TRAFFIX INC - 10-Q Quarterly Report

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 ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares outstanding of the Registrant's common stock is 14,316,866 (as of 10/13/03).

TRAFFIX, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED AUGUST 31, 2003

		Page
Part I	Financial Information
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	None
Item 4.	Controls and Procedures	43
Part II	Other Information
Item 1.	Legal Proceedings	44
Item 2.	Changes in Securities and Use of Proceeds	None
Item 3.	Defaults Upon Senior Securities	None
Item 4.	Submission of Matters to a Vote of Security Holders	None
Item 5.	Other Information	46
Item 6.	Exhibits and Reports on Form 8-K	47
Signatures	48

TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(UNAUDITED)

TRAFFIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

During the nine months ended August 31, 2002, the Company issued 117,521 shares of common stock, valued at $728,636, in the purchase of the assets of a closely held, private company (See note 8).

During the nine months ended August 31, 2002, the Company collected approximately $114,403, after related costs and income tax expense of $185,597, from a Section 16-b violation brought against a former non-management "insider" shareholder.

TRAFFIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED AUGUST 31, 2003
(UNAUDITED)

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, the unaudited consolidated financial statements do not include certain information and note disclosures normally required by generally accepted accounting principles. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods presented. In the preparation of these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the interim periods reported. Actual results could differ from those estimates. Principally, estimates are used in accounting for bad debts, data qualification allowances and sales allowances, depreciation and amortization, income taxes and contingencies. Management's estimates and assumptions are continually reviewed against actual results with the effects of any revisions being reflected in the results of operations at that time.

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2002. The results of operations for the three and nine month periods ended August 31, 2003 are not necessarily indicative of the results to be expected for the subsequent quarter or the entire fiscal year ending November 30, 2003. Certain prior year amounts in the unaudited consolidated financial statements have been reclassified to conform with the current year presentation.

During the nine months ended August 31, 2003 and 2002, options for 25,600 shares and 188,481 shares of the Company's common stock, respectively, were exercised by certain employees and directors. Tax benefits of $10,155 and $309,166 in the nine months ended August 31, 2003 and 2002, respectively, were recorded as an increase to additional paid-in capital and a reduction of income taxes currently payable.

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, however, these assets must be reviewed at least annually for impairment subsequent to adoption. Intangible assets with finite useful lives will continue to be amortized over their respective useful lives. The standard also establishes specific guidance for testing for impairment of goodwill and intangible assets with indefinite useful lives. The Company has adopted SFAS 142 as of December 1, 2002. Prior to December 1, 2002, goodwill was amortized on a straight-line basis over 5 years. In accordance with SFAS 142, the Company has performed a transitional impairment test as of December 1, 2002 for its unamortized goodwill. As a result of the impairment test performed, no impairment was noted.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 promulgates rules regarding exit or disposal activities that are initiated after December 31, 2002. SFAS 146 requires companies to recognize costs associated with the exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan and nullifies the requirements under the "Emerging Issues Task Force No. 94-3",

"Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs in a Restructuring)". The adoption of SFAS 146 did not have a material impact on the Company's consolidated financial position and results of operations.

In October 2002, Statement of Financial Accounting Standards No. 147 "Acquisitions of Certain Financial Institutions ("SFAS 147") was issued. The statement addresses the financial accounting and reporting for the acquisition of all or a part of a financial institution. Additionally, SFAS 147 also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets. The provisions of this statement are effective for acquisitions on or after October 1, 2002. The adoption of SFAS 147 did not have a material impact on either our financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation requires that, upon issuance of a guarantee, a guarantor must recognize a liability for the fair market value of an obligation assumed under the guarantee. Disclosures by the guarantor in its interim and quarterly financial statements about obligations associated with guarantees issued are also required by FIN 45. The recognition requirements of FIN 45 are effective for guarantees that are issued after December 31, 2002. The adoption of this Interpretation did not have a material impact on the Company's consolidated financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure ("SFAS 148"). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation", providing alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. FAS 148 also requires disclosure of the method used to account for stock-based employee compensation and the effect of the method in both annual and interim financial statements. The provisions of this statement related to transition methods are effective for fiscal years ending after December 15, 2002, while provisions related to disclosure requirements are effective in financial reports for interim periods beginning after December 31, 2002. As permitted under SFAS 148, the Company has not adopted the fair value approach, and will continue to use the intrinsic value method, and has complied with the disclosure provisions as outlined in the accounting standard beginning with the prior quarter ended May 31, 2003.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of FIN 46 will have an immaterial impact on the Company's consolidated financial position and results of operations, if any effect at all.

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 nine basic categories: (1) delivery of consumer traffic to the websites and inbound telemarketing call centers of its Corporate Customers (e.g., click-thrus from the game banners on the Company's websites), (2) delivery of consumer data to Corporate Customers with respect to the consumers who have registered for Corporate Customers' products or services (e.g., a consumer who registered via the

registration page of one of the Company's websites to receive on-line promotions from Corporate Customers), (3) delivery of pre-qualified consumer data to Corporate Customers as a result of consumers' responses to targeted questions and surveys (e.g., receiving free gifts for your children), (4) delivery of a sale or completed application for a Corporate Customer's product or service (e.g., a consumer who responds to a Traffix email promotion on behalf of a Corporate Customer by completing an on-line application for a credit card or subscribing for a cellular phone service), (5) generating revenue from any of the foregoing categories by placing Corporate Customers' offers on the media of third parties with whom the Company has a marketing relationship on a revenue share basis, (6) sales of inexpensive gift items directly to consumers, (7) rentals and sales of copies of specific segments of the Company's databases to Corporate Customers for their proprietary marketing and database enhancements, (8) sales of memberships to the Company's online dating service, iMatchUp.com, and (9) customer acquisition services, both on-line and off-line, under a net branch agreement with a qualified mortgage banking establishment. Regarding the Company's net branch agreement revenues, see Note 10 "Sale of Majority Owned Subsidiary" for a discussion of the disposition of the Company's majority owned subsidiary that generated such revenue.

During the nine months ended August 31, 2003, the Company introduced two additional revenue sources to its product and service suite. Such revenue sources include a proprietary on-line dating service (referenced above as item (8)) and proprietary ISP, Email and Voice Over Internet LD service offers (included in the LEC Billed Product and Service segment). The combination of the two newly introduced revenue sources accounted for approximately 23% and 16% of the Company's revenue for the three and nine-month periods ended August 31, 2003, respectively.

The Company invoices its customers in accordance with the terms of their respective underlying agreement. Revenue is recognized at the time the marketing activity is delivered, or service is provided (normally, either daily or weekly), net of estimated contractually specified data qualification allowances, when applicable. Such data qualification allowances may include duplications, invalid addresses, age restrictions and other allowances. Historically, the variance between actual allowances and previously estimated allowances has been immaterial. The Company records all related obligations associated with the related net revenue at its point of recognition.

Membership revenue on the Company's online dating service is billed to members in one-month, three-month and annual terms. The monthly memberships are recognized as revenue in the month billed (which is the same month as the services are provided). Three month and annual memberships are deferred and recognized over the subscription term.

Revenues from the Company's off-line customer acquisition services historically consisted of residential long distance customer acquisition programs, and were recorded upon the achievement of certain events particular to the corresponding program's fulfillment liability. For example, subsequent to the delivery of the initial sales record to the respective long distance carrier, the Company may have been required to provide to the customer certain products and services (fulfillment liability), such as cellular phones and/or other premiums. These costs were estimated and accrued, based upon historical fulfillment costs, as a component of marketing expense and included in the cost of sales at the time the associated revenues were recognized. Historically, the Company has recognized variances between the actual fulfillment experience, when comparing such experience to previously estimated fulfillment accruals. This variance is attributable to significant variations in consumers' redemption behavior as accumulated on a premium-by-premium basis. The variance in said estimates continue to be reflected in current operations when facts and circumstances allow for their measurement.

The Company's current business, as conducted in its E-commerce segment, also may require the provision of a premium; premiums are also referred to as fulfillment costs elsewhere. These E-commerce segment premiums are estimated and accrued, based upon historical and current experience. Such E-commerce premium costs are classified as a component of marketing expense and

are included in the cost of sales at the time the associated revenues are recognized. Any variance in the initial accrual, as compared to the actual experience, is included in the financial statements for the period that the variance is determinable. The nine months ended August 31, 2003 included a reduction to fulfillment expense of approximately $510,000 relating to the estimated fulfillment expense adjustment resulting from the termination of the fulfillment liability associated with a former major customer.

Revenue from the Company's LEC Billed Product and Service segment, which resumed activity during the nine months ended August 31, 2003, consists of Local Exchange Carrier ("LEC") billed Internet based products. Such products include an Internet Service Provider ("ISP") product, an email service product and a Voice Over Internet Protocol product. The revenue from such services is recognized net of an estimated provision for refunds, credits and adjustments subsequently granted to customers ("customer chargebacks"). Customer chargebacks are reflected as a contra-revenue account within the Company's statement of operations. Since the provision for customer chargebacks is established prior to the periods in which chargebacks are actually expended, the Company's revenues are adjusted in later periods if the Company's incurred chargebacks vary from the amounts previously estimated.

Revenues from the Company's off-line marketing services segment during the nine months ended August 31, 2003 included the revenue earned by Montvale Management, LLC, the Company's majority-owned subsidiary. The Company sold its interest in such subsidiary to the other member thereof on March 7, 2003. See Note 10 "Sale of Majority Owned Subsidiary". Such revenues represented approximately $-0- and $2.4 million, or -0-% and 10%, respectively, of the Company's consolidated net revenues for the three and nine-month periods ended August 31, 2003, compared to $1.9 million and $3.9 million, or 18% and 11%, respectively, of the Company's consolidated net revenues for the three and nine-month periods ended August 31, 2002. Such revenue resulted from Montvale's commission earned for the provision of net branch services to a mortgage banking institution. Under such arrangement Montvale managed the branch offices and loan origination business of a single third party licensed mortgage banker. Approximately 15% of Montvale's revenues were derived from on-line sources, with such portion then being included in the Company's E-commerce segment. Montvale recognizes its commission upon the closing of the loan, with a provision for mortgage refinance rescissions applicable to mortgage refinances consummated within the last 3 business days of the quarter (as all refinancings are subject to a federally mandated 3-day right of rescission). Actual experience regarding rescissions indicates that the historical variance between rescission provisions and the actual rescissions have been immaterial.

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

Accounts receivable consist of trade accounts receivable from the Company's Corporate Customer base, with extension of credit varying between 30 to 60 days, with the majority at 30 days. Additionally, accounts receivable from Local Exchange Carriers (LEC segment) and credit card companies (on-line dating service) are due to the Company. The Company's customer base is comprised of domestic entities with diverse demographics. The allowance for doubtful accounts is based on management's evaluation of the collectibility of receivables after giving consideration to current delinquency data, historical loss experience and general economic conditions, both at the Company level and sector/industry level. The Company's accounts receivable balances are continually reviewed by management, and when situations dictate, provisions for losses are recorded. Additional allowances might be required if the original estimates for loss prove to be inadequate.

