nine month periods ended August 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 are
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 of each segment based on many factors,
with the primary criteria being (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. The organization shares a common

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


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

|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |           |            | 
|---------------- | -------------------------------------- | ------------------- | - | ----------------- | --------- | ---------- | - | ---------- | --------- |  | - | ---------- | ---------- |  | - | --------- | ---------- | 
|                 |                                        |                     |   |                  
|                 |                                        | Three Months Ended  |   | Nine Months Ended
|                 |                                        |                     |   |                  
|                 |                                        | August 31,          |   | August 31,        |           | August 31, |   | August 31,
|                 |                                        | 2001                |   | 2000              |           | 2001       |   | 2000      
|                 |                                        |                     |   |                   |           |            |   |           
|For the periods: |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          
|                 | E-commerce                             |                     | $ | 7,203,452         |           |            | $ | 3,320,198  |           |  | $ | 16,834,124 |            |  | $ | 4,533,876 |           
|                 | Off-line Customer Acquisition Services |                     |   |                   |           |            |   | 2,335,333  |           |  |   |           |            |  |   | 7,015,056 |           
|                 | LEC Billed Products and Services       |                     |   | 201,368           |           |            |   | 2,206,855  |           |  |   | 1,324,793  |            |  |   | 6,212,892 |           
|                 | Corporate and other                    |                     |   |                  |           |            |   |           |           |  |   |           |            |  |   | 20,072    |           
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          
|                 |                                        | Consolidated totals |   | $                 | 7,404,820 |            |   | $          | 7,862,386 |  |   | $          | 18,158,917 |  |   | $         | 17,781,896 | 
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          

Segment Data  Gross Profit

|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |           |            | 
|---------------- | -------------------------------------- | ------------------- | - | ----------------- | --------- | ---------- | - | ---------- | --------- |  | - | ---------- | ---------- |  | - | --------- | ---------- | 
|                 |                                        |                     |   |                  
|                 |                                        | Three Months Ended  |   | Nine Months Ended
|                 |                                        |                     |   |                  
|                 |                                        | August 31,          |   | August 31,        |           | August 31, |   | August 31,
|                 |                                        | 2001                |   | 2000              |           | 2001       |   | 2000      
|                 |                                        |                     |   |                   |           |            |   |           
|For the periods: |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          
|                 | E-commerce                             |                     | $ | 4,965,555         |           |            | $ | 1,917,296  |           |  | $ | 12,111,583 |            |  | $ | 1,049,880 |           
|                 | Off-line Customer Acquisition Services |                     |   | 41                |           |            |   | 1,537,345  |           |  |   | (29,262    | )          |  |   | 6,776,540 |           
|                 | LEC Billed Products and Services       |                     |   | 157,509           |           |            |   | 2,025,618  |           |  |   | 1,169,279  |            |  |   | 5,890,196 |           
|                 | Corporate and other                    |                     |   |                  |           |            |   |           |           |  |   |           |            |  |   | 20,072    |           
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          
|                 |                                        | Consolidated totals |   | $                 | 5,123,105 |            |   | $          | 5,480,259 |  |   | $          | 13,251,600 |  |   | $         | 13,736,688 | 
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |            |  |   |          

Segment Data  EBITDA

|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |           |  |   |            |           | 
|---------------- | -------------------------------------- | ------------------- | - | ----------------- | --------- | ---------- | - | ---------- | --------- |  | - | ---------- | --------- |  | - | ---------- | --------- | 
|                 |                                        |                     |   |                  
|                 |                                        | Three Months Ended  |   | Nine Months Ended
|                 |                                        |                     |   |                  
|                 |                                        | August 31,          |   | August 31,        |           | August 31, |   | August 31,
|                 |                                        | 2001                |   | 2000              |           | 2001       |   | 2000      
|                 |                                        |                     |   |                   |           |            |   |           
|For the periods: |                                        |                     |   |                   |           |            |   |            |           |  |   |            |           |  |   |           
|                 | E-commerce                             |                     | $ | 2,798,129         |           |            | $ | 191,956    |           |  | $ | 5,920,916  |           |  | $ | (3,182,186 | )        
|                 | Off-line Customer Acquisition Services |                     |   | (62,212           | )         |            |   | 1,297,375  |           |  |   | (300,161   | )         |  |   | 6,184,482  |          
|                 | LEC Billed Products and Services       |                     |   | 100,279           |           |            |   | 1,807,889  |           |  |   | 934,260    |           |  |   | 5,180,985  |          
|                 | Corporate and other                    |                     |   | (1,199,295        | )         |            |   | (1,435,113 | )         |  |   | (2,761,370 | )         |  |   | (2,995,298 | )        
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |           |  |   |           
|                 |                                        | Consolidated totals |   | $                 | 1,636,901 |            |   | $          | 1,862,107 |  |   | $          | 3,793,645 |  |   | $          | 5,187,983 | 
|                 |                                        |                     |   |                   |           |            |   |            |           |  |   |            |           |  |   |           

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TRAFFIX, INC. AND SUBSIDIARIES


NOTES TO FINANCIAL STATEMENTS 
(Continued)

(Unaudited)


Segment Data  Depreciation and
Amortization

|                 |                                        |                     |   |                   |         |            |   |            |        |  |   |         |         |  |   |         |         | 
|---------------- | -------------------------------------- | ------------------- | - | ----------------- | ------- | ---------- | - | ---------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                 |                                        |                     |   |                  
|                 |                                        | Three Months Ended  |   | Nine Months Ended
|                 |                                        |                     |   |                  
|                 |                                        | August 31,          |   | August 31,        |         | August 31, |   | August 31,
|                 |                                        | 2001                |   | 2000              |         | 2001       |   | 2000      
|                 |                                        |                     |   |                   |         |            |   |           
|For the periods: |                                        |                     |   |                   |         |            |   |            |        |  |   |         |         |  |   |        
|                 | E-commerce                             |                     | $ | 74,495            |         |            | $ | 7,452      |        |  | $ | 100,432 |         |  | $ | 63,114  |        
|                 | Off-line Customer Acquisition Services |                     |   |                  |         |            |   |           |        |  |   |        |         |  |   |        |        
|                 | LEC Billed Products and Services       |                     |   |                  |         |            |   |           |        |  |   |        |         |  |   |        |        
|                 | Corporate and other                    |                     |   | 57,524            |         |            |   | 73,717     |        |  |   | 172,484 |         |  |   | 165,490 |        
|                 |                                        |                     |   |                   |         |            |   |            |        |  |   |         |         |  |   |        
|                 |                                        | Consolidated totals |   | $                 | 132,019 |            |   | $          | 81,169 |  |   | $       | 272,916 |  |   | $       | 228,604 | 
|                 |                                        |                     |   |                   |         |            |   |            |        |  |   |         |         |  |   |        

9.  Litigation

Class Action

On May 31, 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 District Court
held a settlement hearing on September 21, 2001, and on
that date issued an Order and Final Judgment approving the
settlement and dismissing the Class Action with prejudice.

Philip Michael Thomas

In October 2001, in an arbitration before
the American Arbitration Association in New York entitled
Philip Michael Thomas; PMT Productions Inc.; Kaye Porter
Management; RMI Entertainment, Inc.; Millennium Telemedia, Inc.,
Claimants v. New Lauderdale, LLC d/b/a Calling Card Co.; Psychic
Readers Network, Inc. d/b/a PRN Telecommunications; and Quintel
Entertainment, Inc. (No. 131400004900), the claimants
quantified the aggregate amount of their claims as being for
$8,573,339, with interest of $3,576,264. The claims arise from
agreements among the parties pursuant to which the respondents
were permitted to use claimants name and likeness in
connection with certain programs and membership clubs and
pursuant to which Thomas was to make certain infomercials. The
claimants allege that they were not paid the appropriate
percentage of revenues allegedly due them and have asserted
claims for fraud and deceit, constructive fraud, civil
conspiracy, breach of constructive trust, quantum meruit/unjust
enrichment, and unauthorized publication of Thomas name
and likeness. Hearings on the arbitration have been adjourned on
a number of occasions and are currently scheduled for late
February and early March of 2002. The Company believes that
there is no merit to the claims and intends to vigorously defend
against them.

Group
Lotto

On or about May 9, 2001, Mavies Wingler
commenced an action against Group Lotto, Inc. (GLI),
a wholly owned subsidiary of the Company in the Circuit Court of
Logan County, West Virginia. Ms. Wingler claims to have
picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States
District Court, Southern District of West Virginia, and is
entitled Wingler v. GroupLotto, Inc., Docket Number
2:01  CV  518. The action is in the
initial stages of discovery. The Company does not believe that
there is any merit to Ms. Winglers claim, and intends
vigorously to defend against it. GLI has a contract of
indemnification with SCA Promotions, Inc. (SCA) to
be indemnified for prizes paid out to qualified winners.

