TALX CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 2002
or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________

Commission File Number 000-21465

TALX CORPORATION
(Exact name of registrant as specified in its charter)

MISSOURI 43-0988805

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

1850 BORMAN COURT, ST. LOUIS, MO 63146

(Address of principal executive offices) (Zip Code)

(314) 214-7000

(Registrant's telephone number,
including area code)

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.
[x] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[x] Yes [ ] No

As of December 16, 2002 there were 13,669,254 shares of the Registrant's Common
Stock outstanding, net of treasury shares held by the Company.

Exhibit Index is on page 40.

TALX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS

PAGE NO.
--------

PART I - FINANCIAL INFORMATION
------------------------------

Item 1. Financial Statements:

Consolidated Balance Sheets as of March 31, 2002 and September 30, 2002...................... 3

Consolidated Statements of Operations for the Three Months and Six Months Ended
September 30, 2001 and 2002.................................................................. 4

Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 2001 and 2002.................................................................. 5

Notes to Consolidated Financial Statements................................................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 35

Item 4. Controls and Procedures......................................................................... 35

PART II - OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings............................................................................... 36

Item 2. Changes in Securities and Use of Proceeds....................................................... 36

Item 3. Defaults Upon Senior Securities................................................................. 36

Item 4. Submission of Matters to a Vote of Securities Holders........................................... 36

Item 5. Other Information............................................................................... 36

Item 6. Exhibits and Reports on Form 8-K................................................................ 36

Signatures................................................................................................ 37

2

TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
(unaudited)

MARCH 31, SEPTEMBER 30,
2002 2002
--------------- -----------------
(RESTATED)

ASSETS
Current assets:
Cash and cash equivalents $ 21,431 $ 4,041
Accounts receivables, net 12,469 11,940
Inventories 104 69
Work in progress, less progress billings 1,377 1,216
Prepaid expenses and other current assets 3,340 4,015
Deferred tax assets, net 2,948 3,332
--------------- -----------------
Total current assets 41,669 24,613
Property and equipment, net 11,357 11,123
Capitalized software development costs, net 3,262 3,490
Goodwill 102,564 105,354
Other intangibles, net 19,175 19,132
Other assets 1,711 1,578
--------------- -----------------
$ 179,738 $ 165,290
=============== =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations $ 156 $ 161
Current portion of long term debt 8,000 9,000
Accounts payable 1,200 1,350
Accrued expenses and other liabilities 20,455 6,710
Dividends payable 413 409
Income taxes payable 814 -
Deferred revenue 7,632 8,925
--------------- -----------------
Total current liabilities 38,670 26,555
Deferred tax liabilities, net 371 1,650
Capitalized lease obligations 152 70
Long term debt 22,000 17,000
Other long term liabilities 2,417 2,466
--------------- -----------------
Total liabilities 63,610 47,741
--------------- -----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares and
no shares issued or outstanding at March 31, and September 30, 2002 - -
Common stock, $.01 par value; authorized 30,000,000 shares,
issued and outstanding 13,909,714 shares at March 31, 2002
and 13,948,542 shares at September 30, 2002 139 139
Additional paid-in capital 162,058 162,643
Accumulated deficit (44,007) (41,915)
Accumulated other comprehensive income:
Unrealized loss on interest rate swap contract, net of tax of $129 - (206)
Treasury stock, at cost, 120,951 shares at March 31, 2002 and
279,651 shares at September 30,2002 (2,062) (3,112)
--------------- -----------------
Total shareholders' equity 116,128 117,549
--------------- -----------------
$ 179,738 $ 165,290
=============== =================

See accompanying notes to consolidated financial statements.

3

TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share information)
(unaudited)

THREE MONTHS ENDED SEPT. 30, SIX MONTHS ENDED SEPT. 30,
----------------------------------- --------------------------------
2001 2002 2001 2002
----------------- ---------------- -------------- ----------------
(RESTATED) (RESTATED)

Revenues:
The Work Number services $ 6,659 $ 8,573 $ 12,762 $ 16,189
Unemployment cost management services - 17,939 - 35,978
Human resources and benefits application services 1,281 1,906 2,661 3,353
Customer premises systems 978 313 2,009 900
Maintenance and support 978 916 1,966 1,849
------------ ------------ ------------ ------------
Total revenues 9,896 29,647 19,398 58,269
------------ ------------ ------------ ------------
Cost of revenues:
The Work Number services 2,447 3,018 4,311 5,833
Unemployment cost management services - 9,511 - 18,771
Human resources and benefits application services 1,968 1,740 3,800 3,327
Customer premises systems 563 237 1,656 576
Maintenance and support 273 179 584 376
Inventory write-down 307 - 307 -
------------ ------------ ------------ ------------
Total cost of revenues 5,558 14,685 10,658 28,883
------------ ------------ ------------ ------------
Gross margin 4,338 14,962 8,740 29,386
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 2,347 4,324 4,537 9,187
General and administrative 2,029 6,247 3,364 12,102
Restructuring charge 2,627 - 2,627 -
------------ ------------ ------------ ------------
Total operating expenses 7,003 10,571 10,528 21,289
------------ ------------ ------------ ------------
Operating income (loss) (2,665) 4,391 (1,788) 8,097
------------ ------------ ------------ ------------
Other income (expense), net:
Interest income 458 31 570 55
Interest expense - (409) - (765)
Other, net 18 - 29 -
------------ ------------ ------------ ------------
Total other income (expense), net 476 (378) 599 (710)
------------ ------------ ------------ ------------
Earnings (loss) before income tax expense (2,189) 4,013 (1,189) 7,387
Income tax expense (benefit) (813) 1,535 (388) 2,834
------------ ------------ ------------ ------------
Net earnings (loss) $ (1,376) $ 2,478 $ (801) $ 4,553
============ ============ ============ ============

Basic earnings (loss) per share $ (0.11) $ 0.18 $ (0.07) $ 0.33
============ ============ ============ ============
Diluted earnings (loss) per share $ (0.11) $ 0.17 $ (0.07) $ 0.32
============ ============ ============ ============

Weighted average number of shares outstanding - basic 12,592,057 13,787,004 11,483,106 13,824,861
============ ============ ============ ============
Weighted average number of shares outstanding - diluted 12,592,057 14,237,195 11,483,106 14,318,587
============ ============ ============ ============

See accompanying notes to consolidated financial statements.