During the three and nine months ended August 31, 2003, the Company had five customers in its E-commerce segment which, in combination, accounted for approximately $2.6 million and $6.7 million of consolidated net revenue, respectively, or 31.2% and 26.6% of consolidated net revenues. Approximately $1.4 million, or 31.9% of consolidated net accounts receivable, was attributable to such major customer group as of August 31, 2003. Such major customers accounted for 12%, 7%, 5%, 4% and 3% of consolidated net revenue for the three months ended August 31, 2003, and 9%, 7%, 5%, 3% and 2% of consolidated net revenue for the nine months ended August 31, 2003. Regarding the balance of the Company's customer base, no single customer had net revenues that equaled, or exceeded, 3% of consolidated net revenues for the three and nine-month periods ended August 31, 2003.

The Company continued to conduct business with all such five major customers as of October 10, 2003. The customer that accounted for 2% of the Company's net revenues for the nine months ended August 31, 2003 filed for bankruptcy protection in June 2003. The Company charged approximately $300,000 of such customer's accounts receivable to the allowance. After the application of the allowance increase, the Company has completely reserved the customer's entire accounts receivable balance. In the three and nine months ended August 31, 2002, the Company had five customers in its E-commerce segment which, in combination, accounted for approximately $5.2 million and $18 million of consolidated net revenues, respectively, or 49% and 53% of consolidated net revenues, respectively, and approximately $4.5 million, or 65% of consolidated accounts receivable as of August 31, 2002.

Pursuant to Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, the Company will continue to use the intrinsic value method of accounting for its employee and director stock-based compensation awards. Accordingly, the Company has not recognized compensation expense for its noncompensatory employee and director stock option awards. As recommended by SFAS No. 123, the fair values of options were estimated using the Black-Scholes option-pricing model. The Company's adjusted net income and adjusted earnings per share had it elected to adopt the fair value approach of SFAS No. 123, which charges earnings for the estimated fair value of stock options, would have been as follows:

For purposes of computing pro forma net (loss) income, the Company estimates the fair value of each option grant on the date of grant using the Black-Scholes option- pricing model. The assumptions used to value the option grants are set forth below:

	Three Months Ended		Nine Months Ended
	August 31, 2003		August 31, 2002		August 31, 2003		August 31, 2002
Expected life of options (in years)	4.0		4.8		4.0		4.8
Volatility	61.00	%	71.50	%	61.00	%	71.50	%
Risk free interest rate	2.53	%	3.51	%	2.53	%	3.51	%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%

Options grants typically vest over a three-year period and new option grants are made periodically each year. Therefore, the pro forma information shown above may not be representative of the pro forma effect on reported net (loss) income in future fiscal periods.

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

Options to purchase 1,769,998 and 1,429,333 shares of common stock for the three months ended August 31, 2003 and 2002, respectively, and 3,015,494 and 659,778 for the nine months ended August 31, 2003 and 2002, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would be anti-dilutive.

Comprehensive income (loss) is defined as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources." Excluding net income, the Company's primary sources of comprehensive income (loss) would ordinarily include the after-tax net unrealized gains and (losses) on available-for-sale securities, and the equity adjustment from foreign currency translation. Based on prior fiscal year unrealized capital losses in excess of the current year's three and nine month period's unrealized gains, a full credit has been taken against the estimated deferred tax liability attributable to the unrealized gains arising in the three and nine month periods ended August 31, 2003. At November 30, 2001, full valuation allowances were taken against the estimated deferred tax assets attributable to the unrealized losses based on the absence of other

appreciated capital gain property. The components of comprehensive income (loss) are presented below:

Currently, substantially all of the Company's advertising and marketing costs are comprised of (1) costs associated with the transmission of email marketing messages, both from internal sources and external third party vendors, (2) costs associated with the purchase of on-line consumer data, and (3) email program promotional and creative development costs. Such costs are charged to operations (1) at the time of the email transmission, (2) upon receipt of the qualified consumer data, and (3) at the time the promotional and creative services are provided, respectively, and are included as a component of cost of sales.

Total advertising and marketing costs included in cost of sales for the three months ended August 31, 2003 and 2002 were approximately $3,207,000 and $3,127,000, respectively, and for the nine months ended August 31, 2003 and 2002 were approximately $8,773,000 and $9,703,000, respectively.

During the three and nine months ended August 31, 2003, the Company did not have any material events regarding its marketable securities. As of November 30, 2002, the Company had disposed of all of its long-term, cost-based investments.

Historically, the Company's reportable operating segments are aligned into three fundamental areas: (1) Internet Commerce billed directly to the Company's marketing partners and corporate customers, as well as consumers (E-commerce), (2) Off-line Marketing services (such as telemarketing and postal mail), billed directly to licensed mortgage bankers, long distance carriers, wireless carriers and other service providing businesses (Off-line Marketing services) and (3) Products and Services billed to consumers by Local Exchange Carriers. The Company reintroduced the LEC billed products and services activities during the nine months ended August 31, 2003. Such segment was inactive in Fiscal 2002. The balance of the Company's operations, immaterial individually and in the aggregate, are included as part of Corporate and other. This business segment delineation is consistent with the Company's management and financial reporting structure based on products and services. The Company evaluates performance based on many factors, with the primary criteria being each segment's gross profit, pre-tax income and EBITDA, which the Company has defined as net income excluding (i) special charges, (ii) interest expense, (iii) interest and dividend income, (iv) net gains (losses) on the sale of marketable securities, (v) long-lived asset impairment charges, (vi) gains on non-monetary cost basis exchanges, (vii) other non-operating income, (viii) minority interest (income)loss, (ix) depreciation, (x) amortization and (xi) income taxes. The Company shares a common workforce and office headquarters, which precludes an allocation of all overhead components. Overhead items

that are specifically identifiable to a particular segment are applied to such segment and all other overhead costs are included in Corporate and other. The following tables set forth the Company's financial results by operating segment. All revenues are from non-intersegment sources and, therefore, no intersegment elimination applies.

		Three Months Ended				Nine Months Ended
		August 31, 2003		August 31, 2002		August 31, 2003		August 31, 2002
E-commerce		$	7,972,197	$	9,069,588	$	21,713,844	$	30,253,955
Off-line Marketing Services			—		1,594,658		2,017,225		3,585,726
LEC Billed Products and Services			531,070		—		1,312,031		—
Corporate			—		—		—		—

	Consolidated totals	$	8,503,267	$	10,664,246	$	25,043,100	$	33,839,681

		Three Months Ended				Nine Months Ended
		August 31, 2003		August 31, 2002		August 31, 2003		August 31, 2002
E-commerce		$	4,571,881	$	6,057,474	$	12,830,488	$	20,661,356
Off-line Marketing Services			—		1,388,612		1,755,439		3,198,350
LEC Billed Products and Services			273,023		—		593,533		—
Corporate			—		—		—		—

	Consolidated totals	$	4,844,904	$	7,446,086	$	15,179,460	$	23,859,706

		Three Months Ended						Nine Months Ended
		August 31, 2003			August 31, 2002			August 31, 2003			August 31, 2002
E-commerce		$	1,018,918		$	1,576,942		$	1,378,939		$	6,722,296
Off-line Marketing Services			—			261,973			203,094			553,654
LEC Billed Products and Services			145,160			—			185,885			—
Corporate			(544,899	)		(919,328	)		(2,765,863	)		(2,966,598	)

	Consolidated totals	$	619,179		$	919,587		$	(997,945	)	$	4,309,352

		Three Months Ended				Nine Months Ended
		August 31, 2003		August 31, 2002		August 31, 2003		August 31, 2002
E-commerce		$	259,033	$	249,104	$	927,803	$	587,649
Off-line Marketing Services			—		4,278		6,877		15,265
LEC Billed Products and Services			—		—		—		—
Corporate			59,556		68,423		204,467		201,327

	Consolidated totals	$	318,589	$	321,805	$	1,139,147	$	804,241

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

The total purchase price components are as follows: (a) cash of $897,500, of which $697,500 was paid simultaneously with the asset acquisition closings, both on which occurred in December 2001, and the $200,000 which was paid on December 6, 2002, and which is included as a component of the Company's accrued expenses as at November 30, 2002; and (b) 117,521 shares of the Company's common stock, valued at $6.20 per share (the average closing prices of the Company's stock for the period December 4 to December 10, 2001), which accounted for the additional consideration in the InfiKnowledge asset acquisition. Of the total share consideration, 39,174 of such shares were issued at closing, 39,174 shares were issued on December 6, 2002, with the balance of 39,173 shares issuable on December 6, 2003. The issuable shares were considered as outstanding common shares in the computation of both basic and diluted weighted shares outstanding for all periods subsequent to December 6, 2001. Goodwill and other intangible assets recognized as a result of these transactions amounted to approximately $1,477,000, of which approximately 90%, or $1.3 million, is expected to be deductible for income tax purposes. The goodwill and other intangibles were included in the E-commerce segment. The purchase price allocation to Goodwill and identifiable intangibles is set forth in Note 9 to the financial statements.

The gross carrying value and accumulated amortization of goodwill and other intangibles are as follows:

The Infiknowledge identifiable intangibles and unamortizable goodwill gross carrying amount changes as a result of the effects of foreign currency exchange translation.

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

In March 2003, the Company sold its majority owned subsidiary, Montvale Management LLC ("Montvale") to Mortgage Industry Consultants, LLC ("MIC") for $1.6 million, plus its investment. The terms of the agreement included an initial payment of $1 million (received in March 2003) followed by an additional $600,000 to be paid in 24 monthly installments of $25,000 each. As of October 15, 2003, six installments were received. In May 2003, the Company received approximately $299,000, representing its GAAP basis capital account in such majority owned subsidiary as at November 30, 2002. Traffix had obtained its 51% interest in September of 1999 through an initial investment of approximately $50,000. Based on management's assessment of Montvale's future cash flows, after taking into consideration Montvale's increased obligations with respect to the note obligations due the Company, the Company has deemed it prudent to defer recognition of income on the unpaid portion of the note. Recognition will take place in future periods under the cost recovery method.

The Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires us to describe briefly any material pending legal proceedings to which we are a party or of which any of our property

is subject. The Exchange Act further provides that no information need be given with respect to any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of our current assets. We believe that all of the claims made against us to date are either without merit or will ultimately result in a judgment against us (if at all) in an amount less than 10% of our current assets. Nevertheless, as the plaintiff in the Wingler action is seeking damages in excess of 10% of our current assets, and as certain of the remaining legal claims made against us fail to specify an amount of damages being sought by the plaintiff, and as there is a potential that the ultimate damages awarded in a claim could exceed such 10% threshold, in compliance with the Exchange Act, we listed below the Wingler action, as well as all legal claims made against us for which no amount of damages has been specified. The Qwest action seeks damages against us in an amount slightly less than 10% of our current assets. The Hellyer action seeks damages against us in an amount slightly less than 6% of our current assets.

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

In September 2003, the Magistrate Judge assigned by the Court to review and recommend on the motion, issued a report recommending that the complaint be dismissed. Ms. Wingler has objected to the report. The Court is to rule on the report and the objection.

James Hellyer—On or about June 20, 2003, pro se Plaintiff, James Hellyer commenced an action against Traffix, Inc. and its principals in the Court of Common Pleas in Licking County, Ohio. Mr. Hellyer claims to have been grievously injured by the receipt of three (3) electronic mail messages offering him credit card services and seeks $2.5 million in damages. We filed a Motion to Dismiss the action for failure to state a claim upon which relief may be granted on September 8, 2003. We believe that Mr. Hellyer's complaint is entirely without merit and we intend to continue vigorously defending this action.