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##### Table of Contents






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 $7,203,452 and $16,834,124 during the three and
nine month periods ended August 31, 2001, respectively,
from approximately $3,320,198 and $4,533,876 during the
respective three and nine month periods ended August 31,
2000. During the three and nine month periods ended
August 31, 2001, the Company also continued to generate
residual revenue from one of its historical income sources, LEC
Billed products and services ($201,368 and $1,324,793,
respectively). A significant portion of the LEC Billed products
and services revenue ($486,406) was earned during 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
ARS Transaction Agreements). The ARS 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. The Company
no longer realizes revenue from the ARS Transaction Agreements
in accordance with their January 16, 2001 expiration date.

Historically, the Company was primarily engaged
in the direct marketing of various telecommunications products
and services(LEC Billed Products and Services Segment). It 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, its
on-line generated databases and the on-line media of other
websites to generate revenue from direct marketing related
activities. Such on-line databases (the Databases),
both proprietary and partnered, contain information (such as
postal addresses, phone numbers and birth dates) on over
35 million on-line consumers. The Company obtains
permission to market to all of the consumers in the Databases.

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 Customers promotion or product. This
activity forms the GroupLotto Site net revenue
subset of the Companys E-commerce segment. Second, the
Company uses the Databases to send, via e-mail, offers and

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##### Table of Contents



promotions to these individuals on behalf of its
Corporate Customers. These offers and promotions include a
variety of actions, such as affecting sales, generating targeted
leads by answering questions and driving calls to inbound
telemarketing centers. 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 from sales or
leads generated for these offers (cost-per-acquisition or
cpa), and, to a lesser extent, 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) the Databases, sells copies of specific segments
of the Databases (such as for enhancements), or sells data that
was created on a customized basis for a Corporate Customer , 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 97%, or $7.2 million, of the
Companys net revenues during the three months ended
August 31, 2001, when compared to approximately 42%, or
$3.3 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 93%, or
$16.8 million, of the Companys net revenues during
the nine months ended August 31, 2001, when compared to
approximately 26%, or $4.5 million, of the Companys
net revenue during the comparable prior years nine month
period. During the separate three month periods ended
August 31, 2000, November 30, 2000, February 28,
2001 and May 31, 2001, the Companys E-commerce
segment accounted for the following percentages of net revenues
(%), and net revenues ($), respectively: 42%, or
$3.3 million; 66%, or $5.4 million (which included
approximately $3.4 million in revenue earned from Talk.com,
see Part II, Other Information, Item 1. Legal
Proceedings); 84%, or $4.1 million; and 95%, or
$5.5 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 nine 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 nine months ended August 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 nine months ended August 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 nine month period ended
August 31, 2001, with the Companys book value being
negatively impacted to the extent of the loss at the time of the
write-down. During the three months ended August 31, 2001,
the Company recognized gains of approximately $406,000, included
in Other Income, from the disposition of the
marketable securities portion of these investments.

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##### Table of Contents



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 (e.g. outbound telemarketing
for long distance customer acquisition programs) for which no
revenue was generated during the three month and nine month
periods ended August 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 of each segment
based on many factors, with the primary criteria being
(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. 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 nine-month periods ended August 31, 2001 and
August 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.

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##### Table of Contents



Three Months Ended August 31, 2001 and
August 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
August 31, 2001 and August 31, 2000, are detailed in
the following tables:

Segment Data  Net revenues, by segment
component

|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|-------------------------------------------------- |  | ------------------ | --------- | ---------- |  | -------- | --------- | -------- |  | - | ---------- | - |  |  | ------ | -
|                                                   |  |                    |           |            |  |         
|                                                   |  | Three Months Ended |           |            |  |         
|                                                   |  |                    |           | Change     |  | Change  
|                                                   |  | August 31,         |           | August 31, |  | Inc(Dec) |           | Inc(Dec)
|                                                   |  | 2001               |           | 2000       |  | $$$      |           | %%%     
|                                                   |  |                    |           |            |  |          |           |         
|E-Commerce                                         |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|GroupLotto Site                                    |  | $                  | 2,449,358 |            |  | $        | 1,675,008 |          |  | $ | 774,350    |   |  |  | 46     | %
|E-mail                                             |  |                    | 4,335,949 |            |  |          | 1,641,186 |          |  |   | 2,694,763  |   |  |  | 164    | %
|Data sales                                         |  |                    | 418,145   |            |  |          | 4,004     |          |  |   | 414,141    |   |  |  | 10,343 | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Total E-commerce                                   |  |                    | 7,203,452 |            |  |          | 3,320,198 |          |  |   | 3,883,254  |   |  |  | 117    | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Off-line Customer Acquisition Services
	components |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Long distance customer acquisitions                |  |                    |          |            |  |          | 2,334,882 |          |  |   | (2,334,882 | ) |  |  | -100   | %
|Long distance usage commissions                    |  |                    |          |            |  |          |          |          |  |   |           |   |  |  | 0      | %
|Other customer acquisition services                |  |                    |          |            |  |          | 451       |          |  |   | (451       | ) |  |  | -100   | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Total Off-line Customer Acquisition Services       |  |                    |          |            |  |          | 2,335,333 |          |  |   | (2,335,333 | ) |  |  | -100   | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|LEC Billed Products and Services
	components       |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|900 Entertainment Service termination
	royalties |  |                    |          |            |  |          | 932,058   |          |  |   | (932,058   | ) |  |  | -100   | %
|Club 900 Products                                  |  |                    |          |            |  |          | 308,061   |          |  |   | (308,061   | ) |  |  | -100   | %
|Enhanced Services, principally voice mail          |  |                    | 201,368   |            |  |          | 966,736   |          |  |   | (765,368   | ) |  |  | -79    | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Total LEC Billed Products and Services             |  |                    | 201,368   |            |  |          | 2,206,855 |          |  |   | (2,005,487 | ) |  |  | -91    | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Corporate and other components                     |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Miscellaneous products, list revenue and other     |  |                    |          |            |  |          |          |          |  |   |           |   |  |  | 0      | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  
|Total Consolidated Net Revenue                     |  | $                  | 7,404,820 |            |  | $        | 7,862,386 |          |  | $ | (457,566   | ) |  |  | -6     | %
|                                                   |  |                    |           |            |  |          |           |          |  |   |            |   |  |  |        |  

Net Revenue decreased $457,566, or 6%, to
$7,404,820 for the three months ended August 31, 2001 from
$7,862,386 in the comparable prior year period. The primary
components of this decrease were attributable to decreases in
the Companys Off-line Customer Acquisition services
segment ($2.34 million) and LEC Billed Products and
Services segment ($2.01 million). During the three months
ended August 31, 2001, the aforementioned segment revenue
decreases were offset by increases of approximately
$3.9 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,
Service Bureaus and Local Exchange Carriers, and
Subsequent Events following the Liquidity and
Capital Resources section for a detailed discussion of the
decrease as it relates to the Companys comparative and
anticipated future revenues.

The Companys cost of revenues during the
three months ended August 31, 2001 and August 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 (expense) from

18



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##### Table of Contents



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 August 31, 2001, such
(expense) included in Other non-operating
income was approximately ($4,000), compared to
approximately $539,230 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 three month periods ended
August 31, 2001 and August 31, 2000 are presented in
the following tables:



| |                                                      
| | -----------------------------------------------------
| | Consolidated Cost of Sales, by Segment, by
	Component