4

TALX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

SIX MONTHS ENDED SEPT. 30,
--------------------------------
2001 2002
--------------- ---------------
(RESTATED)

Cash flows from operating activities:
Net earnings (loss) $ (801) $ 4,553
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,477 3,951
Inventory write-down 307 -
Capitalized software write-down 1,941 -
Non-cash restructuring charges 565 -
Deferred taxes (706) 895
Change in assets and liabilities, excluding those acquired:
Trade receivables 718 529
Inventories 195 35
Work in progress, less progress billings (256) 161
Prepaid expenses and other current assets (2,154) (675)
Other assets 18 11
Accounts payable 320 268
Accrued expenses and other liabilities (3,042) 2,751
Income taxes payable 328 (435)
Deferred revenue 2,736 1,293
Other noncurrent liabilities - 49
--------- ---------
Net cash provided by operating activities 2,646 13,386
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (1,489) (2,634)
Acquisitions, net of cash received (110) (19,937)
Purchases of short-term investments (168,502) (4,000)
Maturities of short-term investments 1,500 -
Sales of short-term investments 83,655 4,000
Capitalized software development costs (1,435) (948)
--------- ---------
Net cash used in investing activities (86,381) (23,519)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 83,133 1,099
Purchases of treasury stock (1,162) (3,449)
Repayments of capitalized lease obligations - (77)
Repayments of long term debt - (4,000)
Dividends paid (566) (830)
--------- ---------
Net cash provided by (used in) financing activities 81,405 (7,257)
--------- ---------
Net decrease in cash and cash equivalents (2,330) (17,390)
Cash and cash equivalents at beginning of period 5,167 21,431
--------- ---------
Cash and cash equivalents at end of period $ 2,837 $ 4,041
========= =========

See accompanying notes to consolidated financial statements.

5

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION AND RESTATEMENT OF FINANCIAL STATEMENTS

Our consolidated balance sheet at March 31, 2002 was obtained from our balance
sheet, as restated, as of that date. All financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation. Operating results for the three months and six months ended
September 30, 2002 are not indicative of the results that may be expected for
the year ending March 31, 2003. Our accounting policies and certain other
disclosures are set forth in the notes to our consolidated financial statements
as of and for the year ended March 31, 2002, or in the case of restated amounts,
as indicated within this Form 10-Q.

In response to inquiries made by the Securities and Exchange Commission during
the course of its recent investigation, we commenced a review of the accounting
treatment for two items in the year ended March 31, 2001. We have restated
certain of our previously issued financial statements. As a result, certain
information in the accompanying financial statements and notes as of and for the
periods ended September 30, 2001 and March 31, 2002 has been restated from its
original presentation in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and Annual Report on Form 10-K for the fiscal
year ended March 31, 2002. The two items reviewed were the accounting for a
patent technology license agreement and the award of certain bonus payments to
the executive officers. The $1.6 million paid in connection with the patent
technology license entered into with Ronald A. Katz Technology Licensing, L.P.
and A2D, L.P. in March 2001 had been recorded as an intangible asset and was
being amortized over a 10-year period. We have decided to expense the entire
amount in the March 2001 quarter. Certain bonus payments to the executive
officers, recommended by the compensation committee and approved by the board of
directors on May 15, 2001, totaling approximately $158,000, had been reflected
as an expense related to the quarter ended June 30, 2001. We have decided to
record the entire expense in the quarter ended March 31, 2001.

The effect of these restatements, after income-tax effect, was to reduce
shareholders' equity by approximately $800,000 (less than 1 percent of
shareholders' equity) at September 30, 2002. The statement of operations effect
is to reduce earnings for the year ended March 31, 2001 by $1.1 million, after
income tax, and to increase earnings over the following 10-year period by the
same dollar amount in the aggregate.

Independent of the SEC investigation, we have also considered recent guidance
from the SEC staff concerning the accounting for service transactions across
many industries, and have restated certain revenues, as well as attendant costs,
in the Human Resources and Benefits Application Services and The Work Number
Services revenue lines. This guidance requires, for certain of our contracts,
revenues to be recognized on a straight-line basis from the time the service is
available to be used by our clients through the end of the service period.
Previously, we had consistently recorded revenues as services were provided. The
impact of this restatement was to reduce earnings for the years ended March 31,
2001 and 2002 and the six months ended September 30, 2002 by $1.1 million,
$750,000, and $750,000, respectively.

Additionally, during the course of the review into these matters, we identified
an inaccuracy in the method of computing the weighted average shares outstanding
used for the computation of diluted earnings (loss) per share.

The following tables indicate the impact of all restatements to our statements
of operations and balance sheets. The restatements had no impact on our cash
flows from operations, investing activities, or financial activities.

6

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

We will also restate the financial statements contained in its
previously filed June 30, 2002 Form 10-Q and its March 31, 2002 Form 10-K to
reflect the effects of the adjustments discussed above.

Throughout the financial statements and notes, all amounts presented as of March
31, 2002 for the three and six months ended September 30, 2002 have been
adjusted to reflect the aforementioned adjustments.

As a result of the recent SEC guidance, as discussed above, concerning the
accounting for service transactions, we have updated our revenue recognition
policy. The updated policy is described in the following paragraph.

Revenues from The Work Number are recognized in the period that they are earned,
from transaction fees charged to users for verifications of employment history
and income. Additionally, revenue for set up fees, monthly maintenance and
employer conversion fees are recognized on a straight-line basis from the time
the service in available to be used by our clients through the end of the
service period. Revenues from our unemployment cost management services, called
UC eXpress, are recognized in the period that they are earned, evenly over the
life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met. Human resources and benefits
application services revenue is recognized on a straight-line basis from the
time the service is available to be used by our clients through the end of the
service period. We recognize hardware and software license revenue upon shipment
based on vendor-specific objective evidence. Revenues for customization services
of customer premises systems are recognized by the contract method of accounting
using percentage of completion for larger, more complex systems and the
completed contract method for smaller systems. Revenue from maintenance
contracts is deferred and recognized ratably over the maintenance period.
Deferred revenue represents the unearned portion of The Work Number setup fees,
as well as, Human Resources and Benefits Application Services, UC eXpress and
maintenance fees.

NOTE 2 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
reflects the incremental increase in common shares outstanding assuming the
exercise of all employee stock options and warrants that would have had a
dilutive effect on earnings (loss) per share. The weighted average number of
shares is based on common stock outstanding for basic earnings (loss) per share
and common stock outstanding and common stock options and warrants for diluted
earnings (loss) per share in periods when such common stock options and warrants
are not antidilutive. All weighted average share amounts include the effect of
all stock dividends and splits.