Plasmanet—On November 21, 2002, Plasmanet, Inc., one of our competitors, commenced an action alleging patent infringement and misappropriation of trade secrets. Plasmanet, Inc. v. Apax Partners, Inc., et al., Case No. 02 Civ 9290 (S.D.N.Y.). Plasmanet operates a website, FreeLotto.com, which is similar to one operated by GLI. Plasmanet alleges that on September 24, 2002 it obtained a patent for a "Free Remote Lottery System" and that we infringed this patent. In addition, Plasmanet asserts that trade secrets were contained in a private placement memorandum and that we misappropriated these trade secrets after we were allegedly shown such private placement memorandum by an agent of Plasmanet's investment banker. The complaint seeks injunctive relief and unspecified money damages. We believe there is no merit to the claims and intend vigorously to defend against them. We have also asserted counterclaims, inter alia, to declare Plasmanet's patent invalid.

carrier to Qwest. They assert that they were not told that they would have to stay at certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We introduced the promotion ("Fly Free America") to Qwest, and had been retained by Qwest to operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement terminating our contract and settling the amount due us (the "May 2000 Agreement"). The May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any loss it may sustain by reason of this class action. We maintain that we have no liability in the matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false advertising claims. The court has recently certified the class and Qwest is defending the action.

In November 2002, we commenced an arbitration against Qwest to recover certain amounts due us pursuant to the May 2000 Agreement. In December 2002, Qwest filed counterclaims in the arbitration relating to the Fly Free America program. Qwest asserts that we must indemnify Qwest for, among other things, fines and penalties amounting to approximately $1.5 million which Qwest claims it paid in connection with a number of consent decrees it entered into with various state attorneys general, an unspecified amount of attorneys' fees, and any and all expenses, penalties or other amounts Qwest becomes liable for in connection with the class action. Qwest also seeks reimbursement of approximately $3.1 million it paid us pursuant to the May 2000 Agreement. We believe that there is no merit to Qwest's counterclaims and intend vigorously to defend against them, as well as to pursue our claim.

Columbia House/Rydel—In or about August 2002, Columbia House, one of our clients, notified us of an indemnification claim relating to a class action filed against Columbia House, among others, in Illinois, Rydel v. Comtrad Industries, Inc. et al., Circuit Court of Cook County, Illinois, No. 02 CH 13269. In that action, plaintiff claims to have received unsolicited commercial e-mail from, among others, Columbia House, in violation of Illinois law. Columbia House advised us that it believes that the email in question was not approved by Columbia House when it was sent, and asserted a claim for indemnification against us pursuant to our contract. We and Columbia House agreed to defer resolution of the indemnification claim (and reserved each of our respective rights). Columbia House is defending against the class action. Its motion to dismiss the complaint has been denied.

In or about January 2003, we were named as a defendant in the Rydel class action. In an additional count in the complaint, the plaintiff asserted that we violated the Illinois Consumer Fraud and Deceptive Business Practices Act by providing to a co-defendant a list of consumers who had consented to receive commercial e-mails when, the complaint alleges, they had not. The complaint sought injunctive relief and unspecified damages. Our motion to dismiss the complaint was granted in June 2003, and the plaintiff has filed an appeal. We believe that there is no merit to the claim, and, in the event the dismissal of the claim is reversed on appeal, we intend to vigorously defend against it.

As stated above, we are unable to determine the ultimate outcomes of any of the foregoing claims, and, accordingly, no provision for loss has been recorded in the unaudited financial statements included in this Report.

On September 22, 2003, the Company's Board of Directors declared a dividend out of the Company's surplus of $0.08 per share on the outstanding shares of the Company's common stock for the quarter ended August 31, 2003. Such dividend is payable on or about November 10, 2003 to holders of record of such shares at the close of business on November 1, 2003. The amount and record dates of future quarterly dividends will be reviewed and determined by the Board of Directors.

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", "continue", 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. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

We are a leading on-line database marketing company that uses our on-line media network to generate leads, customers and sales for our proprietary product and service offers, and our corporate client's product and service offers. We provide complete end-to-end marketing solutions for companies seeking to increase sales and customers through on-line marketing programs, and database development and enhancement programs. The services we offer include the development of a complete creative promotion to be used to market the client's product to consumers, broadcasting a promotion on-line in order to generate new customers for the client, delivery of data files from the results of campaigns, creating and hosting the customized websites or web pages necessary to effect the consumer transaction that drives the client's sales and generating comprehensive reporting in order for the client to analyze the effectiveness of a promotion. We use our websites, interactive games, email marketing and database of permission-based, profiled records (and the on-line media of third parties) to generate the customers, sales and leads for our clients, as well as our own product and service offers. We are paid by our clients primarily on a success-based model, in that we receive a fee for every lead, customer or sale generated for the client. In addition to our third party client-based revenue, we generate revenue from our own products and services, such as retail gift items, which accounted for approximately 3.1% and 3.5% of our revenue during the nine-month periods ended August 31, 2003 and 2002, respectively.

In Fiscal 2003, our own products and services have been expanded, and include Internet based services (LEC Billed Products) and iMatchUp.com (E-Commerce), our on-line dating service. The combination of the revenue generated from such services introduced in Fiscal 2003 were approximately $1.9 million, or 23% of our revenue during the three months ended August 31, 2003, as compared to $1.4 million, or 19% of our revenue during the quarter ended May 31, 2003. Such products and services did not contribute to Fiscal 2002 revenue.

We also generate revenues from the sales and rentals (for use both on-line and off-line) of our proprietary, profiled databases.

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

marketing background, we believe we are able to design on-line marketing programs to cost-effectively generate traffic and leads for traditional direct marketing media channels, such as inbound and outbound telemarketing and direct mail.

We own and operate multiple on-line properties, such as GroupLotto.com, our free on-line lottery, AtlasCreditGroup.com, PrizeAmerica.com and iMatchup.com, our premier on-line dating service which commenced operations during the nine months ended August 31, 2003, as well as a number of interactive games (such as Direct Deposit Promotions and Scratch&Win), all supplemented by our affiliates' other web sites providing services on the Web. These activities are designed to generate real-time response-based marketing results for our corporate clients, as well as for our own offers. When visiting our on-line properties, consumers are given the opportunity to purchase, sign-up for, ask to be contacted regarding, or simply indicate an interest in, hundreds of offers for various products and services. Specifically, through these interactive Web properties we generate a variety of transactional results for our products, and our corporate clients ranging from (a) Web traffic, (b) inbound telemarketing calls, (c) outbound telemarketing leads, (d) demographically/psychographically profiled lists of consumers, (e) highly-targeted customized response-based leads, (f) completed applications for products, and (g) actual sales of products and services.

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

Similar to the GroupLotto website, we generate results for our clients through several other interactive games and products. For example, we market through a "scratch and win" game that offers consumers the chance to win any number of prizes, which range from $100 to $25,000. The consumer plays the game by "scratching" with the mouse certain parts of the entry ticket to uncover the results. These games are presented as "pop-ups" upon browser exit, and can also be "pushed" to consumers by delivering them to the player's email inbox. We also market product and services that can be purchased on-line with a credit card through our "Direct Deposit" sweepstakes game (patent pending), whereby a consumer can win up to $5,000 instantly if a portion of his or her credit card number matches a pre-selected winning number.

We own and operate several other websites such as AtlasCreditGroup.com, PrizeAmerica.com, TheBargainSpot.com, prizecade.com and jewelclaimcenter.com. Additionally, during the nine months ended August 31, 2003, we launched AtlasAutomotiveGroup.com. a website that enables its visitors to read reviews and request price quotes to purchase automobiles on-line. Such websites are deployed to generate revenue for our clients in a similar manner as the GroupLotto model described above. Each of these sites is designed to appeal to a specific consumer interest category that we matched with product promotions that appeal to such interest category.

EMAIL MARKETING. Direct marketing via email is an important business channel. Each program that we market for our clients can be implemented not only through the websites, interactive games and "pop-ups" discussed above, but also, and often, through email marketing. We currently market to a vast database that exceeds 100 million permission-based records, which are either owned by us or are managed by us under our revenue share arrangements.

Compared to postal marketing and telemarketing, email marketing is significantly less expensive, offers much faster response times, and, we believe, provides for a more interactive consumer media experience. We now own an email delivery system (acquired in December 2001 through the acquisition of the assets of Infiknowledge.com, a privately held Canadian technology company), which reduces our dependence on third party vendors and has created economies associated with our commercial email delivery, as well as our site maintenance and development costs. FOR A FURTHER DISCUSSION OF RECENT BUSINESS AND LEGAL DEVELOPMENTS REGARDING THIS E-COMMERCE COMPONENT, AND EVENTS IMPACTING EMAIL MARKETING, SEE—CRITICAL ACCOUNTING POLICY AND ACCOUNTING ESTIMATE DISCUSSION—FACTORS THAT COULD AFFECT FUTURE RESULTS."

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

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

SYNDICATION. We expend a significant portion of our email resources to generate sales for our own products and services and for traffic to our websites. After we develop a campaign that works efficiently on our own media, we often "syndicate" the program to third-party media. Typically, we have expended time, media and other costs in developing certain campaigns. In exchange for this invested effort, we obtain the right to market those campaigns to a list of other on-line media companies. We enter into agreements with these other on-line media companies to run the campaigns, generally on a fee-share arrangement. We believe such media companies obtain a benefit from receiving an immediately marketable, fully-packaged and tested marketing program. As a result, we believe we maintain the ability to leverage campaigns we have developed (including our own products and services) so that in future fiscal periods we can generate additional revenue with diminished costs and risks associated with such business extension.

Several new business units, which we introduced during the nine months ended August 31, 2003, include a dating/personal program conducted over the Internet ("iMatchup.com") and LEC Billed Internet based products ("TxNET" and "WorldWebAccess.com"). During the nine months ended August 31, 2002, we introduced the on-line marketing of our own products and services through the Thanksmuch.com website which sells gift items (such as DVDs, CD's and inexpensive jewelry) directly to consumers. When a consumer selects a gift item and tenders his credit card, he is given the opportunity to purchase other, more valuable products and services at special discounts. One of the additional benefits that is derived from the credit card billed portion of these programs, is our ability to accumulate consumer credit card data, which allows for the subsequent use of our marketing concept of "just-one-click" credit card billing, making on-line purchases easier for the consumer, and allowing us to more easily process additional sales and services in the future. In addition, certain of these services are designed as monthly recurring revenue sources, such as our dating and ISP services.

No assurances can be given, however, that these new sources of revenue will contribute material revenues and/or income from operations in future fiscal periods, if at all. During the three and nine-month periods ended August 31, 2003, the combination of all such newly introduced services generated approximately $1.9 million and $3.8 million, respectively, or approximately 23% and 16%, respectively, of consolidated net revenue.

Our expansion in, and dependence on, our on-line direct marketing efforts, coupled with the potential for state and/or federal legislation limiting our ability to contact consumers on-line should all be considered when referring to the results for the three and nine-month periods ended August 31, 2003, as well as prior year historical results, in evaluating the potential for our future fiscal period operations, cash flows, and financial position.

Transactions with major customers and related economic dependence information is set forth (1) following our discussion of Liquidity and Capital Resources, (2) in our discussion of Critical Accounting Policy and Accounting Estimate Discussion (immediately following (1) previously mentioned) and (3) under the heading Transactions with Major Customers in Note 1 to the Consolidated Financial Statements included herein.