|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |      |    |  
|----------------------------------------------- | ---------------------------------------- | ------------------- | --------- | ---------- | --------- | -------- | --------- | --------- | --------- | - | ---------- | --------- | -------- | - | ---- | ---- | -- | -
|                                                |                                          |                     |           |            |           |         
|                                                |                                          | For the             |           |            |           |         
|                                                |                                          | Three Months Ended  |           |            |           |         
|                                                |                                          |                     |           | Change     |           | Change  
|                                                |                                          | August 31,          |           | August 31, |           | Inc(Dec) |           | Inc(Dec) 
|                                                |                                          | 2001                |           | 2000       |           | $$$      |           | %%%      
|                                                |                                          |                     |           |            |           |          |           |          
|E-commerce                                      |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Email marketing and related delivery costs      |                                          | $                   | 1,142,357 |            |           | $        | 285,571   |           |           | $ | 856,786    |           |          |   | 300  | %   
|Customer procurement cost and fulfillment costs |                                          |                     | 966,658   |            |           |          | 653,538   |           |           |   | 313,120    |           |          |   | 48   | %   
|Promotional and creative development costs      |                                          |                     | 39,354    |            |           |          | (69,417   | )         |           |   | 108,771    |           |          |   | -157 | %   
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                | Total E-commerce Advertising             |                     | $         | 2,148,369  |           |          | $         | 869,692   |           |   | $          | 1,278,677 |          |   |      | 147  | % 
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                               
|Service Bureau fees                             |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Contingent based prize indemnification costs    |                                          | $                   | 89,528    |            |           | $        | 542,757   |           |           |   | (453,229   | )         |          |   | -84  | %   
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                | Total E-commerce Cost of Sales           |                     | $         | 2,237,897  |           |          | $         | 1,412,449 |           |   | $          | 825,448   |          |   |      | 58   | % 
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                               
|Off-line Customer Acquisition
	Services         |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Telemarketing and related costs                 |                                          | $                   | (41       | )          |           | $        | 1,769,424 |           |           | $ | (1,769,465 | )         |          |   | -100 | %   
|Premium fulfillment costs                       |                                          |                     |          |            |           |          | (887,337  | )         |           |   | 887,337    |           |          |   | -100 | %   
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                | Total Off-line Acquisition Cost of Sales |                     | $         | (41        | )         |          | $         | 882,087   |           |   | $          | (882,128  | )        |   |      | -100 | % 
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                               
|LEC Billed Products and Services                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Telemarketing and related costs                 |                                          | $                   |          |            |           | $        | 27,820    |           |           | $ | (27,820    | )         |          |   | -100 | %   
|Premium fulfillment costs                       |                                          |                     |          |            |           |          | 258       |           |           |   | (258       | )         |          |   | -100 | %   
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                | Total LEC Billed Advertising             |                     | $         |           |           |          | $         | 28,078    |           |   | $          | (28,078   | )        |   |      | -100 | % 
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                               
|Service Bureau fees                             |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|Billing and collection fees                     |                                          | $                   | 43,859    |            |           | $        | 59,513    |           |           |   | (15,654    | )         |          |   | -26  | %   
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                | Total LEC Billed Cost of Sales           |                     | $         | 43,859     |           |          | $         | 87,591    |           |   | $          | (43,732   | )        |   |      | -50  | % 
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     
|                                                |                                          | Total Cost of Sales |           | $          | 2,281,715 |          |           | $         | 2,382,127 |   |            | $         | (100,412 | ) |      |      | -4 | %
|                                                |                                          |                     |           |            |           |          |           |           |           |   |            |           |          |   |      |     

Cost of sales decreased ($100,412), or (4)%, to
$2,281,715 for the three months ended August 31, 2001 from
$2,382,127 in the comparable prior year period. The decrease is
the result of two offsetting factors. The Companys legacy
business segments (e.g., Off-line Customer Acquisition Services
and LEC Billed Products and Services) were primarily inactive,
resulting in virtually no cost of sales during the three months
ended August 31, 2001. This segment inactivity was
attributable to a cost of sales reduction of approximately
$926,000 during the three months ended August 31, 2001 when
compared to the prior years comparable period. This
decrease in legacy business related cost of sales were more than
offset by increases in the cost of sales generated by the
Companys E-commerce segment due to the growth in that
segments sales. During the three months ended
August 31, 2001, the cost of sales from the Companys
E-commerce segment increased

19



---



##### Table of Contents



by $825,448, or 58%, to $2,237,897, from
$1,412,449 during the prior years comparable period. This
increase was directly attributable to the Companys
increased marketing efforts, with such increased expenditure
benefit being reflected in an E-commerce segment net revenue
increase of approximately $3.9 million, or 117%, when
compared to the net revenues earned in the prior years
comparable quarter. Within the cost components of the E-commerce
segment, the Company recognized increases in email marketing
costs ($856,786/300%) and customer procurement and fulfillment
costs ($313,120/48%) when compared to the prior years
comparable quarter. Nevertheless, the Companys
consummation of agreements with vendors, as well as what
Management believes to be the Companys ability to exercise
improved marketing strategies to take advantage of market
conditions and correspondingly reduce the unitary cost of
customer data acquired, the Company was able to reduce data
costs on a unitary basis, with such savings enhancing gross
profit.


Within the E-commerce segment, the Company
recognized a decrease in the cost to provide for liability
indemnification related to potential winners playing the free
online lottery offered by GroupLotto.com. This decrease in
indemnification costs amounted to $453,229, or 84%, and was the
result of the Company restructuring the prize levels for
GroupLotto.com game players. The restructuring process had a
negligible effect on site visitation structure, and as a result
yielded a significant increase to the Companys gross
profit and income from operations.

The Companys gross profit for the three
months ended August 31, 2001 was $5,123,105, or 69.2% of
net revenues for such period. During the prior years
comparable period, the Companys gross profit was
$5,480,259, or 69.7% of net revenues for that period. During the
three months ended August 31, 2000, net revenues included
approximately $2.2 million from the Companys legacy
operations, specifically its LEC Billed Product and Services
legacy segment. Such $2.2 million in revenue included
approximately $932,000 in non-compete royalty income, which had
a 100% gross margin due to the absence of explicit costs to
generate such revenue. Additionally, included in this
$2.2 million was approximately $1.3 million in other
LEC net revenue, compared to approximately $201,000 during the
three months ended August 31, 2001. This revenue relates to
an attriting base of voice mail customers that were acquired in
fiscal 1998. The only costs associated with this revenue is the
billing and collection costs incurred in the processing of the
billing records. After adjusting the prior years gross
profit to give effect to the proforma elimination of the above
mentioned higher gross profit legacy segment activity, the
proforma comparable three month, August 31, 2000, gross
profit percentage would have approximated 59.4% compared with
the current quarters reported 69.2%.

During the three months ended August 31,
2001, the Company e-mailed approximately 1.1 billion
promotional pieces compared to approximately 22 million
promotional pieces being mailed in the prior years
comparable period. The Companys subsidiary,
GroupLotto.com, acquired approximately 12.8 million members in
its database, including approximately 1 million new
registered players, during the three months ended
August 31, 2001, compared to approximately 3.7 million
members acquired, including approximately 442,000 new registered
players, in the prior years comparable period.

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, (vi) marketing partner profit
participation commissions and (vii) all other general and
miscellaneous corporate expense items.

20



---



##### Table of Contents



The Companys SG&A expenses for the
three months ended August 31, 2001 and August 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

|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|----------------------------------------------- |  | ---------------- | --------- | ---------- |  | -------- | --------- | -------- |  | - | -------- | - |  |  | ---- | -
|                                                |  |                  |           |            |  |         
|                                                |  | For the periods: |           |            |  |         
|                                                |  |                  |           | Change     |  | Change  
|                                                |  | August 31,       |           | August 31, |  | Inc(Dec) |           | Inc(Dec)
|                                                |  | 2001             |           | 2000       |  | $$$      |           | %%%     
|                                                |  |                  |           |            |  |          |           |         
|E-commerce                                      |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                | 812,396   |            |  | $        | 326,909   |          |  | $ | 485,487  |   |  |  | 149  | %
|Professional fees                               |  |                  | 309,413   |            |  |          | 59,411    |          |  |   | 250,002  |   |  |  | 421  | %
|Insurance costs                                 |  |                  | 148,888   |            |  |          | 42,810    |          |  |   | 106,078  |   |  |  | 248  | %
|Occupancy and equipment costs                   |  |                  | 65,125    |            |  |          | 22,927    |          |  |   | 42,198   |   |  |  | 184  | %
|Site development, maintenance and modifications |  |                  | 317,845   |            |  |          | 664,079   |          |  |   | (346,234 | ) |  |  | -52  | %
|All other corporate level expense               |  |                  | 588,254   |            |  |          | 645,320   |          |  |   | (57,066  | ) |  |  | -9   | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL SG&A  E-commerce segment                 |  | $                | 2,241,921 |            |  | $        | 1,761,456 |          |  | $ | 480,465  |   |  |  | 27   | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Off-line Customer Acquisition
	services         |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                | 36,758    |            |  | $        | 105,128   |          |  | $ | (68,370  | ) |  |  | -65  | %
|Professional fees                               |  |                  |          |            |  |          | (1,750    | )        |  |   | 1,750    |   |  |  | -100 | %
|Insurance costs                                 |  |                  | 8,499     |            |  |          | 42,813    |          |  |   | (34,314  | ) |  |  | -80  | %
|Occupancy and equipment costs                   |  |                  | 7,179     |            |  |          | 22,925    |          |  |   | (15,746  | ) |  |  | -69  | %
|All other corporate level expense               |  |                  | 9,817     |            |  |          | 46,897    |          |  |   | (37,080  | ) |  |  | -79  | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL SG&A  Off-line segment                   |  | $                | 62,253    |            |  | $        | 216,013   |          |  | $ | (153,760 | ) |  |  | -71  | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|LEC Billed products and services                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                | 36,602    |            |  | $        | 105,126   |          |  | $ | (68,524  | ) |  |  | -65  | %
|Professional fees                               |  |                  |          |            |  |          | 3,895     |          |  |   | (3,895   | ) |  |  | -100 | %
|Insurance costs                                 |  |                  | 8,499     |            |  |          | 42,818    |          |  |   | (34,319  | ) |  |  | -80  | %
|Occupancy and equipment costs                   |  |                  | 7,179     |            |  |          | 22,929    |          |  |   | (15,750  | ) |  |  | -69  | %
|All other corporate level expense               |  |                  | 4,950     |            |  |          | 19,009    |          |  |   | (14,059  | ) |  |  | -74  | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL SG&A  LEC segment                        |  | $                | 57,230    |            |  | $        | 193,776   |          |  | $ | (136,546 | ) |  |  | -70  | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Corporate and other                             |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Compensation costs and related expenses         |  | $                | 669,738   |            |  | $        | 838,467   |          |  | $ | (168,729 | ) |  |  | -20  | %
|Professional fees                               |  |                  | 397,654   |            |  |          | 395,811   |          |  |   | 1,843    |   |  |  | 0    | %
|Insurance costs                                 |  |                  | 916       |            |  |          |          |          |  |   | 916      |   |  |  | 100  | %
|Occupancy and equipment costs                   |  |                  |          |            |  |          |          |          |  |   |         |   |  |  |     |  
|All other corporate level expense               |  |                  | 188,511   |            |  |          | 143,499   |          |  |   | 45,012   |   |  |  | 31   | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|TOTAL SG&A  Corporate and other                |  | $                | 1,256,819 |            |  | $        | 1,377,777 |          |  | $ | (120,958 | ) |  |  | -9   | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  
|Consolidated Totals                             |  | $                | 3,618,223 |            |  | $        | 3,549,022 |          |  | $ | 69,201   |   |  |  | 2    | %
|                                                |  |                  |           |            |  |          |           |          |  |   |          |   |  |  |      |  