NOTE 3 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the three months ended September 30, 2001 and
2002 was ($1.3) million and $2.3 million, respectively, and for the six months
ended September 30, 2001 and 2002 was ($771,000) and $4.3 million, respectively.
The difference between comprehensive income (loss) and net income (loss) for the
three and six months ended September 30, 2001 arose from unrealized holding
gains on our debt securities portfolio. The difference between comprehensive
income and net income for the three and six months ended September 30, 2002
arose from unrealized holding losses on our interest rate swap contract.

13

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for income taxes totaled $918,000 and $2.5 million for the six months
ended September 30, 2001 and 2002, respectively. Cash paid for interest totaled
$0 and $647,000 for the six months ended September 30, 2001 and 2002,
respectively.

We declared a $0.03 per share cash dividend, totaling $409,000, on September 5,
2002. The dividend was payable October 18, 2002 to shareholders of record on
September 20, 2002.

NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. Under the provisions of SFAS No. 142, any impairment
loss identified upon adoption of this standard is recognized as a cumulative
effect of a change in accounting principle. Any impairment loss incurred
subsequent to initial adoption of SFAS No. 142 is recorded as a charge to
current period earnings.

We have adopted the provisions of SFAS No. 141 related to all three of our
acquisitions during fiscal 2002, and have adopted SFAS No. 142 effective April
1, 2002. Goodwill and intangible assets determined to have an indefinite useful
life that are acquired in purchase business combinations will not be amortized,
but instead tested for impairment on an annual basis. Because we did not have
goodwill prior to the acquisition of Ti3, Inc., there is no impact to the
Company of implementing SFAS No. 142.

The following table summarizes goodwill and other intangible asset activity for
the six months ended September 30, 2002 (dollars in thousands).

OTHER INTANGIBLE ASSETS
----------------------------------------------------------------------------------
CUSTOMER CUSTOMER NON- GROSS ACCUM NET
GOODWILL BASE SOFTWARE RECORDS COMPETE TOTAL AMORT TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------

MARCH 31, 2002 $ 102,564 $ 16,904 $ 154 $ 2,200 $ -- $ 19,258 $ (83) $ 19,175
Adjust intangibles to final
valuations (618) 679 (154) (16) 109 618 -- 618
Adjust acquired assets to
final valuations 422 -- -- -- -- -- -- --
Transaction costs 986 -- -- -- -- -- -- --
Ti3 acquisition additional
consideration 2,000 -- -- -- -- -- -- --
Amortization -- -- -- -- -- -- (661) (661)
--------- --------- --------- --------- --------- --------- --------- ---------
SEPTEMBER 30, 2002 $ 105,354 $ 17,583 $ -- $ 2,184 $ 109 $ 19,876 $ (744) $ 19,132
========= ========= ========= ========= ========= ========= ========= =========

Weighted average lives (in years) 14.92 15.00 3.00 14.86
========= ========= ========= =========

Amortization of other intangible assets was $662,000 for the six months ended
September 30, 2002, and is currently projected to be $1.3 million for the fiscal
year ended March 31, 2003, $1.4 million for the fiscal year ended March 31, 2004
and $1.3 million for each of the fiscal years ended March 31, 2005 through 2007.

14

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENT

On March 27, 2002, we entered into a $30 million variable rate term loan. This
loan, which accrues interest based upon certain LIBOR indexes, will amortize
over three years with a maturity of February 27, 2005. As a condition of our
Term Loan Agreement, we were required to enter into a hedge contract for 50% of
our outstanding term loan as a means of reducing our interest rate exposure.
Pursuant to this requirement, we entered into an interest rate swap contract on
June 26, 2002 for a notional amount of $14 million, which represented 50% of our
outstanding term loan balance on that date. Under this contract, we pay a fixed
rate of 3.45% and receive a variable rate of LIBOR, which is equal to the LIBOR
rate utilized on our term loan. The notional amount of our interest rate swap
contract steps down according to the same schedule as our term loan, maintaining
a 50% hedged position. All payment dates and maturity dates are the same as our
term loan. This strategy effectively converts 50% of our term loan into a fixed
rate instrument.

The interest rate swap and related gains and losses arising on the contract are
accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative
instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed. The ineffective portion, if
any, of these hedges is recognized in income currently.

As of September 30, 2002, the fair value of the interest rate swap in the amount
of $335,000 is included in accrued expenses and other liabilities.

We do not use financial instruments for trading or speculative purposes.

NOTE 7 - BUSINESS SEGMENTS

FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. We have two reportable segments: Payroll-Based Services and
Software and Unemployment Cost Management Services.

PAYROLL-BASED SERVICES AND SOFTWARE: This segment includes the
following:

- The Work Number Services - The Work Number(R), W-2
eXpress(sm), ePayroll and FasTime(R);
- Human Resources and Benefits Application Services; and
- Customer Premises Systems and Related Maintenance and Support

UNEMPLOYMENT COST MANAGEMENT SERVICES: This segment includes our UC
eXpress(sm) services suite.

The following items are not reported on an operating segment basis (and are
included in the following table in the column entitled "Unallocated") because
they are not considered in the performance evaluation by our chief operating
decision-maker, our chairman and CEO:

- Interest income and expense and income taxes;
- Acquisition-related debt, goodwill and intangible assets;
- Intangible asset amortization expense; and
- Executive overhead expenses

15

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Summarized financial information concerning our reportable operating segments is
shown in the following table for the periods indicated, in thousands:

PAYROLL-BASED UNEMPLOYMENT
SERVICES AND COST MANAGEMENT
SOFTWARE SERVICES UNALLOCATED TOTAL
-------- -------- ----------- -----

THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues.................................. $ 9,896 $ -- $ -- $ 9,896
Operating income (loss)................... (2,665) -- -- (2,665)
Total assets.............................. 126,965 -- -- 126,965

THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenues.................................. $ 11,708 $ 17,939 $ -- $ 29,647
Operating income (loss)................... 3,183 2,851 (1,643) 4,391
Total assets.............................. 14,853 25,952 124,485 165,290

SIX MONTHS ENDED SEPTEMBER 30, 2001
Revenues.................................. $ 19,398 $ -- $ -- $ 19,398
Operating income (loss)................... (1,788) -- -- (1,788)
Total assets.............................. 126,965 -- -- 126,965

SIX MONTHS ENDED SEPTEMBER 30, 2002
Revenues.................................. $ 22,291 $ 35,978 $ -- $ 58,269
Operating income (loss)................... 5,539 5,494 (2,936) 8,097
Total assets.............................. 14,853 25,952 124,485 165,290

NOTE 8 - COMMITMENTS AND CONTINGENCIES

We are a defendant from time to time in routine lawsuits incidental to our
business. Except to the extent described below, based on information currently
available, we believe that no current proceedings, individually or in the
aggregate, will have a material adverse effect upon us.