During the three and nine-month periods ended August 31, 2003, we generated revenue from the following segments: E-Commerce, Off-line Marketing and LEC Billed products. The E-Commerce segment currently represents the core of our business operations. Revenue in the E-commerce segment is generated primarily from marketing of third party products and services on our websites and through email promotions. The Off-Line Marketing services segment consists of revenue generated by us through off-line direct marketing channels. LEC Billed products consist of our proprietary LEC billed ISP product, known as TXNet ISP. This product was introduced during the nine months ended August 31, 2003. During the three and nine-month periods ended August 31, 2002, we generated revenue only from the segments E-Commerce and Off-line Marketing. Historically, the Off-line Marketing service segment's activities consisted of telemarketing services used for the acquisition of long distance and wireless phone customers for various phone service providers. In Fiscal 2002, this segment consisted exclusively of our majority owned subsidiary, Montvale Management, LLC, and the revenues and expenses of Montvale's net branch services provided to qualified mortgage banking and lending institutions. During March 2003, we disposed of our interest in Montvale, all as more fully described in Note 10 included in the attached financial statements. Historically, the LEC Billed Products segment represented telecommunications-related products and services marketed by us directly to consumers who were billed by local exchange carriers (LECs) on the consumer's telephone bill. This segment was inactive during the entire Fiscal 2002 year. Segment information is set forth in Note 7 to the Consolidated Financial Statements referred to in the Financial Statements and Supplementary Data section hereof and incorporated herein by reference.

The following is a discussion of our financial condition and results of operations for the three and nine-month periods ended August 31, 2003 and August 31, 2002, respectively. It should be read in conjunction with our Form 10-K as filed for the year ended November 30, 2002, the Notes thereto and other financial information included elsewhere in this report.

Our net revenues, on a segmental basis, and with disclosure of the components of the individual segments, for each of the three month periods ended August 31, 2003 and August 31, 2002, are detailed in the following tables:

Net Revenue decreased approximately $2.2 million, or 20%, to $8.5 million for the three months ended August 31, 2003 from $10.7 million in the comparable prior year period. Three significant factors contributed to the decline in net revenue: (1) our loss of one of our significant customers in the fourth quarter of Fiscal 2002, which customer accounted for approximately $2.3 million, or 21%, of our revenue during the three months ended August 31, 2002, and which customer did not contribute to revenue during the comparable 2003 quarter; (2) our sale of a majority-owned subsidiary (Montvale Management, LLC) during the quarter ended May 31, 2003, which subsidiary accounted for approximately $1.9 million, or 18% of our revenue during the three months ended August 31, 2002; and (3) our complete cessation of recognizing revenue from one of our major customers in the quarter ended May 31, 2003 based on the absence of collection probability. Such customer, a public company, accounted for approximately $0.5 million, or 5% of our revenue during the three months ended August 31, 2002. We made our collection assessment during our second quarter, ended May 31, 2003, based on such customer's publicly filed information. This assessment included the consideration of AMEX's May 23, 2003 trading halt of the customer's securities, and its eventual filing for bankruptcy protection on June 16, 2003. See—"Bad Debt Expense".

Offsetting the net revenue declines in the quarter were increases in net revenue attributable to our recently launched online dating service, iMatchup.com, which accounted for $1.4 million, or 16% of consolidated net revenues for the three months ended August 31, 2003, and our recently launched LEC Billed Products and Services segment, which accounted for approximately $0.5 million, or 6% of consolidated net revenues for the three months ended August 31, 2003. Both iMatchup.com and the

LEC Billed Products and Services segment were inactive in the Fiscal 2002 comparable period. Additionally, our "Atlas" and PrizeAmerica.com websites (both introduced in Fiscal 2003) and new customer additions to our existing websites and email marketing programs accounted for approximately $0.9 million of revenue during the three months ended May 31, 2003, further offsetting the revenue decreases noted above.

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

Our cost of sales during the three months ended August 31, 2003 and August 31, 2002 were comprised of (1) direct and indirect marketing costs associated with the procurement and retention of consumers for our databases, including direct response email marketing costs, data and customer profile purchases, promotional costs and premium fulfillment costs, and (2) the related contingent-based sweepstakes indemnification expense, service provision costs, billing and collection fees and customer service costs.

Our cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the three month periods ended August 31, 2003 and August 31, 2002 are set forth below:

Cost of sales on a consolidated basis increased $0.4 million, or 14%, to $3.7 million for the three months ended August 31, 2003 from $3.2 million in the comparable prior year period.

The significant factors contributing to the increase in cost of sales were: (a) an approximate $0.5 million, or 30%, increase in the costs incurred in the acquisition of customer profiles related to our on-line dating service, iMatchUp.com and increased acquisitions of registrants for our other websites; (b) an approximate $0.1 million, or 112% increase in prize indemnification costs from increased site visitation which resulted in the approximate 48% increase in site revenue discussed above in the revenue section; and (c) an approximate $0.3 million increase in service provision, billing, collection and customer service costs incurred in the LEC Billed Products and Services segment, which segment was inactive in the prior year's comparable period. LEC's are the Local Exchange Carriers (local phone companies) that bill customers for their use of our LEC based services, which include an ISP (Internet Service Provider) service (Txnet, Inc.), a Voice Over Internet Protocol Long Distance service and an Email service (both as WorldWebAccess.com).

Our gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the three month periods ended August 31, 2003 and 2002 are set forth below:

		For the Three Months Ended
		Absolute percentage change inc(dec)		Relative percentage change inc(dec)
		August 31, 2003		August 31, 2002
E-commerce		57.3	%	68.9	%	-11.6	%	-16.8	%
Off-line Marketing services		0.0	%	90.9	%	-90.9	%	-100.0	%
LEC Billed products and services		51.4	%	0.0	%	51.4	%	100.0	%

	CONSOLIDATED GROSS PROFIT PERCENTAGE		57.0	%	68.9	%	-11.9	%	-17.3	%

Consolidated Gross Profit Percentage ("Gross Margin") as a percentage of net revenue was 57% during the three months ended August 31, 2003, compared to 69% in the prior year's comparable fiscal period, representing an absolute percentage point decrease of 12%, or a 17% decrease on a relative basis. The decline in gross profit is primarily attributable to increased profile acquisition costs for our iMatchUp.com on-line dating site and other websites, and the reintroduction of the LEC Billed Products and Services segment activity, which has a gross profit lower than our historical gross profit. Additionally, the iMatchUp.com service has a decreasing effect on gross profit resulting from the expensing of the customer acquisition cost during the current period, with the corresponding revenue being deferred, based on the terms of the enrolled member (i.e., one month, three month or annual memberships). The iMatchUp.com profiles that convert to billable members generally do so over a period subsequent to their month of acquisition. Therefore, we expect that these future conversions of profiles to billable members, coupled with the amortization of the revenue deferred at August 31, 2003, as well as the anticipated renewal revenues from such acquired customers, should allow us to report improved consolidated gross profit relationships in future fiscal quarters.

Our Selling Expenses for each of the three months ended August 31, 2003 and August 31, 2002 are presented, on a segmental basis, and with the components of the individual segments, in the tables set forth below:

Selling expenses, on a consolidated basis, decreased approximately $1.7 million, or 53%, from $3.1 million during the three months ended August 31, 2002, to $1.5 million during the three months ended August 31, 2003. The decrease was primarily related to an approximate $0.6 million reduction in selling expenses attributable to the sale of our majority owned subsidiary, Montvale Management, LLC, on March 6, 2003. Such majority owned subsidiary was active for the entire three months ended August 31, 2002. Additionally, our E-Commerce segment's selling expense decreased approximately $1.0 million, or 41%, resulting from decreased database fee share commissions and decreased other selling commissions, both related to declines in revenue. The database fee share commission relationship generally arises after we conclude a contractual arrangement with a third party database owner pursuant to which we market our Clients' offers and services to such third party database. The terms of the third party database owner's compensation are set forth within the specific contractual arrangement and are performance-based only. Compensation is either calculated as a fixed fee paid for each customer or lead generated by the third party's database, or a revenue share that is a percentage of the revenue generated (after deduction for certain direct costs) by us for marketing offers to the third party's database. We utilize unique Universal Resource Locater identifier links ("URLs") when promotions are mailed to the third party's database as a tracking mechanism by which we are able to account for revenue generated under the fee share arrangement with such third party database owner.

Our general and administrative expenses ("G&A") are principally comprised of (i) compensation costs and related expenses for executive, finance, information and operation systems, and general administration personnel, (ii) professional fees (which include legal; audit, accounting and tax; public relations; database management and consulting; and public company related printing costs), (iii) insurance costs, (iv) occupancy and other equipment rental costs, (v) site development, maintenance and modification costs related to our E-commerce segment, and (vi) all other general and miscellaneous corporate expense items.

Our General and Administrative Expenses for the three months ended August 31, 2003 and August 31, 2002 are presented, on a segmental basis, and with the components of the individual segments, in the tables set forth below:

Consolidated General and Administrative Expenses, by segment, by component

General and Administrative expenses ("G&A") on a consolidated basis decreased approximately $0.7 million, or 20%, when comparing G&A of $3.7 million for the three months ended August 31, 2002 to G&A of $2.9 million incurred during the three months ended August 31, 2003. The net decrease was attributable to decreases in our: (a) Off-line Marketing Service segment ($496,733) pursuant to our disposition of our majority-owned subsidiary (Montvale Management, LLC) in March 2003; (b) Corporate and Other segment ($383,296), offset by increases in our LEC Billed Products and Services segment ($127,863). G&A increases in the LEC Billed Products and Services segment resulted from the reintroduction of such segment's activity in Fiscal 2003. Such segment was inactive during the comparable Fiscal 2002 period. The material G&A decreases in the Corporate and

Other segment, as it relates to the "Compensation costs and related expense" category, resulted from decreased bonus accruals to officers and staff when compared to the prior year's comparable period and a reduction in officers salaries attributable to an officer resignation in the fourth quarter of Fiscal 2002. Additionally, professional fees decreased when compared to the prior year's comparable period pursuant to the closure of certain legal cases that were active during the three months ended August 31, 2002.

Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $95,000 in legal fees from FKIWSBR during the three months ended August 31, 2003.

Bad Debt expense increased approximately $68,000, or 140%, when comparing the three months ended August 31, 2003 with the three months ended August 31, 2002. The increase in bad debt expense resulted from our assessment of the risk of collection embedded in our customer base as a product of the processes described below.

We continuously evaluate the potential of the collectibility of trade receivables by reviewing such factors as deterioration in the operating results, financial condition and/or bankruptcy filings of our customers. As a result of this review process, we record bad debt provisions to adjust the related receivables' carrying amount to an amount that reflects their probable realizable value. Provisions for bad debts are also recorded resulting from the review of other factors, including (a) length of time the receivables are past due, and (b) historical experience. If circumstances related to specific customers change, our estimates for bad debt provisions could be further increased.

The components of our "Other income(expense)" for the three months ended August 31, 2003 and 2002 are set forth below:

Consolidated Other Income (Expense) increased approximately $0.6 million, from approximately ($0.4) million in net-expense for the three months ended August 31, 2002, to approximately $0.2 million in net-other-income for the three months ended August 31, 2003.