SG&A expenses increased $69,201, or 2%, to
$3,618,223 for the three months ended August 31, 2001 from
$3,549,022 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. In terms of percentage
relationships, the Companys net revenue from its
E-commerce segment grew 117%, or approximately $3.9 million
compared to the prior years comparable quarter; however,
the E-commerce segments corresponding SG&A expenses
increased by only 27%, or approximately $480,465 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
August 31, 2001.

21



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##### Table of Contents



The selling expenses portion of
SG&A has been separately identified in the Companys
Consolidated Statement of Income. This line item captures
traditional selling expenses such as selling salaries, travel
and entertainment. In addition, this line item includes costs
associated with the Companys program of promoting its
Corporate Customers offers on the media of the
Companys third party marketing partners (e.g., third party
websites and databases). Generally, the Company incurs these
expenses on a revenue-share basis whereby (a) the third
party marketing partners market an offer on behalf of the
Company, (b) the Company in turn is paid by its Corporate
Customer, and (c) then the Company pays each marketing
partner a percentage (the revenue share) of the gross revenue
actually generated from promoting the offer on such marketing
partners media. For the three month periods ended
August 31, 2001 and August 31, 2000, selling expenses
were $663,549 and $590,100 respectively. These amounts are
included in the Companys SG&A tables above. As the
Company expands its program of marketing on third party media,
the Company anticipates that these selling expenses will
continue to grow as a function of gross revenue.

The Companys components of Other
income (expense) for the three months ended
August 31, 2001 and August 31, 2000 are presented
below:

Consolidated
Other Income (Expense)

|                                                     |                                            |                    |         |            |   |          |          |          |  |   |          |          |   |  |      |      |  
|---------------------------------------------------- | ------------------------------------------ | ------------------ | ------- | ---------- | - | -------- | -------- | -------- |  | - | -------- | -------- | - |  | ---- | ---- | -
|                                                     |                                            |                    |         |            |   |         
|                                                     |                                            | For the periods:   |         |            |   |         
|                                                     |                                            | Three Months Ended |         |            |   |         
|                                                     |                                            |                    |         | Change     |   | Change  
|                                                     |                                            | August 31,         |         | August 31, |   | Inc(Dec) |          | Inc(Dec)
|                                                     |                                            | 2001               |         | 2000       |   | $$$      |          | %%%     
|                                                     |                                            |                    |         |            |   |          |          |         
|Other income (expense):                              |                                            |                    |         |            |   |          |          |          |  |   |          |          |   |  |      |     
|Interest expense                                     |                                            | $                  |        |            |   | $        | (150,000 | )        |  | $ | 150,000  |          |   |  | -100 | %   
|Interest income and dividends                        |                                            |                    | 353,645 |            |   |          | 641,324  |          |  |   | (287,679 | )        |   |  | -45  | %   
|Net (losses) gains on sale of marketable
	securities |                                            |                    | 405,837 |            |   |          | (10,040  | )        |  |   | 415,877  |          |   |  | 4142 | %   
|Permanent impairment charges                         |                                            |                    |        |            |   |          | (335,000 | )        |  |   | 335,000  |          |   |  | -100 | %   
|Other non-operating income:                          |                                            |                    |         |            |   |          |          |          |  |   |          |          |   |  |      |     
|                                                     | Residual revenues from terminated programs |                    |         | (4,060     | ) |          |          | 539,230  |  |   |          | (543,290 | ) |  |      | -101 | %
|                                                     |                                            |                    |         |            |   |          |          |          |  |   |          |          |   |  |      |     
|Total Consolidated Other Income (Expense)            |                                            | $                  | 755,422 |            |   | $        | 685,514  |          |  | $ | 69,908   |          |   |  | 10   | %   
|                                                     |                                            |                    |         |            |   |          |          |          |  |   |          |          |   |  |      |     

During the three months ended August 31,
2001, the Companys interest and dividend income decreased
by $287,679, or 45%, 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 months ended August 31, 2001, the Company
disposed of its interests in equity based marketable securities,
generating capital gains of $405,837.

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 generally related to the current inability
to completely utilize capital loss carry forwards. The
Companys effective tax rate was approximately 35% for the
three month period ended August 31, 2001. This less than
usual rate was attributable to the utilization of capital loss
carry forwards from prior periods that had full valuation
allowances taken against them at the time of recognizing the
initial capital losses. The Companys effective tax rate
was approximately 40% for the three month period ended
August 31, 2000.

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##### Table of Contents



Nine Months Ended August 31, 2001 and August
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 nine month periods ended
August 31, 2001 and August 31, 2000, are detailed in
the following tables:

Segment Data  Net revenues, by Segment
Component

|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|-------------------------------------------------- |  | ----------------- | ---------- | ---------- |  | -------- | ---------- | -------- |  | - | ---------- | - |  |  | ---- | -
|                                                   |  |                   |            |            |  |         
|                                                   |  | Nine Months Ended |            |            |  |         
|                                                   |  |                   |            | Change     |  | Change  
|                                                   |  | August 31,        |            | August 31, |  | Inc(Dec) |            | Inc(Dec)
|                                                   |  | 2001              |            | 2000       |  | $$$      |            | %%%     
|                                                   |  |                   |            |            |  |          |            |         
|E-Commerce                                         |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|GroupLotto Site                                    |  | $                 | 4,941,285  |            |  | $        | 2,421,533  |          |  | $ | 2,519,752  |   |  |  | 104  | %
|E-mail                                             |  |                   | 9,892,382  |            |  |          | 1,641,186  |          |  |   | 8,251,196  |   |  |  | 503  | %
|Data sales                                         |  |                   | 2,000,457  |            |  |          | 471,157    |          |  |   | 1,529,300  |   |  |  | 325  | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Total E-commerce                                   |  |                   | 16,834,124 |            |  |          | 4,533,876  |          |  |   | 12,300,248 |   |  |  | 271  | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Off-line Customer Acquisition Services
	Components |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Long distance customer acquisitions                |  |                   |           |            |  |          | 2,623,115  |          |  |   | (2,623,115 | ) |  |  | -100 | %
|Long distance usage commissions                    |  |                   |           |            |  |          | 4,387,149  |          |  |   | (4,387,149 | ) |  |  | -100 | %
|Other customer acquisition services                |  |                   |           |            |  |          | 4,792      |          |  |   | (4,792     | ) |  |  | -100 | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Total Off-line Customer Acquisition Services       |  |                   |           |            |  |          | 7,015,056  |          |  |   | (7,015,056 | ) |  |  | -100 | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|LEC Billed Products and Services
	Components       |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|900 Entertainment Service termination
	royalties |  |                   | 486,406    |            |  |          | 2,420,254  |          |  |   | (1,933,848 | ) |  |  | -80  | %
|Club 900 Products                                  |  |                   |           |            |  |          | 202,327    |          |  |   | (202,327   | ) |  |  | -100 | %
|Enhanced Services, principally voice mail          |  |                   | 838,387    |            |  |          | 3,524,788  |          |  |   | (2,686,401 | ) |  |  | -76  | %
|Telephone number list rentals                      |  |                   |            |            |  |          | 65,523     |          |  |   | (65,523    | ) |  |  | -100 | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Total LEC Billed Products and Services             |  |                   | 1,324,793  |            |  |          | 6,212,892  |          |  |   | (4,888,099 | ) |  |  | -79  | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Corporate and Other Components                     |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Miscellaneous products, list revenue and other     |  |                   |            |            |  |          | 20,072     |          |  |   | (20,072    | ) |  |  | -100 | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  
|Total Consolidated Net Revenue                     |  | $                 | 18,158,917 |            |  | $        | 17,781,896 |          |  | $ | 377,021    |   |  |  | 2    | %
|                                                   |  |                   |            |            |  |          |            |          |  |   |            |   |  |  |      |  

Net Revenue increased $377,021, or 2%, to
$18,158,917 for the nine months ended August 31, 2001 from
$17,781,896 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
$12.3 million resulting from the Companys increased
emphasis on generating revenue from on-line direct marketing.
The E-commerce segments increase was offset by decreases
in the Companys Off-line Customer Acquisition Services
segment ($7.0 million) and LEC Billed Products and Services
segment ($4.9 million). See Transactions with Major
Customers and Termination of Economic Dependence,
Prior Year Transactions Impacting Current and Future
Fiscal Periods,Service Bureaus and Local Exchange
Carriers and Subsequent Events following the
Liquidity and Capital Resources section for a
detailed discussion of the decrease as it relates to the
Companys comparative and future revenues.