On December 26, 2001, a purported class action lawsuit was filed in the United
States District Court for the Eastern District of Missouri (Civil Action No.
4:01CV02014DJS) by Matt L. Brody, an alleged shareholder of the Company, against
the Company, certain of its executive officers and directors (William W.
Canfield, Craig N. Cohen and Richard F. Ford) (collectively, the "Individual
Defendants"), and two underwriters (Stifel, Nicolaus & Company, Incorporated and
A.G. Edwards & Sons, Inc.) in the Company's August 2001 secondary common stock
offering ("Secondary Offering"). The case purportedly is brought on behalf of
all persons who purchased or otherwise acquired shares of the Company's common
stock between July 18, 2001 and October 1, 2001 ("Putative Class Period"),
including as part of the Secondary Offering. The complaint alleges, among other
things, that certain statements in the registration statement and prospectus for
the Secondary Offering, as well as other statements made by the Company and/or
the Individual Defendants during the Putative Class Period, were materially
false and misleading because they allegedly did not properly account for certain
software and inventory, did not reflect certain write-offs, and did not
accurately disclose certain business prospects. The complaint alleges violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against the Company and the Individual Defendants,
violations of Section 11 of the Securities Act of 1933 against the Company, the
Individual Defendants and the underwriters, and violation of Section 15 of the
Securities Act of 1933 against Mr. Canfield.

Three additional purported class action lawsuits were filed in the same court,
against the same defendants and making substantially the same allegations: on
January 8, 2002 by Donald Metzger (Civil Action No. 4:02CV00031DJS); on

16

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

January 9, 2002 by Anna Goodman (Civil Action No. 4:02CV00033DJS); and on
January 30, 2002 by Al Hinton (Civil Action No. 4:02CV00168DJS) each of whom
allegedly were shareholders of the Company during the Putative Class Period. On
February 15, 2002, these three lawsuits were consolidated with and into the
Brody lawsuit (Civil Action No. 4:01CV02014DJS) for all purposes. In October
2002, the case was transferred from the Honorable Donald J. Stohr, United States
District Judge, to the Honorable Henry E. Audrey, United States District Judge.

The consolidated lawsuit seeks, among other things, an award of unspecified
money damages, including interest, for all losses and injuries allegedly
suffered by the putative class members as a result of the defendants' alleged
conduct and unspecified equitable/injunctive relief as the Court deems proper.

On May 20, 2002, the Company and the Individual Defendants filed a motion to
dismiss the lawsuits, and the underwriter defendants filed a separate motion to
dismiss. The plaintiffs filed their opposition to the motions to dismiss on June
19, 2002. The defendants' reply memoranda in support of the motions to dismiss
were filed on July 9, 2002. The parties are awaiting the Court's ruling on the
motions.

The Company believes the plaintiffs' claims are without merit and intends to
defend vigorously against them. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the
litigation. An unfavorable outcome could have a material adverse impact on the
Company's business, financial condition and results of operations.

Additionally, the Company is required to indemnify each of the Individual
Defendants, as officers and/or directors of the Company, in connection with the
above matters, provided they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the Company. Stifel,
Nicolaus & Company and A.G. Edwards & Sons, Inc. have made demands on the
Company to indemnify them in connection with these matters.

The Company has provided notice of the consolidated litigation to its directors
and officers liability insurance carriers.

As previously disclosed, the Securities and Exchange Commission is conducting an
investigation into our August 2001 secondary offering of common stock and second
fiscal quarter 2001 financial results. We are cooperating fully with the
investigation, and have voluntarily produced documents requested by the
Commission and have made our employees available for interviews or testimony
upon request. On November 12, 2002, the staff of the Central Regional Office of
the Commission sent us a "Wells letter" indicating the staff's plans to
recommend to the Commission that it institute an enforcement action against us
and two of our executive officers, William Canfield and Craig Cohen, related to
two matters. The Wells letter states that the SEC staff will allege among other
things, that our financial statements were misleading as a result of
capitalizing instead of expensing $1.6 million related to a patent technology
license agreement executed in March 2001 and expensing approximately $158,000 in
bonus payments to executive officers in the first quarter of fiscal 2002 instead
of the fourth fiscal quarter of 2001. Those items are among those that are the
subject of our restatement discussed herein. The remedies the Commission may
consider include an injunction against us and the individuals and, if
appropriate, an officer and director bar and disgorgement and civil money
penalties against the individuals. We and the individuals have been given the
opportunity to file a written response to the Wells letter setting forth the
reasons why an enforcement action should not be instituted by the Commission.

As described above, the Company is filing herewith restated financial statements
and has announced that it would restate its financial statements for each of the
quarters ended June 30, 2001 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, we could become
subject to additional litigation or regulatory proceedings or both. As of the
date hereof, we are not aware of any litigation having been commenced against us
related to this restatement. However, such litigation could be commenced against
us in the future and the plaintiffs who have filed lawsuits against us
previously could amend their complaints to include claims related to this
restatement, and if so, we could not predict the outcome of any such litigation
at this time. Additionally, the lenders under our March 27, 2002 Loan Agreement,
which is described more fully below under Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources, could seek to exercise remedies which may be available to them, such
as acceleration of our loan, in the event they determine that, as a result of
the restatement discussed above or the SEC investigation discussed below, we
have breached a covenant or representation and warranty in the Loan Agreement.
If an unfavorable result occurred in any such action, our business and financial
conditions could be harmed.

17

TALX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of the date hereof, the SEC is investigating our accounting for two items
which are the subject of this restatement. At this time, we cannot predict
whether or not any additional regulatory investigation related to this
restatement will be commenced, or if it is, the outcome of any such
investigation. However, if any such investigation were to result in a regulatory
proceeding or action against us, our business and financial condition could be
harmed.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of this type are expensive and will
require that we devote substantial resources and executive time to defend these
proceedings.

NOTE 9 - SUBSEQUENT EVENT

As a result of the delay in filing this Form 10-Q, The Nasdaq Stock Market
notified us that effective Tuesday, November 26, 2002, the letter "E" would be
appended to our trading symbol, signifying the delay. Similarly, The Nasdaq
Stock Market informed us that we were not in compliance with the requirements of
NASD Marketplace Rule 4310(c)(14) because we had not then filed the Form 10-Q.
Our delay in filing the Form 10-Q was the only listing deficiency cited by The
Nasdaq Stock Market.

We requested an appeal hearing by The Nasdaq Stock Market, and have been
informed that our potential delisting is stayed, pending the review and
determination of a Nasdaq Listing Qualifications Panel. The hearing date has
been set for December 20, 2002. There can be no assurance that the panel will
grant the request for continued listing of our common stock.