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

Quarterly income taxes are calculated in accordance with the Interim Financial Reporting requirements as set forth in the Accounting Principal Board's Opinion 28. Such Opinion considers interim quarterly periods as an integral part of the annual period, with interim quarterly tax periods reflecting the estimated annual effective tax rate. The Company believes that it has adequately provided for tax-related matters. The Company is subject to examination by taxing authorities in various jurisdictions. Matters raised upon audit may involve substantial amounts and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse effect upon the Company's consolidated financial statements.

The three months ended August 31, 2003 reflects a tax benefit of approximately $178,000 on pre-tax income of approximately $484,000. The tax benefit differs from the Company's effective tax rate due to several factors. (1) the true-up of state and foreign taxes upon the filing of our prior year's tax returns (benefit of approximately $263,000); (2) a change in the effective rate within the quarter on our state and foreign tax expense based on our filings (benefit of approximately $298,000); and (3) a

reclassification from the credit method to the expense method for a prior year foreign tax liability (net provision of approximately $164,000).

Our 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, 2003 and August 31, 2002, are detailed in the following tables:

Net Revenue decreased approximately $8.8 million, or 26%, to $25 million for the nine months ended August 31, 2003 from $33.8 million in the comparable prior year period. Three significant factors contributed to the decline in net revenue: (1) our loss of one of our significant customers in the fourth quarter of Fiscal 2002, which customer accounted for approximately $8.5 million, or 25%, of our revenue during the nine months ended August 31, 2002, and which customer contributed only $24,000 to Fiscal 2003 revenue; (2) the sale of our majority-owned subsidiary (Montvale Management, LLC) during the quarter ended May 31, 2003, which subsidiary accounted for approximately $4.1 million, or 12% of our revenue during the nine months ended August 31, 2002, compared to $2.4 million during the nine months ended August 31, 2003, representing a $1.7 million, or a 41% decrease; and (3) our complete cessation of recognizing revenue from one of our major customers in the quarter ended May 31, 2003 based on the absence of collection probability. Such customer, a public company, accounted for approximately $2.8 million, or 5% of our revenue during the nine months ended August 31, 2002, compared to approximately $529,000, or 2% of our revenue during the nine months ended August 31, 2003. We made our collection assessment during the quarter ended May 31, 2003, based on such customer's publicly filed information. This assessment included the consideration of AMEX's May 23, 2003 trading halt of the customer's securities, and its eventual filing for bankruptcy protection on June 16, 2003. See "—Bad Debt Expense".

Offsetting the net revenue declines recognized during the nine months ended August 31, 2003, were increases in net revenue attributable to our recently launched online dating service, iMatchup.com, which accounted for $2.5 million, or 10% of consolidated net revenues for the nine months ended August 31, 2003, and net revenue from our recently launched LEC Billed Products and Services segment, of approximately $1.3 million, or 5% of consolidated net revenues for the nine months ended August 31, 2003. Both iMatchup.com and the LEC Billed Products and Services segment were inactive in the Fiscal 2002 comparable period.

Our cost of sales during the nine months ended August 31, 2003 and August 31, 2002 were comprised of (1) direct and indirect marketing costs associated with the procurement and retention of consumers for our databases, including direct response email marketing costs, data and customer profile purchases, promotional costs and premium fulfillment costs, and (2) the related contingent-based sweepstakes indemnification expense, billing and collection fees and customer service costs.

Our cost of sales, on a segmental basis, and with disclosure of the components of the individual segments, for each of the nine month periods ended August 31, 2003 and August 31, 2002 are set forth below:

Cost of sales on a consolidated basis remained relatively constant, with a decrease of $0.1 million, or 1%, to $9.9 million for the nine months ended August 31, 2003 from $10 million in the comparable prior year period.

A combination of several offsetting factors contributed to the net decrease in cost of sales. We recognized an approximate $0.8 million decrease in data, profile and premium costs. Such decrease was primarily attributable to decreases in premium costs of approximately $2 million, offset by increases in data and profile costs of approximately $1.2 million. The premium cost decline was related to our loss of a significant customer, which customer's enrollment-based marketing program offered a premium to entice enrollments. We discontinued conducting business with this significant customer in the fourth quarter of Fiscal 2002. Therefore, Fiscal 2003 was not burdened with such premium obligation costs. Offsetting such decrease was an increase in the cost of consumer data and profile acquisitions, both directly associated with our current year increased website activities, specifically the iMatchUp.com website, the "Atlas" websites, PrizeAmerica.com and other newly introduced websites. The net decrease of $0.8 million discussed above was offset by billing, collection and customer service costs of approximately $0.7 million associated with our LEC Billed Product activities, which activities were dormant during the nine months ended August 31, 2002.

Our gross profit in terms of dollars, on a segmental basis, and our gross profit percentage, on a segmental basis, for each of the nine month periods ended August 31, 2003 and 2002 are set forth below:

		For the Nine Months Ended
		Absolute percentage change inc(dec)		Relative percentage change inc(dec)
		August 31, 2003		August 31, 2002
E-commerce		59.1	%	68.9	%	-9.8	%	-14.2	%
Off-line Marketing services		87.0	%	89.2	%	-2.2	%	-2.4	%
LEC Billed products and services		45.2	%	0.0	%	45.2	%	100.0	%

	CONSOLIDATED GROSS PROFIT PERCENTAGE		60.6	%	70.5	%	-9.9	%	-14.0	%

Consolidated Gross Profit Percentage ("Gross Margin") as a percentage of net revenue was 60.6% during the nine months ended August 31, 2003, compared to 70.5% in the prior year's comparable fiscal period, representing an absolute percentage point decrease of 9.9%, or a 14% decrease on a relative basis.

The decline in gross profit is primarily attributable to increased mailing costs due to an increase in volume mailed, coupled with a reduction in response rates, the addition of profile acquisition costs for its iMatchUp.com on-line dating site and the reintroduction of the LEC Billed Products and Services segment activity, which has a gross profit lower than our historical gross profit. The impact on gross

profit from the iMatchUp.com service results from the expensing of the customer acquisition during the current period, with the corresponding revenue being deferred, based on the terms of the enrolled member (i.e., one month, three month or annual memberships). The iMatchUp.com profiles that convert to billable members generally do so over a period subsequent to their month of acquisition. Therefore, we expect that these future conversions of profiles to billable members, coupled with the amortization of the revenue deferred at August 31, 2003, as well as the anticipated renewal revenues from such acquired customers, should allow us to report improved consolidated gross profit relationships in future fiscal quarters.

Our Selling Expenses for each of the nine months ended August 31, 2003 and August 31, 2002 are presented, on a segmental basis, and with the components of the individual segments, in the tables set forth below:

Selling expenses on a consolidated basis decreased approximately $3.1 million, or 36%, from $8.7 million during the nine months ended August 31, 2002, to $5.6 million during the nine months ended August 31, 2003. The decrease was primarily attributable to an approximate $2.2 million decrease in database fee share commissions and other sales based commissions. Such selling expense item's decreases were primarily related to the business conducted by us with a significant customer during the nine months ended August 31, 2002. This significant customer relationship ended in the fourth quarter of Fiscal 2002. We did not transact business with such customer during the nine and three-month periods ended August 31, 2003 and, accordingly, did not incur the related selling expenses. Additional selling expense reductions amount to approximately $0.7 million, and relate to a reduction in selling expenses attributable to the sale of our majority owned subsidiary, Montvale Management, LLC, on March 6, 2003. Such majority owned subsidiary was active for the entire nine months ended August 31, 2002.

maintenance and modification costs related to our E-commerce segment, and (vi) all other general and miscellaneous corporate expense items.

Our General and Administrative Expenses for each of the nine-month periods ended August 31, 2003 and August 31, 2002 are presented, on a segmental basis, and with the components of the individual segments, in the tables set forth below:

Consolidated General and Administrative Expenses, by segment, by component

General and Administrative expenses ("G&A") on a consolidated basis decreased approximately $0.1 million, or 1%, when comparing G&A of $11.2 million from the nine months ended August 31, 2002 to G&A of $11.1 million incurred during the nine months ended August 31, 2003. The decrease was attributable to offsetting activity within our segments as set forth in the following: (a) E-commerce segment increased approximately $108,000, primarily attributable to increases in the costs of the development, maintenance and modifications to our newly introduced, and existing, websites, offset by reductions in: (i) compensation costs (primarily from bonus reductions), (ii) professional fees (primarily

from reduced litigation defense demand) and (iii) other E-commerce G&A expenses (primarily related to decreased activity within the segment resulting from revenue declines); (b) decreased Off-line Marketing Services segment expenses of approximately $402,000, attributable to the March 6, 2003 sale of our majority owned subsidiary, Montvale Management, LLC; (c) increased G&A costs associated with the LEC Billed Products and Services segment of approximately $408,000, with such segment being inactive in Fiscal 2002; and (d) decreases in Corporate and other segment of approximately $198,000, with such decrease being primarily attributable to reduced litigation defense demand.

Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. We incurred approximately $596,000 in legal fees from FKIWSBR during the nine months ended August 31, 2003.

Bad Debt expense increased approximately $120,000, or 25% when comparing the nine months ended August 31, 2003 with the nine months ended August 31, 2002. The increase in bad debt expense resulted from our assessment of the risk of collection embedded in our customer base as a product of the processes described below.

During the nine months ended August 31, 2003, one of our major customers filed for bankruptcy protection. We charged approximately $300,000 of such customer's accounts receivable to the allowance. We had recognized $322,000 in bad debt expense for such customer during the three months ended February 28, 2003. The current nine-month period's bad debt expense relates to the risk of collection from bad debts as it relates to the balance of our customer base.

The components of our "Other income(expense)" for the nine months ended August 31, 2003 and 2002 are set forth below:

Consolidated Other Income (Expense) increased approximately $1.2 million, from approximately $0.1 million for the nine months ended August 31, 2002, to approximately $1.3 million for the nine months ended August 31, 2003.

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

The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. The Company believes that it has adequately provided for tax-related matters. The Company is subject to examination by taxing authorities in various jurisdictions. Matters raised upon audit may involve substantial amounts and could be material. Management considers it unlikely that resolution of any such matters would have a material adverse effect upon the Company's consolidated financial statements.

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, as well as reductions to valuation allowances taken in prior fiscal periods when available evidence indicate such adjustments are necessary. For the nine months ended August 31, 2003, the Company recorded a net income tax benefit of approximately $349,000, this represented an effective income tax rate of 43.2%. This effective tax rate is higher than the Company's historically recognized effective tax rate and resulted partially from the release of a prior year deferred tax asset valuation allowance related to capital loss carry-forwards, offset by tax expense at the state and foreign levels that did not benefit from the Company's consolidated pre tax loss.

In the prior comparable period the Company had recorded income tax expense of approximately $1.4 million for the nine months ended August 31, 2002 on a pre-tax income of approximately $3.6 million. This equated to an effective tax rate of approximately 39%.

As of August 31, 2003, we had aggregate working capital of $37.6 million compared to aggregate working capital of $39.3 million as of November 30, 2002. We had available cash, cash equivalents and readily available marketable debt securities of $34.2 million as of August 31, 2003 compared to available cash, cash equivalents and readily available marketable debt securities of $36.3 million as of November 30, 2002. The approximate $2.1 million decrease in cash, cash equivalents and readily available marketable debt securities is primarily the result of $602,002 of cash provided by operating activities, offset by $1,338,839 used in the purchase of capital expenditures (which included the purchase of a building, located in Moncton, New Brunswick, Canada, for approximately $606,000) and the $1,021,318 used in the payment of a dividend to common shareholders during the nine months ending August 31, 2003.