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 ARS 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 has 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 nine months ended
August 31, 2001, such revenues included in Other
non-operating income were approximately $84,000, compared
to approximately $1,211,171 for the prior years comparable
period.

23



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##### Table of Contents



The Companys cost of sales, on a segmental
basis, and with disclosure of the components of the individual
segments, for each of the nine month periods ended
August 31, 2001 and August 31, 2000 are presented
below:

Consolidated Cost of Sales, by Segment, by
Component

|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |      |    |  
|----------------------------------------------- | ---------------------------------------- | ------------------------- | --------- | ---------- | --------- | -------- | ---------- | --------- | --------- | - | ---------- | --------- | ------- |  | ---- | ---- | -- | -
|                                                |                                          |                           |           |            |           |         
|                                                |                                          | For the Nine Months Ended |           |            |           |         
|                                                |                                          |                           |           | Change     |           | Change  
|                                                |                                          | August 31,                |           | August 31, |           | Inc(Dec) |            | Inc(Dec) 
|                                                |                                          | 2001                      |           | 2000       |           | $$$      |            | %%%      
|                                                |                                          |                           |           |            |           |          |            |          
|E-commerce                                      |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|E-mail marketing and related delivery costs     |                                          | $                         | 2,269,214 |            |           | $        | 351,875    |           |           | $ | 1,917,339  |           |         |  | 545  | %   
|Customer procurement cost and fulfillment costs |                                          |                           | 2,067,665 |            |           |          | 2,320,400  |           |           |   | (252,735   | )         |         |  | -11  | %   
|Promotional and creative development costs      |                                          |                           | 89,508    |            |           |          | 97,380     |           |           |   | (7,872     | )         |         |  | -8   | %   
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                | Total E-commerce Advertising             |                           | $         | 4,426,387  |           |          | $          | 2,769,655 |           |   | $          | 1,656,732 |         |  |      | 60   | % 
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Service Bureau fees                             |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Contingent based prize indemnification costs    |                                          | $                         | 296,154   |            |           | $        | 723,888    |           |           |   | (427,734   | )         |         |  | -59  | %   
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                | Total E-commerce Cost of Sales           |                           | $         | 4,722,541  |           |          | $          | 3,493,543 |           |   | $          | 1,228,998 |         |  |      | 35   | % 
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Off-line Customer Acquisition
	Services         |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Telemarketing and related costs                 |                                          | $                         | 21,698    |            |           | $        | 1,860,068  |           |           | $ | (1,838,370 | )         |         |  | -99  | %   
|Premium fulfillment costs                       |                                          |                           | 7,564     |            |           |          | (1,537,453 | )         |           |   | 1,545,017  |           |         |  | -100 | %   
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                | Total Off-line Acquisition Cost of Sales |                           | $         | 29,262     |           |          | $          | 322,615   |           |   | $          | (293,353  | )       |  |      | -91  | % 
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|LEC Billed Products and Services                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Advertising, promotion and fulfillment
	costs   |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Telemarketing and related costs                 |                                          | $                         |          |            |           | $        | (17,643    | )         |           | $ | 17,643     |           |         |  | -100 | %   
|Premium fulfillment costs                       |                                          |                           |          |            |           |          | 1,866      |           |           |   | (1,866     | )         |         |  | -100 | %   
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                | Total LEC Billed Advertising             |                           | $         |           |           |          | $          | (15,777   | )         |   | $          | 15,777    |         |  |      | -100 | % 
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Service Bureau fees                             |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|Billing and collection fees                     |                                          | $                         | 155,514   |            |           | $        | 244,827    |           |           |   | (89,313    | )         |         |  | -36  | %   
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                | Total LEC Billed Cost of Sales           |                           | $         | 155,514    |           |          | $          | 229,050   |           |   | $          | (73,536   | )       |  |      | -32  | % 
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     
|                                                |                                          | Total Cost of Sales       |           | $          | 4,907,317 |          |            | $         | 4,045,208 |   |            | $         | 862,109 |  |      |      | 21 | %
|                                                |                                          |                           |           |            |           |          |            |           |           |   |            |           |         |  |      |     

Cost of revenues increased $862,109, or 21%, to
$4,907,317 for the nine months ended August 31, 2001 from
$4,405,208 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 nine months ended August 31,
2001, the Company e-mailed approximately 2.06 billion
promotional pieces compared to approximately 22.4 million
mailed in the prior years comparable period. The
Companys subsidiary, GroupLotto.com, acquired
approximately 23.8 million members in its database,
including approximately 2.9 new registered players during
the nine months ended August 31, 2001, compared to
approximately 7.8 million members acquired, including
approximately 740,000 new registered players, in the prior
years comparable period.

The Companys gross profit for the nine
months ended August 31, 2001 was $13,251,600, or 72.9% of
net revenues for such period. During the prior years
comparable period, the Companys gross profit was
$13,736,688, or 77.3% of net revenues for that period. During
the nine months ended August 31, 2000, net revenues
included approximately $6.2 million from the Companys
legacy operations, specifically its LEC Billed Product and
Services segment. The above referenced $6.2 million in
revenue included approximately $2.4 million in non-compete
royalty income, which had a 100% gross margin due to the absence
of explicit costs to generate such revenue. Additionally,
included in this $6.2 million was approximately
$3.8 million in

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other LEC net revenue, compared to approximately
$838,000 during the nine months ended August 31, 2001. This
revenue relates to an attriting base of voice mail customers
that were acquired in fiscal 1998. The only costs associated
with this revenue is the billing and collection costs incurred
in the processing of the billing records. After adjusting the
prior years gross profit to give effect to the proforma
elimination of the above mentioned higher gross profit legacy
segment activity, the proforma comparable nine months ended
August 31, 2000 gross profit percentage would have
approximated 67.0% compared with the current quarters
reported 72.9%.


The Companys SG&A expenses for the nine
months ended August 31, 2001 and August 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