18

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with the financial statements and other
financial information included in this Form 10-Q and in our Annual Report on
Form 10-K for the year ended March 31, 2002. However, as described above in Note
1 to the Unaudited Consolidated Financial Statements, which is incorporated by
reference herein, we have decided to restate certain of our previously issued
financial statements. As a result, certain information in the accompanying
financial statements and notes as of and for the periods ended September 30,
2001 and March 31, 2002 has been restated from its original presentation in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

Throughout the following Management's Discussion and Analysis, all amounts
reflect the restatements indicated in the Notes to Unaudited Consolidated
Financial Statements.

OVERVIEW

We are the leading provider of automated employment and income verification and
unemployment cost management services and a leader in providing outsourced
employee self-service applications. Our services enable mortgage lenders,
pre-employment screening companies, employers and other authorized users to
obtain employee human resources and payroll information. We also allow employees
to review and modify information in human resources, benefits and payroll
management information systems without requiring employer assistance. Further,
we provide unemployment insurance claims processing and unemployment tax
planning and management to a broad range of employers.

Our services and software use interactive web and interactive voice response
software, fax and other technologies and are designed to enhance service levels,
improve productivity and reduce costs by automating historically labor
intensive, paper-based processes and enabling users to perform self-service
transactions. We typically serve large organizations, including approximately
two-thirds of the Fortune 500 and a number of federal, state and local
government agencies.

From the early 1980s until 1993, we offered our products and services
exclusively through licensed software specifically developed for each customer
and installed at the customer's site. We refer to this as our "customer premises
systems" business. In 1993, we began to deliver benefits enrollment and other
human resource services on an outsourced basis, allowing clients to utilize
applications and services over public or private networks without incurring the
capital expenditures and maintenance responsibilities of operating such a system
in-house. We also host many of our clients' databases at our facilities. In
1995, we introduced The Work Number, our leading service for employment and
income verification.

With the market's acceptance of our outsourced delivery method, in 1998, we
began to de-emphasize sales of customer premises systems, and in 2000
discontinued sales to new clients; however, we still have a base of clients for
whom we continue to provide maintenance and technical support services as well
as software and hardware upgrades.

SERVICES AND PRODUCTS

We provide services and systems that enable large corporations and government
agencies to outsource operations that would otherwise be performed by their own
human resources, benefits or payroll departments. Our software uses interactive
web and interactive voice response software and other technologies to enable
mortgage lenders, pre-employment screening companies, employees and other
authorized users to obtain employee human resources and payroll information, and
allows employees and their managers to review and modify information in the
human resources benefits and payroll management information systems on a
self-service basis. Our services and products fall within four general
categories: The Work Number services, unemployment cost management services,
human resources and benefits application services and customer premises systems,
including related maintenance and support.

19

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE WORK NUMBER SERVICES

Responding to inquiries to verify employment and income information, printing
and distributing pay stubs and annual W-2 forms, and updating employee personnel
records are burdensome and time-consuming tasks for employers and divert
resources from managing their businesses. The Work Number employment and income
verification service and other payroll application services supported by The
Work Number's database of employee records are designed to help employers save
time and effort and reduce expenses associated with many of the administrative
tasks required to support large workforces.

The Work Number. Mortgage lenders, pre-employment screeners, social service
agencies and other information verifiers often request organizations to verify
employment and income information that has been provided by employees or former
employees. For example, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, leading purchasers of residential
mortgages in the United States, usually require independent verification of
employment and income data for the past two calendar years and a current payroll
period in connection with mortgages that they will purchase. In 1995, we
developed The Work Number as an outsourced service that enables employers to
reduce the costs and resources to respond to verification requests, while
empowering employees to control the release of personal information to third
parties.

When an employer receives a request for income and employment data regarding an
employee, the employer may direct the third-party verifier to our web site or to
a telephone number. Using the Internet or a toll-free telephone number,
verifiers who subscribe to our service can confirm the employee's employment
status and income for the past three years. Non-subscribing verifiers can
receive the same information through these methods using a credit card or
through a 1-900 telephone number. The Work Number is designed to ensure that
access to an employee's income data is available only to verifiers who have been
pre-authorized by the employee.

We generate substantially all of The Work Number revenues from transaction-based
fees charged to mortgage lenders, pre-employment screeners, credit issuers and
other information verifiers for verification of income and employment
information. Revenue is recognized on these transaction-based fees in the period
that the transactions occur and are billed. We also generate revenues from
employer data conversion and ongoing maintenance fees, and record this revenue
on a monthly basis as billed. Lastly, we derive revenues from one-time up-front
setup fees. These fees are recognized as revenue on a straight-line basis over
the initial contract period, beginning with the date the client is live on our
system.

W-2 eXpress. W-2 eXpress is a suite of services relating to the printing,
distribution (either printed or electronic) and correction of W-2 wage and tax
statement forms that we offer to existing clients of The Work Number and other
large employers. Using data provided by employers, we distribute original W-2
forms to employees and provide an automated process to enable employees to
request corrections to their W-2 forms and obtain additional copies via the
Internet or by telephone, instead of requiring direct interaction with the
employer's payroll staff.

The majority of W-2 eXpress clients are billed based upon the number of
employees, generally pursuant to multi-year contracts. Revenue is recognized on
a straight-line basis from the time the service is available to be used by TALX
clients through the end of the service period. Additionally, we have some
clients that are billed on a transactional basis. For these clients, we
recognize revenue on a monthly basis, as transactions occur.

ePayroll. ePayroll is another outsourcing service that we offer to existing
clients of The Work Number and other large employers. ePayroll is a suite of
payroll self-services applications that enable employees, via the Internet or by
telephone, to receive pay statement information, access current and historical
payroll information and review and change direct deposit account information.

Employers that send us electronic transmissions of their employees' pay stubs
and direct deposit data can reduce the amount of staff required to process
routine employee payroll requests.

20

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We began offering ePayroll in November 2000, and our first clients began using
the service in August 2001. We charge ePayroll clients on a per-employee
per-month basis, plus an initial set-up fee, generally pursuant to multi-year
contracts. Revenue for the initial setup fees is recognized on a straight-line
basis over the initial contract period, beginning with the date the client is
live on our system. Per-employee per-month fees are recognized as revenue in the
months billed.

FasTime. FasTime services are integrated time capture and reporting solutions
that work from any phone or the Internet. For large employers, FasTime collects
hours worked and exception time codes providing a user-friendly online approval
and reporting for managers. FasTime is customized according to a company's
business rules and processes. For the temporary staffing industry, FasTime
provides a comprehensive, paperless system for time, expenses and availability,
including manager approvals and the reporting and management tools for branch
offices.