Our days-sales-outstanding ("DSO") in accounts receivable at August 31, 2003 was 49 days, compared to 53 days at May 31, 2003, 52 days at February 28, 2003, 45 days in the fourth quarter of Fiscal 2002, and 56 days in the prior year's comparable period. The decrease in the current quarter's DSO compared to the first quarter and second quarter of the current fiscal year, and the fourth quarter of the prior fiscal year relates to the improved collection cycles on our client billed business, partially offset by longer collection cycles attributable to our recently reinstated LEC Billed Products and Services segment activities. Our DSO may rise above 49 days in future fiscal periods primarily in the event of growth in revenues from the Company's LEC Billed Products and Services segment.

The majority of our customers are extended 30-day credit terms. We continually monitor customer adherence to such terms and constantly strive to improve the effectiveness of our collection efforts with the goal of achieving a DSO in the 40-day range. Future fiscal periods might not reflect this goal of a 40-day DSO, and might exceed the 49-day DSO recognized in the nine month period ended August 31, 2003.

Historically, our primary cash requirements have been used to fund the cost of advertising and promotion, with additional funds having been used in the purchasing of equipment and services in connection with the commencement of new business lines, further development of businesses being test marketed and for the development of the equipment infrastructure of subsidiaries organized in Fiscal 2002.

In Fiscal 2000, we executed our on-line direct marketing strategy. Our future plans and business strategy continue to call for our Internet-based E-commerce segment to be our primary operating focus, with such segment generating the material portion of our revenues for the nine months ended August 31, 2003. We continue to invest considerable capital into our E-commerce segment. If the E-commerce segment's activities fail to generate sufficient revenue, we could realize a material adverse impact on our capital and liquidity resources resulting from expenditures necessary to generate such revenue, including, but not limited to, expenditures for (a) marketing campaigns, (b) product development costs, (c) site development and maintenance and related technology based costs, (d) potential on-line, and/or off-line, business acquisitions, (e) costs associated with developing alternative means of email promotion delivery, or (f) other unexpected and/or currently unidentifiable costs. During the three and nine month periods ended August 31, 2003, we expended approximately $63,000 and $1.3 million in capital expenditures, respectively, to support our E-commerce activities. Such expenditures included the purchase of property located in New Brunswick, Canada, through a wholly owned subsidiary, to house the business activities of such subsidiary. The purchase price for the land and building was $606,000 (US) and was settled in cash at closing on March 6, 2003. We continue to be obligated under operating leases on rental space in Canada through April 2005, for a total lease commitment of approximately $143,000. We currently intend to continue to occupy such property for the term of said leases. Such subsidiary was formed in December 2001, using the assets of a Canadian-based Internet technology company acquired by us at such time, which purchased the property previously mentioned. We believe this prior year acquisition will continue to decrease certain costs incurred by us relative to our reliance on third parties in the provision of e-mailing services and other Internet hosting services and data maintenance costs. Since the date of such asset acquisition, we have recognized certain cost savings due to this wholly owned subsidiary. The continued realization of these cost savings will require continued capital expenditures by the wholly owned subsidiary. Should the business climate, Internet operating environment or technology environment change significantly, we could be faced with circumstances that would limit or prevent our utilization of these capital expenditures, which could subject us to non-cash asset impairment charges at that time.

In March 2003, we sold our majority owned subsidiary, Montvale Management LLC ("Montvale"), to Mortgage Industry Consultants, LLC ("MIC") for $1.6 million, plus our investment. The terms of the agreement included an initial payment of $1 million (received in March 2003) followed by an additional $600,000 to be paid in 24 monthly installments of $25,000 each. As of October 15, 2003, six installments were received. In May 2003, we received approximately $299,000, representing our GAAP basis capital account in such majority owned subsidiary as at November 30, 2003. We also entered into a two year Media Purchase Agreement whereby we agreed to provide certain media lead generation and related services to the continuing owners of Montvale for consideration of $40,000 per month over the term of the agreement. As of October 15, 2003, Montvale has abided by the payment terms of the agreement. We had obtained our 51% interest in September of 1999 through an initial investment of approximately $50,000. Based on management's assessment of Montvale's future cash flows, after taking into consideration Montvale's increased obligations with respect to the note obligations due us, we have deemed it prudent to defer recognition of income on the unpaid portion of the note. Recognition will take place in future periods under the cost recovery method.

Our Internet business plan and strategy prompted us to terminate the active marketing of our legacy products and services in the fiscal year ended November 30, 1999. Accordingly, this legacy activity has contributed in a significantly decreasing degree to our cash flows and results of operations for the three-year fiscal period, December 1, 1999 to November 30, 2002. This should be considered when using our historical results in evaluating future operations, cash flows and financial position. Nevertheless, we will continue to explore opportunities to offer other Off-line marketing services, and expect to expand our activities within our LEC Billed Products and Services segment.

Under currently proposed operating plans and assumptions, management believes that projected cash flows from operations and available cash resources and working capital described above, will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months. Our known identifiable short-term and long-term obligations are described below in the "Obligations and Commitments" disclosure as required by the Securities and Exchange Commission's (the "Commission") Release Nos. 33-8056 and 34-45321 and FR-61, as issued on January 22, 2002.

Additionally, as we seek to further extend our reach into the E-commerce and LEC Billed product and service arenas, as well as identifying new and other consumer oriented products and services in the off-line arena, we may use existing cash reserves, enter into long-term financing arrangements, or employ other means to finance such diversification, none of which is specifically identifiable or measurable at this time.

We are not aware of any specific factors, outside of those described in the following table, and those "potential factors" described in the "Critical Accounting Policy and Accounting Estimate Discussion" which follows the Liquidity and Capital Resource discussion, that are reasonably likely to cause a material impact, either positive or negative, on our liquidity trends. Additionally, we do not have off-balance sheet arrangements, other than those described in the following table, and do not engage in trading activities involving non-exchange traded contracts.

Feder, Kaszovitz, Issacson, Weber, Skala, Bass and Rhine LLP ("FKIWSBR") provides general legal services to us in the ordinary course of business and litigation services in defense of actions arising from such business activities. Murray L. Skala, a partner in such firm, has been a member of our Board of Directors since inception. FKIWSBR legal services are billed on an arms length

transaction basis. We incurred approximately $95,000 and $596,000, respectively, in legal fees from FKIWSBR during the three and nine-month periods ended August 31, 2003.

During the three and nine months ended August 31, 2003, we had five customers in our E-commerce segment which, in combination, accounted for approximately $2.6 million and $6.7 million of consolidated net revenue, respectively, or 31.2% and 26.6% of consolidated net revenues. Approximately $1.4 million, or 31.9% of consolidated net accounts receivable, was attributable to such major customer group as of August 31, 2003. Such major customers accounted for 12%, 7%, 5%, 4% and 3% of consolidated net revenue for the three months ended August 31, 2003, and 9%, 7%, 5%, 3% and 2% of consolidated net revenue for the nine months ended August 31, 2003. Regarding the balance of our customer base, no single customer had net revenues that equaled or exceeded 3% of consolidated net revenues for the three and nine-month periods ended August 31, 2003.

We continued to conduct business with all such five major customers as of October 15, 2003. The customer that accounted for 2% of our net revenues for the nine months ended August 31, 2003 filed for bankruptcy protection in June 2003. We charged approximately $300,000 of such customer's accounts receivable to the allowance. After the application of the allowance increase, we have completely reserved the customer's entire accounts receivable balance. In the three and nine months ended August 31, 2002, we had five customers in its E-commerce segment which, in combination, accounted for approximately $5.2 million and $18 million of consolidated net revenues, respectively, or 49% and 53% of consolidated net revenues, respectively, and approximately $4.5 million, or 65% of consolidated accounts receivable as of August 31, 2002.

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

Continuation of trend relative to decreasing revenues and increasing overhead

The following chart and subsequent discussion provide the details of a known trend in revenue deterioration, and the effect of the potential continuation of such trend.

Our quarterly net revenues for the prior eight quarterly periods are set forth in the table below:

Quarterly period ended	net revenue		% change from previous quarter
November 30, 2001	$	14,050,493
February 28, 2002		12,370,897	-11.95	%
May 31, 2002		10,804,538	-12.66	%
August 31, 2002		10,664,246	-1.30	%
November 30, 2002		10,203,244	-4.32	%
February 28, 2003		9,117,229	-10.64	%
May 31, 2003		7,422,604	-18.59	%
August 31, 2003		8,503,267	14.56	%

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

Quarterly period ended	Selling expense		G&A expense		Bad Debt expense		Total Overhead
November 30, 2001	$	2,783,638	$	3,185,320	$	1,083,826	$	7,052,784
February 28, 2002		3,168,568		3,578,591		329,334		7,076,493
May 31, 2002		2,370,775		3,949,851		109,172		6,429,798
August 31, 2002		3,133,682		3,665,681		48,941		6,848,304
November 30, 2002		2,799,663		4,057,299		106,428		6,963,390
February 28, 2003		2,319,559		4,206,037		336,188		6,861,784
May 31, 2003		1,777,890		3,978,704		153,860		5,910,454
August 31, 2003		1,480,191		2,946,741		117,382		4,544,314

Should the trend of quarterly decreases in net revenue, as recognized to May 31, 2003, continue in future quarterly fiscal periods, and the corresponding overhead environment remain stable, or be subject to increases necessary to generate revenues, our liquidity trends, as recorded in the three months ended August 31, 2003, could reverse and our capital resources could be adversely affected.

We currently earn the most significant portion of our revenue from the E-commerce segment pursuant to marketing agreements with marketing partners and corporate customers. The provisions of each agreement determine the type and timing of revenue to be recorded. We invoice our customers in accordance with the terms of the underlying agreement. Revenue is recognized at the time the marketing activity is delivered, or service is provided, net of estimated contractually specified data qualification allowances, when applicable. Such data qualification allowances may include duplications, invalid addresses, and age restrictions, and are recorded as contra revenue. Our revenues are adjusted in later fiscal periods if actual allowances vary from amounts previously estimated. Historically, the variance between actual allowances and previously estimated allowances has been immaterial. If events were to occur that would cause actual allowances (which are recorded as offsets against gross revenue, as contra-revenues, in arriving at reported net revenue) to vary significantly from those originally estimated and reflected in the financial statements, we could suffer material deterioration in future fiscal period gross margins, and, therefore, our profitability, cash flows and capital resources could be adversely affected.

Certain obligations are recorded at the time revenue is recognized. They include costs payable to other on-line, as well as off-line, advertisers for registered user acquisitions and consumer data, database fee sharing costs under third party database use agreements, email message delivery costs, contingent based prize indemnification coverage (for potential free on-line lottery winners), estimated premium fulfillment costs related to the respective promotion and all other variable costs directly associated with completing our obligations relative to the revenue being recognized. Our actual premium fulfillment estimates have varied from that which were accrued at the time of recording the related revenue. We treat this as a change in management's estimate, and take the additional cost, or benefit, on the accrual adjustment in the quarter that the variance is determined. The nine months ended August 31, 2003 included a benefit of approximately $507,000 on the adjustment of the premium fulfillment from November 30, 2002.