|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|----------------------------------------------- |  | ----------------- | --------- | ---------- |  | -------- | --------- | -------- |  | - | --------- | - |  |  | ---- | -
|                                                |  |                   |           |            |  |         
|                                                |  | For the periods:  |           |            |  |         
|                                                |  | Nine Months Ended |           |            |  |         
|                                                |  |                   |           | Change     |  | Change  
|                                                |  | August 31,        |           | August 31, |  | Inc(Dec) |           | Inc(Dec)
|                                                |  | 2001              |           | 2000       |  | $$$      |           | %%%     
|                                                |  |                   |           |            |  |          |           |         
|E-commerce                                      |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses         |  | $                 | 2,454,104 |            |  | $        | 874,795   |          |  | $ | 1,579,309 |   |  |  | 181  | %
|Professional fees                               |  |                   | 629,003   |            |  |          | 222,654   |          |  |   | 406,349   |   |  |  | 183  | %
|Insurance costs                                 |  |                   | 345,496   |            |  |          | 144,281   |          |  |   | 201,215   |   |  |  | 139  | %
|Occupancy and equipment costs                   |  |                   | 190,902   |            |  |          | 70,422    |          |  |   | 120,480   |   |  |  | 171  | %
|Site development, maintenance and modifications |  |                   | 1,340,148 |            |  |          | 2,054,318 |          |  |   | (714,170  | ) |  |  | -35  | %
|All other SG&A expenses                         |  |                   | 1,331,446 |            |  |          | 957,374   |          |  |   | 374,072   |   |  |  | 39   | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL SG&A  E-commerce segment                 |  | $                 | 6,291,099 |            |  | $        | 4,323,844 |          |  | $ | 1,967,255 |   |  |  | 45   | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Off-line Customer Acquisition
	Services         |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses         |  | $                 | 125,929   |            |  | $        | 432,907   |          |  | $ | (306,978  | ) |  |  | -71  | %
|Professional fees                               |  |                   |          |            |  |          | 33,534    |          |  |   | (33,534   | ) |  |  | -100 | %
|Insurance costs                                 |  |                   | 74,035    |            |  |          | 138,078   |          |  |   | (64,043   | ) |  |  | -46  | %
|Occupancy and equipment costs                   |  |                   | 21,513    |            |  |          | 70,421    |          |  |   | (48,908   | ) |  |  | -69  | %
|All other SG&A expenses                         |  |                   | 49,422    |            |  |          | (106,839  | )        |  |   | 156,261   |   |  |  | -146 | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL SG&A  Off-line segment                   |  | $                 | 270,899   |            |  | $        | 568,101   |          |  | $ | (297,202  | ) |  |  | -52  | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|LEC Billed Products and Services                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses         |  | $                 | 125,498   |            |  | $        | 432,901   |          |  | $ | (307,403  | ) |  |  | -71  | %
|Professional fees                               |  |                   |          |            |  |          | 7,713     |          |  |   | (7,713    | ) |  |  | -100 | %
|Insurance costs                                 |  |                   | 74,035    |            |  |          | 144,288   |          |  |   | (70,253   | ) |  |  | -49  | %
|Occupancy and equipment costs                   |  |                   | 21,513    |            |  |          | 70,424    |          |  |   | (48,911   | ) |  |  | -69  | %
|All other SG&A expenses                         |  |                   | 13,973    |            |  |          | 29,933    |          |  |   | (15,960   | ) |  |  | -53  | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL SG&A  LEC segment                        |  | $                 | 235,019   |            |  | $        | 685,258   |          |  | $ | (450,239  | ) |  |  | -66  | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Corporate and other                             |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Compensation costs and related expenses         |  | $                 | 1,600,292 |            |  | $        | 1,626,796 |          |  | $ | (26,504   | ) |  |  | -2   | %
|Professional fees                               |  |                   | 943,251   |            |  |          | 927,955   |          |  |   | 15,296    |   |  |  | 2    | %
|Insurance costs                                 |  |                   | 2,214     |            |  |          |          |          |  |   | 2,214     |   |  |  | 100  | %
|Occupancy and equipment costs                   |  |                   |          |            |  |          | 7,940     |          |  |   | (7,940    | ) |  |  | -100 | %
|All other SG&A expenses                         |  |                   | 388,097   |            |  |          | 487,116   |          |  |   | (99,019   | ) |  |  | -20  | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|TOTAL SG&A  Corporate and other                |  | $                 | 2,933,854 |            |  | $        | 3,049,807 |          |  | $ | (115,953  | ) |  |  | -4   | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  
|Consolidated Totals                             |  | $                 | 9,730,871 |            |  | $        | 8,627,010 |          |  | $ | 1,103,861 |   |  |  | 13   | %
|                                                |  |                   |           |            |  |          |           |          |  |   |           |   |  |  |      |  

SG&A expenses increased $1,103,861, or 13%,
to $9,730,871 for the nine months ended August 31, 2001
from $8,627,010 in the comparable prior year period. The
increase in SG&A is primarily attributable to the

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##### Table of Contents



Companys expansion of its E-commerce
activities. As detailed above, E-commerce SG&A increased
approximately $1.9 million for the nine months ended
August 31, 2001 over the nine months ended August 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. In terms
of percentage relationships, the Companys net revenue from
its E-commerce segment grew 271%, or approximately
$12.3 million, as compared to the prior years
comparable quarter; however, the E-commerce segments
corresponding SG&A expenses increased by only 45%, or
approximately $1.97 million, as 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 (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 nine months ended August 31, 2001.


The selling expenses portion of
SG&A has been separately identified in the Companys
Consolidated Statement of Income. This line item captures
traditional selling expenses such as selling salaries, travel
and entertainment. In addition, this line item includes costs
associated with the Companys program of promoting its
Corporate Customers offers on the media of the
Companys third party marketing partners (e.g., third party
websites and databases). Generally, the Company incurs these
expenses on a revenue-share basis whereby (a) the third
party marketing partners market an offer on behalf of the
Company, (b) the Company in turn is paid by its Corporate
Customer, and (c) then the Company pays each marketing
partner a percentage (the revenue share) of the gross revenue
actually generated from promoting the offer on such marketing
partners media. For the nine month periods ended
August 31, 2001 and August 31, 2000, selling expenses
were $1,653,635 and $793,541 respectively. These amounts are
included in the Companys SG&A tables above. As the
Company expands its program of marketing on third party media,
the Company anticipates that these selling expenses will
continue to grow as a function of gross revenue.

The Companys components of Other
income(expense) for the nine months ended August 31,
2001 and August 31, 2000 are presented below:

Consolidated Other Income (Expense)

|                                                     |                                            |                   |            |            |  |          |            |           |  |   |            |            |   |  |      |     |  
|---------------------------------------------------- | ------------------------------------------ | ----------------- | ---------- | ---------- |  | -------- | ---------- | --------- |  | - | ---------- | ---------- | - |  | ---- | --- | -
|                                                     |                                            |                   |            |            |  |         
|                                                     |                                            | For the periods:  |            |            |  |         
|                                                     |                                            | Nine Months Ended |            |            |  |         
|                                                     |                                            |                   |            | Change     |  | Change  
|                                                     |                                            | August 31,        |            | August 31, |  | Inc(Dec) |            | Inc(Dec) 
|                                                     |                                            | 2001              |            | 2000       |  | $$$      |            | %%%      
|                                                     |                                            |                   |            |            |  |          |            |          
|Other income (expense):                              |                                            |                   |            |            |  |          |            |           |  |   |            |            |   |  |      |    
|Interest expense                                     |                                            | $                 |           |            |  | $        | (150,300   | )         |  | $ | 150,300    |            |   |  | -100 | %  
|Interest income and dividends                        |                                            |                   | 1,497,906  |            |  |          | 1,817,775  |           |  |   | (319,869   | )          |   |  | -18  | %  
|Net gains (losses) on sale of marketable
	securities |                                            |                   | 404,061    |            |  |          | 892,181    |           |  |   | (488,120   | )          |   |  | -55  | %  
|Permanent impairment charges                         |                                            |                   | (4,690,258 | )          |  |          | (1,680,734 | )         |  |   | (3,009,524 | )          |   |  | 179  | %  
|Gain on non-monetary cost basis exchange             |                                            |                   |           |            |  |          | 565,572    |           |  |   | (565,572   | )          |   |  | -100 | %  
|Other non-operating income:                          |                                            |                   |            |            |  |          |            |           |  |   |            |            |   |  |      |    
|                                                     | Residual revenues from terminated programs |                   |            | 84,290     |  |          |            | 1,211,171 |  |   |            | (1,126,881 | ) |  |      | -93 | %
|                                                     |                                            |                   |            |            |  |          |            |           |  |   |            |            |   |  |      |    
|Total Consolidated Other
	Income (Expense)           |                                            | $                 | (2,704,001 | )          |  | $        | 2,655,665  |           |  | $ | (5,359,666 | )          |   |  | -202 | %  
|                                                     |                                            |                   |            |            |  |          |            |           |  |   |            |            |   |  |      |    

During the nine months ended August 31, 2001
(specifically within the three months ended February 28,
2001), the Company recognized losses due to what the Company
believed 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 nine
months ended August 31, 2001.

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The Company evaluated its long-term investments
during the nine months ended August 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 nine months ended August 31, 2001. During
the three months ended May 31, 2001 this entity effectively
wound down operations and ceased doing business.

During the nine months ended August 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 nine month period ended August 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 nine month period ended August 31, 2000 for the
impaired long-lived assets. During the nine months ended
August 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
$2,109,111 during the nine-month period ended August 31,
2001 on a pre-tax income of approximately $817,000. 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 nine months ended August 31, 2001. A portion of
this valuation allowance was realized, as a tax benefit, during
the three months ended August 31, 2001 upon the liquidation
of marketable securities at disposition prices in excess of post
impairment carrying values. The Companys effective tax
rate was approximately 40% for the nine-month period ended
August 31, 2000. The Companys deferred tax asset
valuation allowance, as reduced for current quarter capital
gains, is being carried at August 31, 2001 due to the
absence of appreciated capital gain property (available for the
potential generation of capital gain income) to offset the net
capital losses realized in the nine months ended August 31,
2001.

Liquidity and Capital Resources

At August 31, 2001, the Company had cash and
cash equivalents of approximately $8.4 million, reflecting
an increase of approximately $3.8 million, compared to the
$ 4.6 million in cash and cash equivalents held at
November 30, 2000. At August 31, 2001, the Company had
marketable securities of approximately $25.1 million
compared to $38.7 million at November 30, 2000.