FasTime clients are billed for initial set up fees, monthly maintenance fees and
per transaction fees, generally pursuant to multi-year contracts. Revenue is
recognized on a straight-line basis from the time the service is available to be
used by our clients through the end of the service period for setup and
maintenance fees and as services are performed for transaction-based fees.

UNEMPLOYMENT COST MANAGEMENT

As a result of our recent acquisitions, we provide unemployment cost management
services under the name UC eXpress. UC eXpress is a comprehensive suite of
services designed to reduce the cost of processing unemployment claims by human
resource departments and better manage the tax rate that employers are assessed
for unemployment taxes. UC eXpress utilizes document imaging and web access to
speed the processing of unemployment claims with the goal of uncovering
inaccuracies in claims that have been filed with the states by separated
employees. UC eXpress services are aimed at relieving HR departments of the
administrative burden of managing unemployment claims.

Following an employee separation, UC eXpress services respond to unemployment
claims on behalf of our clients. This includes reviewing employment records to
preserve the clients' rights as an employer. If an unemployment hearing is
required, UC eXpress services include client conferences with UC eXpress hearing
consultants/attorneys and, upon client request, attendance at the hearing with
the employer's representative. In addition, the UC eXpress field-based account
management team and hearing consultants bring state-specific unemployment tax
knowledge to the client.

UC eXpress also offers comprehensive employer tax services that encompass five
service areas:

- unemployment tax services
- employment tax research and recovery
- unemployment tax planning
- tax registrations
- employment tax consulting (withholding and unemployment)

Clients who choose UC eXpress for tax services collaborate with a UC eXpress tax
analyst to monitor the clients' unemployment tax accounts, verify tax rates and
contribution reports, and identify voluntary contribution opportunities. Since
UC eXpress offers a choice of employer tax services, clients can take advantage
of the services that are most effective in reducing their employment tax costs.

We charge clients fees on an annual contractual basis, generally billed monthly
or quarterly, pursuant to multi-year contracts. Most contracts allow for
additional charges if transaction activity exceeds a certain threshold. Some
unemployment tax planning contracts call for contingent fees based upon actual
tax savings realized. Revenues from UC eXpress, are recognized in the period
that they are earned, evenly over the life of the contract. Transaction fees
are recorded as the services are provided. Revenue which is contingent upon
achieving certain performance criteria is recognized when those criteria are
met.

21

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

HUMAN RESOURCES AND BENEFITS APPLICATION SERVICES

For many human resources departments, benefits enrollment is a burdensome
administrative task. Employees are generally permitted to enroll in or make
changes to many types of benefit plans only at particular times during the year.
As a result, during such enrollment periods, a considerable amount of human
resources and benefits department efforts are directed toward plan
administration. Processing employee changes to information recorded under
multiple providers' benefits plans can require the completion, verification and
handling of numerous paper-based forms. Many companies find it necessary to hire
temporary workers to manage the increased workload during these periods.

We offer our clients outsourcing solutions designed to reduce the resources and
expenses associated with enrolling employees and administering ongoing
participation in employee benefits programs. Our services include processing
enrollments, producing personalized worksheets and confirmations, and delivering
completed enrollments to employers and insurance carriers. We support both open
and ongoing enrollments year-round. To reach the growing number of Internet
users, our applications enable employees to complete enrollments via the
Internet, corporate portals and corporate intranets. For those employees who
prefer or need to use the telephone, options are available for processing
enrollments via interactive voice response.

Historically, we offered customer premises-based software systems that were
tailored to meet the needs of a particular employer. Since 1993, we have been
providing customized benefits enrollment services using the application service
provider model. In 2000, we introduced eChoice, our advanced benefits enrollment
service combining the most popular features of our various customized benefits
enrollment offerings that we can configure to meet each employer's particular
needs.

We market eChoice to organizations employing at least 5,000 people. Through
eChoice, employees can enroll in an employer's medical, dental and other health
and welfare benefits programs and can make changes to their personal information
and benefits elections, all by means of the Internet or telephone. eChoice
enables employers to remove many of the time-consuming aspects of administering
their benefits programs, while providing benefits managers with an automated
means of monitoring the enrollment process and performing certain plan
management functions. Additionally, eChoice allows employees to make enrollment
decisions privately and assures that their elections will not be subject to
human transcription error.

We generate revenues from eChoice by charging clients on a per-employee basis,
generally pursuant to multi-year contracts. We generate revenues from our other
human resources and benefits application services by charging clients an initial
set-up and development fee and monthly hosting and transactions fees, generally
pursuant to multi-year contracts. Revenue is primarily recognized on a
straight-line basis from the time the service is available to be used by our
clients through the end of the service period.

CUSTOMER PREMISES SYSTEMS AND RELATED MAINTENANCE AND SUPPORT

From the early 1980s until 1993, we offered our products and services
exclusively through licensed software specifically developed for each customer,
and installed these systems at the customer's site. In 1993 we began to deliver
benefits enrollment services as an application services provider. In 1998 we
began to de-emphasize sales of customer premises systems, and in 2000 we
discontinued sales to new customers. We provide system enhancements to these
customers and customer support 7-days per week, 24-hours per day, through a
toll-free hotline, email and our website. We sold these systems under licenses
and generate additional revenues by providing ongoing maintenance and support.

22

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On a periodic basis, we evaluate our estimates, including those
related to revenue recognition, intangible assets, capitalized software and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions.

We believe that the following critical accounting policies include our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

REVENUE RECOGNITION: Revenues from The Work Number are recognized in the period
that they are earned, from transaction fees charged to users for verifications
of employment history and income. Additionally, revenue for set up fees, monthly
maintenance and employer conversion fees are recognized on a straight-line basis
from the time the service is available to be used by our clients through the end
of the service period. Revenues from our unemployment cost management services,
called UC eXpress, are recognized in the period that they are earned, evenly
over the life of the contract. Transaction fees are recorded as the services are
provided. Revenue which is contingent upon achieving certain performance
criteria is recognized when those criteria are met. Human resources and benefits
application services revenue is recognized on a straight-line basis from the
time the service is available to be used by our clients through the end of the
service period. Because of seasonal variations of our service offerings, a
greater number of clients have services available to them from October through
December than during any other period during the year. As a result, revenues in
our third fiscal quarter are substantially higher than in the other three
quarters of the year. In prior fiscal years, over fifty percent of annual
revenues in this revenue line have been recorded in the third fiscal quarter.
During the current fiscal year, it is anticipated that between 45 and 50 percent
of the year's Human Resources and Benefits Application Services revenue will be
recorded in the third fiscal quarter. We recognize hardware and software license
revenue upon shipment based on vendor-specific objective evidence. Revenues for
customization services of customer premises systems are recognized by the
contract method of accounting using percentage of completion for larger, more
complex systems and the completed contract method for smaller systems. Revenue
from maintenance contracts is deferred and recognized ratably over the
maintenance period. Deferred revenue represents the unearned portion of The Work
Number setup fees as well as, Human Resources and Benefits Application
Services, UC eXpress, and maintenance fees.