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

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

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

CONTINUATION OF MAJOR CUSTOMERS, MAJOR CUSTOMER IMPAIRMENT, AND
DISPOSITION OF MAJORITY-OWNED SUBSIDIARY

During the nine months ended August 31, 2003, we had five customers in our E-commerce segment which, in combination, accounted for approximately $6.7 million, or 27% of consolidated net revenues during the period, and approximately $1.4 million, or 32% of consolidated net accounts receivable as of August 31, 2003. The five major customers accounted for 9%, 7%, 5%, 3% and 2% of consolidated net revenue for the nine months ended August 31, 2003. Regarding the balance of our customer base, no single customer had net revenues that equaled, or exceeded, 2% of consolidated net revenues for the nine months ended August 31, 2003.

We continued to conduct business with four of the five major customers as of October 15, 2003. The customer who accounted for 2% of our net revenues for the nine months ended August 31, 2003 filed for bankruptcy protection in June 2003. Pursuant to the filing, we fully reserved the major customer's accounts receivable.

In March 2003, we sold our interest, in our majority owned subsidiary, Montvale Management LLC, for $1.6 million, plus our investment. Pursuant to the terms of the sale, we received $1 million in cash at closing on March 7, 2003. Additionally, we received a note from the Purchaser for $600,000, payable in 24 monthly installments of $25,000. We have also received approximately $299,000, representing our GAAP basis capital account in such majority subsidiary as at November 30, 2002. We also entered into a two year Media Purchase Agreement whereby we agreed to provide certain media lead generation and related services to the continuing owners of Montvale for consideration of $40,000 per month over the term of the agreement. We estimate that the cash flow from the Media Purchase Agreement will equal or exceed the cash flows surrendered pursuant to the disposition of the majority owned subsidiary.

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

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

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

MARKET FLUCTUATION AND DEBT REPAYMENT RISK OF MARKETABLE SECURITIES
INVESTMENT PORTFOLIO

We maintain an investment portfolio that is managed by prominent financial institutions. The portfolio includes high-grade corporate commercial paper and auction rate securities, and common stock equities, all of which are held for varying periods of time, pursuant to maturity dates, market conditions and other factors. The fair value of our investments in the common stock of publicly traded companies as of August 31, 2003 amounted to approximately $1.4 million. These investments are subject to market price volatility, in addition to the potential for business failure at the company level. Moreover, due to the economic downturn and difficulties that may be faced by some of the companies in which we have investments, our investment portfolio could be further impaired by the failure of such companies to fulfill their responsibility of adhering to the repayment of principal upon maturity. Additionally, our cash flows and interest income could be negatively impacted by continued Federal Reserve Bank interest rate reductions.

There are a variety of legislative proposals at state and federal levels regarding email marketing. Certain of these proposals, if implemented, could negatively affect our email marketing programs which could cause a material adverse impact in net revenue, gross margins, profitability, cash flows and capital resources.

Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90 days of the filing date of the quarterly report (the "Evaluation Date") have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.

The Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires us to describe briefly any material pending legal proceedings to which we are a party or of which any of our property is subject. The Exchange Act further provides that no information need be given with respect to any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of our current assets. We believe that all of the claims made against us to date are either without merit or will ultimately result in a judgment against us (if at all) in an amount less than 10% of our current assets. Nevertheless, as the plaintiff in the Wingler action is seeking damages in excess of 10% of our current assets, and as certain of the remaining legal claims made against us fail to specify an amount of damages being sought by the plaintiff, and as there is a potential that the ultimate damages awarded in a claim could exceed such 10% threshold, in compliance with the Exchange Act, we listed below the Wingler action, as well as all legal claims made against us for which no amount of damages has been specified. The Qwest action seeks damages against us in an amount slightly less than 10% of our current assets. The Hellyer action seeks damages against us in an amount slightly less than 6% of our current assets.

James Hellyer—On or about June 20, 2003, pro se Plaintiff, James Hellyer commenced an action against Traffix, Inc. and its principals in the Court of Common Pleas in Licking County, Ohio. Mr Hellyer claims to have been grievously injured by the receipt of three (3) electronic mail messages offering him credit card services and seeks $2.5 million in damages. We filed a Motion to Dismiss the action for failure to state a claim upon which relief may be granted on September 8, 2003. We believe that Mr. Hellyer's complaint is entirely without merit and we intend to continue vigorously defending this action.

unspecified money damages. We believe there is no merit to the claims and intend vigorously to defend against them. We have also asserted counterclaims, inter alia, to declare Plasmanet's patent invalid.

Qwest Communications—Qwest Communications, Inc. has notified us of an indemnification claim relating to a class action filed against Qwest in Minnesota, Bindner v. LCI International Telecom Corp. et al., District Court of Minnesota, County of Sibley, Case No. C0-00-242. In that action, plaintiffs claim that in late 1999 into mid-2000, they were misled when they were solicited to change their long distance carrier to Qwest. They assert that they were not told that they would have to stay at certain hotels and pay their regular rates as part of a promotion, which offered them free airline tickets. We introduced the promotion ("Fly Free America") to Qwest, and had been retained by Qwest to operate the telemarketing campaign. In or about May 2000, we and Qwest entered into an agreement terminating our contract and settling the amount due us (the "May 2000 Agreement"). The May 2000 Agreement contained language which Qwest claims obligates us to indemnify Qwest for any loss it may sustain by reason of this class action. We maintain that we have no liability in the matter. Fraud claims in the class action have been dismissed, leaving breach of contract and false advertising claims. The court has recently certified the class and Qwest is defending the action.

Various state laws exist, and federal legislation is currently pending, that limit our ability to deliver commercial e-mail messages to consumers. There are presently no federal laws that explicitly regulate

sending unsolicited e-mail. The pending federal bills and existing state laws require that certain "opt-out" procedures be included in e-mails and prohibit "false routing" or "fictitious address" information. Existing state, and pending federal, laws require functioning return e-mail addresses and that valid postal addresses be included by the senders of commercial e-mail messages. Some states require an "ADV" label in the subject line, and proscribe false header or misleading subject lines. Recently enacted California State regulations require that email recipients provide direct consent to receive advertisements from the advertiser. Attorneys General and/or consumers are given authority to enforce the state laws. Over half the states have enacted legislation affecting the sending of unsolicited commercial e-mail. If strict federal legislation is subsequently written into law, with its terms specifically limiting our ability to market our offers, we could potentially realize a material adverse impact in future fiscal period net revenue growth, and therefore, profitability and cash flows could be adversely affected.

In September 2003, we received a Civil Investigative Demand issued by the Attorney General of Missouri. The investigation inquires into the merchandising practices of Traffix in connection with the sale or advertisement of certain goods and services through the GroupLotto.com sweepstakes promotional website. The Investigative Demand requests the production of documents relevant to its inquiry and we are presently in the process of formulating our response. We believe we are in full compliance with Missouri law and regulations and intend to cooperate with the Attorney General's office.

In November 2002, we received an inquiry from the Federal Trade Commission questioning whether we needed to comply with the Graham Leach Bliley Act (privacy of consumer information for financial institutions) arising from Atlas Credit Group, one of our Internet subsidiaries. We responded by stating that we need not comply with the Graham Leach Bliley Act because Atlas Credit Group utilizes advertising from other financial institutions, but is not itself a financial institution as defined under the statute. We have not received any further comments from the Federal Trade Commission. ThanksMuch.com, LLC, another of our Internet subsidiaries, was served with a class action lawsuit in State Court in the County of Los Angeles, California, for damages associated with allegedly violating the State's Shipping and Handling laws. This suit was recently settled. The settlement offers a $5.00 certificate to California consumers on future purchases of ThanksMuch products and provides a small payment for attorneys' fees.

Any changes in the Internet operating landscape that materially hinder our current ability and/or cost to deliver commercial e-mail messages to the consumer records in our databases, and the consumer records in the databases of our affiliates, could potentially cause a material impact on net revenue and gross margin and, therefore, our profitability and cash flows could be adversely affected.

On September 22, 2003, the Company's Board of Directors declared a dividend out of the Company's surplus of $0.08 per share on the outstanding shares of the Company's common stock for the quarter ended August 31, 2003. Such dividend is payable on or about November 10, 2003 to holders of record of such shares at the close of business on November 1, 2003. On August 10, 2003, we paid a dividend to shareholders of record of our common stock as of August 1, 2003, also in the amount of $0.08 per share. The amount and record dates of future quarterly dividends, if any, will be reviewed and determined by the Board of Directors.

Exhibit Number
3.1.1		Articles of Incorporation of the Company, as amended(1)
3.1.2		Amendment to the Articles of Incorporation of the Company(2)
3.2		By-Laws of the Company(3)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1		Section 1350 Certification of Chief Executive Officer*
32.2		Section 1350 Certification of Chief Financial Officer*

On July 15, 2003, we filed a Current Report on Form 8-K incorporating our fiscal quarter's earnings release. Other than the foregoing, we did not file any reports on Form 8-K during the third quarter of the fiscal year ending November 30, 2003.

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

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.

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

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

			August 31, 2003			November 30, 2002
			(Unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	9,079,265		$	23,136,341
	Marketable securities			28,106,355			14,249,406
	Accounts receivable, trade, net of allowance for doubtful accounts of $913,315 at August 31, 2003 and $326,127 at November 30, 2002			4,464,700			5,050,218
	Deferred income taxes			1,844,547			1,524,821
	Due from related parties			—			57,548
	Prepaid income taxes			702,057			1,195,808
	Prepaid expenses and other current assets			532,184			1,138,362

		Total current assets		44,729,108			46,352,504
Property and equipment, at cost, net of accumulated depreciation				2,849,851			2,169,156
Goodwill				1,022,021			937,465
Other intangibles, net				1,218,180			1,682,242
Deferred income taxes				49,626			49,626

		Total assets	$	49,868,786		$	51,190,993

Liabilities
Current liabilities:
	Accounts payable		$	2,441,268		$	2,197,458
	Accrued expenses			3,634,933			4,457,644
	Reserve for customer chargebacks			530,048			—
	Due to related parties			379,572			353,307

		Total current liabilities		6,985,821			7,008,409
Deferred income taxes				89,559			89,559

		Total liabilities		7,075,380			7,097,968

Minority interest				—			307,017

Shareholders' equity
Preferred stock—$.001 par value; 1,000,000 shares authorized; none issued and outstanding				—			—
Common stock—$.001 par value; authorized 50,000,000 shares; issued 14,281,503 shares and 14,216,729 shares, respectively				14,281			14,215
Common stock issuable—$.001 par value; 39,174 and 78,347 shares, respectively				242,879			485,758
Additional paid-in capital				41,996,904			41,692,066
Retained earnings				4,467,875			5,948,160
Accumulated other comprehensive income				469,520			33,056
Common stock held in treasury, at cost, 1,513,028 and 1,509,428 shares, respectively				(4,398,053	)		(4,387,247	)

		Total shareholders' equity		42,793,406			43,786,008

		Total liabilities and shareholders' equity	$	49,868,786		$	51,190,993

			Three Months Ended						Nine Months Ended
			August 31, 2003			August 31, 2002			August 31, 2003			August 31, 2002
Net revenue			$	8,503,267		$	10,664,246		$	25,043,100		$	33,839,681
Cost of sales				3,658,363			3,218,160			9,863,640			9,979,975