During the nine months ended August 31,
2001, net cash used in operating activities was approximately
$4.2 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 through
December 31, 1999. This payment was made to reduce the
Companys interest expense related to the final settlement,
which was accepted by the IRS in August 2001. The case is
pending IRS Joint Committee review based on the fact that the
tax period under audit had generated a refund in excess of
$1 million due to a tax basis net operating loss carryback.
The Company expended $1 million in September 2001 as an
additional installment against the settlement of the tax audits.
A final payment of approximately $400,000 will be made upon the
IRSs issuance of a final statement of interest expense due
on the matter. The IRS adjustment had been factored into the
Companys tax accrual and corresponding earnings in a prior
fiscal year, and, therefore, the Company does not expect to
recognize a future impact on earnings for these payments.

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During the nine months ended August 31,
2001, approximately $13.8 million of net cash was provided
by investing activities, resulting from approximately
$14.6 million provided by net proceeds from the sale of
investments in short term, high-grade commercial paper, auction
rate securities and other marketable securities, offset by cash
outflows for capital expenditures of approximately $546,000 and
long-term investments of $49,000. Substantially all of the
Companys portfolio of cash and marketable securities is
managed by an independent professional investment manager at a
major financial institution.

Cash used in financing activities during the nine
months ended August 31, 2001 amounted to $5,847,730.
Included in the use of financing activities were the (a) $6
million used to purchase and retire shares of common stock from
a former director and officer, and (b) $48,662 of open
market purchases of the Companys stock, held in treasury,
with both of the preceding being offset by $200,932 in proceeds
generated 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 such
segment generating 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
nine months ended August 31, 2001, the Company expended
approximately $547,000 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 nine months ended
August 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.

Days Sales Outstanding

Days Sales Outstanding (DSO) is an
important financial indicator that exhibits the age of a
companys accounts receivable in terms of days, and the
average time it takes to turn such accounts receivables into
cash. The basic formula used to arrive at a companys DSO
is to take the accounts receivable at the end of a given period,
and divide that end of period accounts receivable by
the result of (a) that periods related sales (net revenues
in the Companys case) divided by (b) the number of
days in the related period.

The following table provides the Companys
DSO as calculated in accordance with the above formula based on
the amounts in the Companys consolidated balance sheets
and consolidated statements of income

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(loss) included in its Forms 10Q as
filed for the periods ended February 28, 2001, May 31,
2001, and August 31, 2001:


|                       |  |  |          |  |  |  |         |  |  |  |         |  |  |  |          | 
|---------------------- |  |  | -------- |  |  |  | ------- |  |  |  | ------- |  |  |  | -------- | 
|Days sales outstanding |  |  | 105.7495 |  |  |  | 88.0916 |  |  |  | 90.6949 |  |  |  | 110.1464 | 

|                                             |                   |                |           |           |  |           |           |           |  |   |           |           |  |   |            |           | 
|-------------------------------------------- | ----------------- | -------------- | --------- | --------- |  | --------- | --------- | --------- |  | - | --------- | --------- |  | - | ---------- | --------- | 
|                                             |                   |                |           | 9 Months 
|                                             |                   | 3 Months Ended |           | Ended    
|                                             |                   |                |           |          
|                                             |                   | 2/28/2001      |           | 5/31/2001 |  | 8/31/2001 |           | 8/31/2001
|                                             |                   |                |           |           |  |           |           |          
|Net revenue for period indicated:            |                   | $              | 4,925,554 |           |  | $         | 5,828,543 |           |  | $ | 7,404,820 |           |  | $ | 18,158,917 |          
|                                             |                   |                |           |           |  |           |           |           |  |   |           |           |  |   |            |          
|Account Receivable Balance @ date indicated: |                   |                |           |           |  |           |           |           |  |   |           |           |  |   |            |          
|                                             | A/ R @ 11/30/2000 |                | $         | 4,354,588 |  |           |           |           |  |   |           |           |  |   |            |           | 
|                                             | A/ R @ 2/28/2001  |                | $         | 5,787,499 |  |           |           |           |  |   |           |           |  |   |            |           | 
|                                             | A/ R @ 5/31/2001  |                |           |           |  |           | $         | 5,580,929 |  |   |           |           |  |   |            |           | 
|                                             | A/ R @ 8/31/2001  |                |           |           |  |           |           |           |  |   | $         | 7,299,777 |  |   | $          | 7,299,777 | 
|                                             | days in period    |                |           | 90        |  |           |           | 92        |  |   |           | 92        |  |   |            | 274       | 

As indicated in the preceding table, it would
appear that the Company required over 105, 88 and 90 days
to collect its net revenues generated in the three-month periods
ending February 28, May 31 and August 31, 2001,
respectively.

Included in accounts receivable in the preceding
table are amounts receivable from Federal Transtel, Inc., which
is more fully described in the notes to the financial statements
under Subsequent Events. Additionally, the accounts
receivable include amounts receivable as described in the notes
to financial statements under Transactions with Major
Customers, specifically the final paragraph of that
section. The following table provides the details of those
accounts receivable balances as of the dates indicated:

|                                |       |                            |           |           |  |           |           |           |  |   |           |           | 
|------------------------------- | ----- | -------------------------- | --------- | --------- |  | --------- | --------- | --------- |  | - | --------- | --------- | 
|                                |       |                           
|                                |       | as at the dates indicated:
|                                |       |                           
|                                |       | 2/28/2001                  |           | 5/31/2001 |  | 8/31/2001
|                                |       |                            |           |           |  |          
|Federal Transtel, Inc.          |       | $                          | 2,057,137 |           |  | $         | 2,053,733 |           |  | $ | 2,089,079 |          
|Qwest Communication Intl., Inc. |       |                            | 611,535   |           |  |           | 634,726   |           |  |   | 640,064   |          
|                                |       |                            |           |           |  |           |           |           |  |   |           |          
|                                | Total |                            | $         | 2,668,672 |  |           | $         | 2,688,459 |  |   | $         | 2,729,143 | 
|                                |       |                            |           |           |  |           |           |           |  |   |           |          

The following table provides the details of net
revenues generated by the above Customers for the periods
indicated:

|                                |       |                             |         |           |  |           |         |         |  |   |         |         | 
|------------------------------- | ----- | --------------------------- | ------- | --------- |  | --------- | ------- | ------- |  | - | ------- | ------- | 
|                                |       |                            
|                                |       | for the three months ended:
|                                |       |                            
|                                |       | 2/28/2001                   |         | 5/31/2001 |  | 8/31/2001
|                                |       |                             |         |           |  |          
|Federal Transtel, Inc.          |       | $                           | 318,582 |           |  | $         | 318,437 |         |  | $ | 201,368 |        
|Qwest Communication Intl., Inc. |       |                             |        |           |  |           |        |         |  |   |        |        
|                                |       |                             |         |           |  |           |         |         |  |   |         |        
|                                | Total |                             | $       | 318,582   |  |           | $       | 318,437 |  |   | $       | 201,368 | 
|                                |       |                             |         |           |  |           |         |         |  |   |         |        

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The following table provides the Companys
DSO as calculated on a proforma basis after the exclusion of the
Federal Transtel, Inc. and Qwest Communications International,
Inc. accounts receivable and net revenues where appropriate:

|                                |  |  |         |  |  |  |         |  |  |  |         |  |  |  |         | 
|------------------------------- |  |  | ------- |  |  |  | ------- |  |  |  | ------- |  |  |  | ------- | 
|Proforma Days sales outstanding |  |  | 60.9282 |  |  |  | 48.2944 |  |  |  | 58.3746 |  |  |  | 72.3046 | 

|                                                       |                  |                |           |           |  |           |           |           |  |   |           |           |  |   |            |           | 
|------------------------------------------------------ | ---------------- | -------------- | --------- | --------- |  | --------- | --------- | --------- |  | - | --------- | --------- |  | - | ---------- | --------- | 
|                                                       |                  |                |           | 9 Months 
|                                                       |                  | 3 Months Ended |           | Ended    
|                                                       |                  |                |           |          
|                                                       |                  | 2/28/2001      |           | 5/31/2001 |  | 8/31/2001 |           | 8/31/2001
|                                                       |                  |                |           |           |  |           |           |          
|Proforma Net revenue for period indicated:             |                  | $              | 4,606,972 |           |  | $         | 5,510,106 |           |  | $ | 7,203,452 |           |  | $ | 17,320,530 |          
|                                                       |                  |                |           |           |  |           |           |           |  |   |           |           |  |   |            |          
|Proforma Account Receivable Balance @ date
	indicated: |                  |                |           |           |  |           |           |           |  |   |           |           |  |   |            |          
|                                                       | A/ R @ 2/28/2001 |                | $         | 3,118,827 |  |           |           |           |  |   |           |           |  |   |            |           | 
|                                                       | A/ R @ 5/31/2001 |                |           |           |  |           | $         | 2,892,470 |  |   |           |           |  |   |            |           | 
|                                                       | A/ R @ 8/31/2001 |                |           |           |  |           |           |           |  |   | $         | 4,570,634 |  |   | $          | 4,570,634 | 
|                                                       | days in period   |                |           | 90        |  |           |           | 92        |  |   |           | 92        |  |   |            | 274       | 

As indicated in the preceding table, exhibiting
proforma DSO, it would require only 61, 48 and
58 days to collect the Companys net revenues
generated in the three-month periods ending February 28,
May 31 and August 31, 2001, respectively, after
exclusion of the Federal Transtel, Inc. (FTT) and
Qwest International, Inc. (Qwest) accounts
receivable. During the fourth quarter ending November 30,
2001 the Company plans to re-evaluate the current balance sheet
presentation of its trade accounts receivable, as such financial
statement caption relates to FTT and Qwest. At that time, and
subject to the collectibility of the FTT and Qwest receivables,
the Company anticipates it will reclassify such receivables and
group them with other current assets.