INTANGIBLE ASSET VALUATIONS: In connection with the acquisitions of Ti3, Inc.;
the unemployment cost management services business of Gates, McDonald & Company,
a subsidiary of Nationwide Mutual Insurance Company; and James E. Frick, Inc.,
d/b/a The Frick Company, TALX acquired certain identifiable intangible assets.
These assets were recorded in accordance with the Financial Accounting Standards
Board SFAS No. 141, "Business Combinations".

Effective April 1, 2002, we have adopted the Financial Accounting Standards
Board SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired
outside of a business combination and the accounting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested at least annually for impairment. Under the provisions of SFAS No.
142, any impairment loss identified upon adoption of this standard will be
recognized as a cumulative effect of a change in accounting principle. Goodwill
and intangible assets determined to have an indefinite useful life that are
acquired in purchase business combinations will not be amortized, but instead
tested for impairment on an annual basis.

CAPITALIZED SOFTWARE: Software development costs are expensed as incurred until
technological feasibility is achieved, after which they are capitalized on a
product-by-product basis. Amortization of capitalized software development costs
is computed using the straight-line method over the remaining estimated economic
life of the product, generally three

23

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

years. Amortization of capitalized software development costs starts when the
product is available for general release to clients. All capitalized software
assets are reviewed as of each balance sheet date for impairment. Upon
determination of any impairment, the asset is written-down to the appropriate
value in the period that the impairment is determined.

INCOME TAXES: We record income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. In assessing the
realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences. If management
were to determine that we would not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged against earnings in the period such determination was made.

The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by accounting principles generally accepted
in the United States of America, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. See
our consolidated financial statements and notes thereto contained in our Annual
Report on Form 10-K for the year ended March 31, 2002 which contains accounting
policies and other disclosures required by accounting principles generally
accepted in the United States of America.

24

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report contains certain statements regarding future results, performance,
expectations, or intentions that may be considered forward looking statements
("forward-looking statements") within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements relate to, among other things,
business trends and prospects, potential future profitability, revenue growth,
cash flows and anticipated improvements in gross margin and general and
administrative expense as a percentage of revenues of the unemployment cost
management business. All statements other than statements of historical facts
included in this Form 10-Q are forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to be
correct. Actual results could differ materially from those projected in the
forward-looking statements as a result of risks facing us. Such risks include,
but are not limited to,

(1) risks surrounding the class action litigation, the SEC investigation,
the restatement of our financial statements, and potential Nasdaq
delisting,
(2) our ability to effectively integrate acquired companies and capitalize
on cross-selling opportunities,
(3) our ability to successfully integrate acquisitions, including, without
limitation, managing contingent liabilities and retaining
employer-customers,
(4) our ability to increase the size and range of applications for The Work
Number database and successfully market current and future human
resources and benefits application services,
(5) fluctuations in The Work Number revenue due to changes in the level of
residential mortgage activity and interest rates,
(6) changes in mortgage documentation requirements in the secondary market,
(7) our ability to maintain accurate and confidential data,
(8) future challenges to applicability of the Fair Credit Reporting Act or
any new privacy legislation or interpretation of existing laws, and
(9) risk of interruption of computer network and telephone operations.

See our Annual Report on Form 10-K for the year ended March 31, 2002, for a
complete description of some of our risk factors. You should read this report
completely and with the understanding that our actual results may be materially
different from what we expect. We will not update these forward-looking
statements, even though our situation may change in the future. We qualify all
of our forward-looking statements by these cautionary statements.

RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, our (1) revenues and
gross margin, (2) gross margin percentage by revenue category, and (3) certain
items from our statements of operations as a percentage of revenues:

PERCENTAGE CHANGE
THREE MONTHS SIX MONTHS ------------------------------
ENDED SEPT. 30, ENDED SEPT. 30, THREE MONTHS SIX MONTHS
--------------------- ----------------------- ENDED SEPT. 30, ENDED SEPT. 30,
2001 2002 2001 2002 2002 OVER 2001 2002 OVER 2001
(RESTATED) (RESTATED)
---------- --------- ---------- ---------- -------------- --------------
(IN THOUSANDS)
(UNAUDITED)

REVENUES AND GROSS MARGIN:
Revenues:
The Work Number services...... $ 6,659 $ 8,573 $ 12,762 $ 16,189 28.7% 26.9%
Unemployment cost management
services.................... -- 17,939 -- 35,978 * *
Human resources and benefits
application services........ 1,281 1,906 2,661 3,353 48.8 26.0
Customer premises systems..... 978 313 2,009 900 (68.0) (55.2)
Maintenance and support....... 978 916 1,966 1,849 (6.3) (6.0)
-------- ------- -------- --------
Total revenues.............. $ 9,896 $29,647 $ 19,398 $ 58,269 199.6 200.4
-------- ------- -------- --------

25

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PERCENTAGE CHANGE
THREE MONTHS SIX MONTHS ------------------------------
ENDED SEPT. 30, ENDED SEPT. 30, THREE MONTHS SIX MONTHS
--------------------- ----------------------- ENDED SEPT. 30, ENDED SEPT. 30,
2001 2002 2001 2002 2002 OVER 2001 2002 OVER 2001
(RESTATED) (RESTATED)
---------- --------- ---------- ---------- -------------- --------------
(IN THOUSANDS)
(UNAUDITED)

REVENUES AND GROSS MARGIN (CONTINUED):
Gross margin:
The Work Number services......... $ 4,212 $ 5,555 $ 8,451 $ 10,356 31.9% 22.5%
Unemployment cost management
services....................... -- 8,428 -- 17,207 * *
Human resources and benefit
application services........... (687) 166 (1,139) 26 * *
Customer premises systems........ 415 76 353 324 (81.7) (8.2)
Maintenance and support.......... 705 737 1,382 1,473 4.5 6.6
Inventory write-down............. (307) -- (307) -- * *
--------- ------- --------- --------
Total gross margin............. $ 4,338 $14,962 $ 8,740 $ 29,386 244.9 236.2
-------- ------- -------- --------