		GROSS PROFIT		4,844,904			7,446,086			15,179,460			23,859,706
Selling expenses				1,480,191			3,133,682			5,577,640			8,650,996
General and administrative expenses				2,946,741			3,665,681			11,131,482			11,216,152
Bad Debt expense				117,382			48,941			607,430			487,447

		(LOSS) INCOME FROM OPERATIONS		300,590			597,782			(2,137,092	)		3,505,111
Other income (expense):
	Interest expense			(3,234	)		(7,865	)		(18,425	)		(27,633	)
	Interest income and dividends			111,723			190,805			377,779			584,404
	Realized gains on marketable securities			—			2,664			4,068			85,821
	Realized gain on sale of subsidiary			90,000			—			1,165,000			—
	Other non-operating income (expense)			(14,845	)		(456,989	)		(61,283	)		(221,887	)
	Minority interest in (income) loss of subsidiary			—			(148,782	)		(137,567	)		(279,731	)

		(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES		484,234			177,615			(807,520	)		3,646,085
(Benefit) provision for income taxes				(177,850	)		69,235			(348,553	)		1,421,245

		NET (LOSS) INCOME	$	662,084		$	108,380		$	(458,967	)	$	2,224,840

Basic (loss) income per share (Note 3):
	Net (loss) income		$	0.05		$	0.01		$	(0.04	)	$	0.17

	Weighted average shares outstanding			12,763,288			13,168,407			12,757,346			13,454,093

Diluted (loss) income per share (Note 3):
	Net (loss) income		$	0.05		$	0.01		$	(0.04	)	$	0.15

	Weighted average shares outstanding			13,056,157			13,895,370			12,757,346			14,548,047

	Cash dividends per common share		$	0.08		$	—		$	0.08		$	—

				Nine Months Ended
				August 31, 2003			August 31, 2002
Cash flows from operating activities:
	Net (loss)income			$	(458,967	)	$	2,224,840
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Depreciation and amortization			1,139,147			804,241
		Reserve for customer chargebacks			530,048			—
		Provision for uncollectible accounts			607,430			487,447
		Deferred income taxes			(319,726	)		1,509,533
		Net (gains) on sale of marketable securities			(4,068	)		(85,846	)
		Gain on sale of subsidiary			(1,165,000	)		—
		Amortized discounts and premiums on marketable securities			—			(50,664	)
		Minority interest			(307,017	)		264,218
		Changes in assets and liabilities of business:
			Accounts receivable		(21,912	)		(56,062	)
			Prepaid expenses and other current assets		606,178			(263,705	)
			Accounts payable		243,810			(1,830,188	)
			Prepaid/payable income taxes		503,905			(1,363,786	)
			Due from/to related parties		83,813			43,178
			Other, principally accrued expenses		(822,709	)		3,185,682

			Net cash provided by operating activities		614,932			4,868,888

Cash flows from investing activities:
	Purchases of securities				(244,604,879	)		(142,524,298	)
	Proceeds from sales of securities				230,956,126			146,804,117
	Proceeds from the sale of a subsidiary				1,165,000			—
	Capital expenditures				(1,338,839	)		(1,618,362	)
	Payments for asset acquisitions, net of cash received				—			(548,482	)

			Net cash (used in) provided by investing activities		(13,822,592	)		2,112,975

Cash flows from financing activities:
	Dividends paid				(1,021,318	)		—
	Purchases of common stock				(10,806	)		(2,014,661	)
	Proceeds from stock options exercised				51,869			584,567
	Proceeds-net on settled Section 16-b action				—			114,403

			Net cash used in financing activities		(980,255	)		(1,315,691	)

	Effect of exchange rate changes on cash and cash equivalents				130,839			(707	)

	Net (decrease) increase in cash and cash equivalents				(14,057,076	)		5,665,465
	Cash and cash equivalents, beginning of period				23,136,341			14,458,055

	Cash and cash equivalents, end of period			$	9,079,265		$	20,123,520

	Common Stock											Treasury Stock				Accumulated Other Comprehensive Income(Loss)
	Common Stock			Common Stock Issuable			Additional Paid-in Capital		Retained Earnings			Treasury Stock						Total Shareholders' Equity
	Shares	Amounts		Common Stock Issuable			Additional Paid-in Capital		Retained Earnings			Shares	Amount					Total Shareholders' Equity
Balance, November 30, 2002	14,216,729	$	14,215	$	485,758		$	41,692,066	$	5,948,160		1,509,428	$	(4,387,247	)	$	33,056	$	43,786,008
Net (Loss) for the nine months ended August 31, 2003										(458,967	)								(458,967	)
Unrealized gains on available-for-sale securities																	204,127		204,127
Foreign Currency Translation adjustment																	232,337		232,337

Comprehensive income (loss)																			(22,503	)

Dividends declared										(1,021,318	)								(1,021,318	)
Stock option exercises	25,600		27					51,843											51,870
Tax benefit from exercise of stock options								10,155											10,155
Purchase of common stock, held in treasury, at cost												3,600		(10,806	)				(10,806	)
Common stock issued in connection with acquisition	39,174		39		(242,879	)		242,840									—		—

Balance, August 31, 2003	14,281,503	$	14,281	$	242,879		$	41,996,904	$	4,467,875		1,513,028	$	(4,398,053	)	$	469,520	$	42,793,406

			As of August 31, 2003				As of November 30, 2002
			Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
GroupLotto identifiable intangibles:
	GroupLotto Site Brand Recognition		$	722,922	$	315,676	$	722,922	$	203,623
	GroupLotto Database			433,754		189,406		433,754		122,174
	Intellectual Property Assets			289,169		126,270		289,169		81,449
	Marketing Right License Fee			300,000		300,000		300,000		106,450
Infiknowledge identifiable intangibles:
	Internet Game Suite			216,606		74,817		191,595		37,440
	Intellectual Property Assets			162,454		56,113		143,696		28,079
	Market Position Acquired			188,524		65,118		166,756		32,585
Thanksmuch identifiable intangibles:
	Profiled customer data			50,000		24,042		50,000		11,542
	Restrictive Covenants			10,000		3,807		10,000		2,308

		Total amortizable intangible assets	$	2,373,429	$	1,155,249	$	2,307,892	$	625,650

Unamortized intangible assets:
	Goodwill—Infiknowledge		$	732,285			$	647,729
	Goodwill—Thanksmuch			289,736				289,736

		Total Goodwill	$	1,022,021			$	937,465

			2003		2004		2005		2006		2007
GroupLotto Identifable intangible amortization:
	GroupLotto Site Brand Recognition		$	144,595	$	144,595	$	144,595	$	84,621
	GroupLotto Database			86,757		86,757		86,757		50,773
	Intellectual Property Assets			57,838		57,838		57,838		33,848
	Marketing Right License Fee			193,530		—		—		—		—

		Total Group's amortization	$	482,719	$	289,189	$	289,189	$	169,242	$	—

Infiknowledge Identifable intangibles:
	Cost allocated
	Internet Game Suite		$	38,319	$	38,319	$	38,319	$	38,319	$	880
	Intellectual Property Assets			28,739		28,739		28,739		28,739		660
	Market Position Acquired			33,351		33,351		33,351		33,351		766

		Total Group's amortization	$	100,409	$	100,409	$	100,409	$	100,409	$	2,306

ThanksMuch Identifable intangibles:
	Profiled customer data		$	10,000	$	10,000	$	10,000	$	10,000	$	230
	Restrictive Covenants			2,000		2,000		2,000		2,000		46

		Total Group's amortization	$	12,000	$	12,000	$	12,000	$	12,000	$	276

Summary
	GroupLotto Identifable intangibles:		$	482,719	$	289,189	$	289,189	$	169,242	$	—
	Infiknowledge Identifable intangibles:			100,409		100,409		100,409		100,409		2,306
	ThanksMuch Identifable intangibles:			12,000		12,000		12,000		12,000		276

		Total identifiable intangible amortization	$	595,128	$	401,598	$	401,598	$	281,651	$	2,582

			Three Months Ended
			August 31, 2003		August 31, 2002		Change Inc(Dec) $$$			Change Inc(Dec) %%%
E-Commerce components
iMatchUp.com and other web sites			$	4,991,099	$	3,375,023	$	1,616,076		48	%
Net branch commission fees				—		281,411		(281,411	)	-100	%
Email marketing programs				2,066,636		4,526,228		(2,459,592	)	-54	%
Data sales and rentals				348,772		485,154		(136,382	)	-28	%
Sales of jewelry and gifts				269,030		351,290		(82,260	)	-23	%
Internet game development and other				296,660		50,482		246,178		488	%

	Total E-commerce			7,972,197		9,069,588		(1,097,391	)	-12	%

Off-line Marketing Service components
Net branch commission fees				—		1,594,658		(1,594,658	)	-100	%
Other off-line marketing

	Total Off-line Marketing Service			—		1,594,658		(1,594,658	)	-100	%

LEC Billed Products and Services components
TXNet LEC Products				531,070		—		531,070		100	%

	Total LEC Billed Products and Services			531,070		—		531,070		100	%

		Total Consolidated Net Revenue	$	8,503,267	$	10,664,246	$	(2,160,979	)	-20	%

			For the periods: Three Months Ended
			August 31, 2003		August 31, 2002		Change— inc(dec) $$$			Change— inc(dec) %%%
E-commerce
Fee share commissions			$	1,066,163	$	1,571,906	$	(505,743	)	-32	%
Other commissions				—		453,117		(453,117	)	-100	%
Selling salaries and related expenses				390,451		421,722		(31,271	)	-7	%
Occupancy and equipment costs				—		11,000		(11,000	)	-100	%
Travel and entertainment				23,577		41,753		(18,176	)	-44	%

	TOTAL Selling—E-commerce segment		$	1,480,191	$	2,499,498	$	(1,019,307	)	-41	%

Off-line Marketing Services
Fee share commissions			$	—	$	—		—
Other commissions				—		—		—
Selling salaries and related expenses				—		575,751		(575,751	)	-100	%
Occupancy and equipment costs				—		51,635		(51,635	)	-100	%
Travel and entertainment				—		6,798		(6,798	)	-100	%

	TOTAL Selling—Off-line segment		$	—	$	634,184	$	(634,184	)	-100	%

		Consolidated Totals	$	1,480,191	$	3,133,682	$	(1,653,491	)	-53	%

		Payments Due by Period
Contractual Obligations		Total		Less than 1 year— September 1, 2003 to November 30, 2003		1 to 3 years— December 1, 2003 to November 30, 2006		4 to 5 years— December 1, 2006 to November 30, 2008
Long-term Debt Obligations:		$	—	$	—	$	—	$	—
Capital Lease Obligations:			—		—		—		—
Operating Leases:
	Domestic		953,625		84,525		869,100		—
	Foreign (Canada)		117,310		17,596		99,713		—
Unconditional Purchase Obligations:
	None		—
Other Long-term Obligations:			—		—		—		—

	Total Contractual Cash Obligations	$	1,070,935	$	102,121	$	968,813		—

	TRAFFIX, INC.

Date: October 15, 2003	By:	/s/ JEFFREY L. SCHWARTZ Jeffrey L. Schwartz Chairman and CEO


Date: October 15, 2003	By:	/s/ DANIEL HARVEY Daniel Harvey Chief Financial Officer (Principal Financial Officer)