Prior Year Transactions Impacting Current and
Future Fiscal Periods

In June 1999, the Company entered into the
ARS 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 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
ARS Transaction Agreements, and until January 16, 2001. For
the nine months ended August 31, 2001 and August 31,
2000, these royalties amounted to approximately $486,000 and
$2.4 million, or 2.7% and 13.6%, respectively, of the
Companys net revenues. As of August 31, 2001 the
Company had 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 nine months ended August 31,
2001, the Company had four customers within its E-commerce
segment who, in combination, accounted for approximately 50.6%
of consolidated net revenues during the nine month period ended
August 31, 2001, and approximately 30.8% of consolidated
net accounts receivable as of August 31, 2001. The Company
did not conduct business with these customers in the prior
years comparable

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period and the related consolidated accounts
receivable from such companies were negligible at
November 30, 2000.


During the nine months ended August 31,
2000, the Company derived approximately 24.7% 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 $640,000 and $611,000 at
August 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.

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.

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 $838,000 and $3,525,000, for the nine
months ended August 31, 2001 and August 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.

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##### Table of Contents






PART II

OTHER INFORMATION




Item 1.  Legal
Proceedings

Class Action

On May 31, 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 District Court
held a settlement hearing on September 21, 2001, and on
that date issued an Order and Final Judgment approving the
settlement and dismissing the Class Action with prejudice.

Philip Michael Thomas

In October 2001, in an arbitration before
the American Arbitration Association in New York entitled
Philip Michael Thomas; PMT Productions Inc.; Kaye Porter
Management; RMI Entertainment, Inc.; Millennium Telemedia, Inc.,
Claimants v. New Lauderdale, LLC d/b/a Calling Card Co.; Psychic
Readers Network, Inc. d/b/a PRN Telecommunications; and Quintel
Entertainment, Inc. (No. 131400004900), the claimants
quantified the aggregate amount of their claims as being for
$8,573,339, with interest of $3,576,264. The claims arise from
agreements among the parties pursuant to which the respondents
were permitted to use claimants name and likeness in
connection with certain programs and membership clubs and
pursuant to which Thomas was to make certain infomercials. The
claimants allege that they were not paid the appropriate
percentage of revenues allegedly due them and have asserted
claims for fraud and deceit, constructive fraud, civil
conspiracy, breach of constructive trust, quantum meruit/unjust
enrichment, and unauthorized publication of Thomas name
and likeness. Hearings on the arbitration have been adjourned on
a number of occasions and are currently scheduled for late
February and early March of 2002. The Company believes that
there is no merit to the claims and intends to vigorously defend
against them.

Group
Lotto

On or about May 9, 2001, Mavies Wingler
commenced an action against Group Lotto, Inc. (GLI),
a wholly owned subsidiary of the Company, in the Circuit Court
of Logan County, West Virginia. Ms. Wingler claims to have
picked the winning numbers entitling her to $10 million. On
June 8, 2001, the action was removed to the United States
District Court, Southern District of West Virginia, and is
entitled Wingler v. GroupLotto, Inc., Docket Number
2:01  CV  518. The action is in the
initial stages of discovery. The Company does not believe that
there is any merit to Ms. Winglers claim, and intends
vigorously to defend against it. GLI has a contract of
indemnification with SCA Promotions, Inc. (SCA) to
be indemnified for prizes paid out to qualified winners.




Item 4.  Submission of
Matters to a Vote of Securityholders

A Proxy Statement was mailed on or about
July 16, 2001 to shareholders of record of the Company as
of June 29, 2001 in connection with the Companys 2001
Annual Meeting of Shareholders, which was held on
August 14, 2001 at the Companys executive offices,
One Blue Hill Plaza, Pearl River, New York. At the Meeting, the
shareholders voted on two matters and both of such matters were
approved.

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##### Table of Contents



The first matter was the election of the members
of the Board of Directors. The seven directors elected and the
tabulation of the votes (both in person and by proxy) were as
follows:

|                       |  |     |           |         |  |          |        |  |  |  |   | 
|---------------------- |  | --- | --------- | ------- |  | -------- | ------ |  |  |  | - | 
|Nominees for Directors |  | For |           | Against |  | Withheld
|                       |  |     |           |         |  |         
|Jeffrey L. Schwartz    |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Andrew Stollman        |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Murray L. Skala        |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Edwin Levy             |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Lawrence Burstein      |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Jack Silver            |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 
|Charles W. Stryker     |  |     | 9,240,647 |         |  |          | 53,151 |  |  |  | 0 | 

There were no broker held non-voted shares
represented at the Meeting with respect to this matter.

The second matter upon which the shareholders
voted was the proposal to ratify the appointment by the Board of
Directors of PricewaterhouseCoopers LLP as independent certified
public accountants for the Company for 2001. The tabulation of
the votes (both in person and by proxy) was as follows:

|          |  |         |        |             |  |  |       | 
|--------- |  | ------- | ------ | ----------- |  |  | ----- | 
|For       |  | Against |        | Abstentions
|          |  |         |        |            
|9,259,269 |  |         | 31,029 |             |  |  | 3,500 | 

There were no broker held non-voted shares
represented at the Meeting with respect to this matter.




Item 6.  Exhibits and
Reports on Form 8-K

(a)  Exhibits.

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




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

(b)  Reports on
Form 8-K.

On July 18, 2001, the Company filed a
Current Report on Form 8-K reporting the consummation of
the transactions contemplated by the July 13, 2001
Redemption Agreement with Jay Greenwald, a principal shareholder
and former director, employee and consultant of the Company (the
Closing), including:



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)  The Companys redemption of
	2 million shares of the Companys Common Stock at a
	price of $3.00 per share for aggregate consideration of
	$6 million.                                                                                                                                                         
|
| | (b)  Mr. Greenwalds agreement to
	refrain from selling, assigning, transferring or otherwise
	disposing of any securities of the Company owned by him for a
	period of 12 months from and after the Closing, except that
	he is permitted to donate any of such securities to a bona fide
	charitable organization.

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| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c)  Mr. Greenwalds resignation
	as a member of the Companys Board of Directors and as a
	consultant to the Company.                                                                                                                                                                                                                                                        
|
| | (d)  Mr. Greenwalds undertaking
	not to directly or indirectly, or through any other person,
	firm, company, entity or enterprise, whether as an employee,
	consultant, independent contractor, owner, shareholder, officer,
	director, partner, joint venturer, member or otherwise, except
	as an employee of the Company, for a period of one (1) year
	after the Closing:



| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i)  directly or indirectly, endeavor to
	entice away from the employ of the Company or otherwise
	negatively influence the relationship of the Company with any
	individual, partnership, firm, corporation or other business
	organization that is employed by the Company, or is otherwise
	performing services or is selling products to the Company; or
|
| | (ii)  attempt in any manner to persuade,
	directly or indirectly, any person or entity, including, but not
	limited to, the customers of the Company, to cease doing
	business or to reduce the amount of business with the Company
	which any such customer has customarily done or contemplates
	doing with the Company; or                               
|
| | (iii)  become a greater than 5% owner,
	employee, independent contractor, consultant or other advisor to
	certain delineated entities.                                                                                                                                                                                                                      

The foregoing is a summary of the Redemption
Agreement and the transactions contemplated thereby and should
be read in conjunction with the Redemption Agreement, a copy of
which was included as an exhibit to the Current Report on
Form 8-K filed with the Commission on July 18, 2001.

Other than the foregoing, the Company did not
file any reports on Form 8-K during the third quarter of
the fiscal year ending November 30, 2001.

FORWARD LOOKING INFORMATION

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

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##### Table of Contents






SIGNATURES

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



| |              
| | -------------
| | TRAFFIX, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/JEFFREY L. SCHWARTZ

| |                            
| | ---------------------------
| |                            
| | Jeffrey L. Schwartz        
| | Chairman, President and CEO

Date: October 16, 2001



| |     |                 
| | --- | ----------------
| | By: | /s/DANIEL HARVEY

| |                              
| | -----------------------------
| |                              
| | Daniel Harvey                
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: October 16, 2001

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##### Table of Contents



EXHIBIT INDEX

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




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



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

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