GROSS MARGIN PERCENTAGE BY REVENUE CATEGORY:
The Work Number services........... 63.3% 64.8% 66.2% 64.0%
Unemployment cost management
services........................ -- 47.0 -- 47.8
Human resources and benefits
application services............ (53.6) 8.7 (42.8) 0.8
Customer premises systems.......... 42.4 24.3 17.6 36.0
Maintenance and support............ 72.1 80.5 70.3 79.7

PERCENTAGE OF TOTAL REVENUES:
Revenues:
The Work Number services........ 67.3% 28.9% 65.8% 27.8% 28.7% 26.9%
Unemployment cost management
services...................... -- 60.5 -- 61.7 * *
Human resources and benefits
application services.......... 12.9 6.4 13.7 5.8 48.8 26.0
Customer premises systems....... 9.9 1.1 10.4 1.5 (68.0) (55.2)
Maintenance and support......... 9.9 3.1 10.1 3.2 (6.3) (6.0)
----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 199.6 200.4
Cost of revenues................... 56.2 49.5 54.9 49.6 164.2 171.0
----- ----- ------ -----
Gross margin....................... 43.8 50.5 45.1 50.4 244.9 236.3
----- ----- ------ -----
Operating expenses:
Selling and marketing........... 23.7 14.6 23.5 15.8 84.2 102.5
General and administrative...... 20.5 21.1 17.3 20.7 207.9 259.6
Restructuring charge............ 26.5 -- 13.5 -- * *
----- ----- ------ -----
Total operating expenses...... 70.7 35.7 54.3 36.5 50.9 102.2
----- ----- ------ -----
Operating income (loss)............ (26.9) 14.8 (9.2) 13.9 * *
Other income (expense), net........ 4.8 (1.3) 3.1 (1.2) * *
----- ------ ------ ------
Earnings (loss) before income
tax expense................... (22.1) 13.5 (6.1) 12.7 * *
Income tax expense (benefit)....... (8.2) 5.1 (2.0) 4.9 * *
------ ----- ------- -----
Net earnings (loss)................ (13.9)% 8.4% (4.1)% 7.8% * *
====== ===== ======= =====

* - not meaningful.

26

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001

Revenues. Total revenues increased 199.6% to $29.6 million in the second quarter
of fiscal 2003 from $9.9 million in the second quarter of fiscal 2002.

Revenues from The Work Number services increased 28.7% to $8.6 million in the
second quarter of fiscal 2003 from $6.7 million in the second quarter of fiscal
2002, due to an increase in the number of employment records in the database and
related transaction volume, new clients gained from continued marketing to
employers and verifiers and, to a lesser extent, an increase in pricing during
the preceding year.

Revenues from unemployment cost management services for the second quarter of
fiscal 2003 of $17.9 million represent revenues from our acquisition of both The
Frick Company and the unemployment cost management business of GatesMcDonald &
Company on March 27, 2002. This represents an increase of approximately 5.7% on
a pro-forma basis compared to the second quarter of fiscal 2002, due principally
to cross-selling successes.

Revenues from human resources and benefits application services increased 48.8%
to $1.9 million in the second quarter of fiscal 2003 from $1.3 million in the
second quarter of fiscal 2002. This was due to an increase in the number of
clients to whom services were available in this quarter compared to the
comparable prior year quarter, offset somewhat by fewer overall clients due to
client attrition not being replaced by new sales. This softening of new sales is
due to the poor economic conditions which began affecting our sales performance
in the second quarter of fiscal 2002.

Revenues from customer premises systems decreased 68.0% to $313,000 in the
second quarter of fiscal 2003 from $978,000 in the second quarter of fiscal
2002. This decrease is due to a shift in our focus away from selling in-house
systems to our human resources and benefits application services.

Revenues from maintenance and support related to the customer premises systems
decreased 6.3% to $916,000 in the second quarter of fiscal 2003 from $978,000 in
the second quarter of fiscal 2002, reflecting the support provided to a
shrinking installed base as we shift our strategy towards providing similar
solutions through application services.

We anticipate revenues from customer premises systems and maintenance and
support will continue to decrease from current levels as we have discontinued
sales to new clients and continue to emphasize The Work Number services and
unemployment cost management services.

Gross Margin. Total gross margin increased 244.9% to $15.0 million in the second
quarter of fiscal 2003 from $4.3 million in the second quarter of fiscal 2002.
As a percentage of total revenues, gross margin increased to 50.5% in the second
quarter of fiscal 2003 from 43.8% in the second quarter of fiscal 2002.

The Work Number services gross margin increased 31.9% to $5.6 million, or 64.8%
of corresponding revenue, in the second quarter of fiscal 2003 from $4.2
million, or 63.3% of corresponding revenue in the second quarter of fiscal 2002.
The increase in gross margin and gross margin percentage was due primarily to
revenue increases and improved leveraging of our operational infrastructure.

Unemployment cost management services gross margin was $8.4 million, or 47.0% of
corresponding revenue in the second quarter of fiscal 2003. We believe that this
gross margin percentage is consistent with the comparable year-ago period for
these businesses on a stand-alone basis. We expect to realize improvements in
the gross margin percentage throughout the fiscal year as we continue to
consolidate the cost structure of the acquired businesses.

Human resources and benefits application services gross margin increased to
$166,000, or 8.7% of corresponding revenue, in the second quarter of fiscal 2003
from ($687,000), or (53.6)% of corresponding revenue in the second quarter of
fiscal 2002. This increase in gross margin and gross margin percentage is
principally due to a higher level of revenues and better leveraging of fixed
infrastructure costs as services were available to a greater number of clients
in this quarter, compared to the comparable prior year quarter. Because of the
seasonal variations in our service

27

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

offerings, gross margins in this revenue line are lower in the first, second and
fourth fiscal quarters and are substantially higher in our third fiscal quarter
each year. This is because fixed infrastructure and personnel costs are incurred
relatively evenly through the year, while revenues are seasonally higher in the
third fiscal quarter due to proportionally increased benefits enrollment
activity.

Customer premises systems gross margin decreased 81.7% to $76,000, or 24.3% of
corresponding revenue, in the second quarter of fiscal 2003 from $415,000, or
42.4% of corresponding revenue in the second quarter of fiscal 2002. The
decrease in gross margin and gross margin percentage is due to a certain level
of fixed personnel costs in place to support this business, even as revenues
continue to decline.

Maintenance and support gross margin increased 4.5% to $737,000, or 80.5% of
corresponding revenue, in the second quarter of fiscal 2003, from $705,000, or
72.1% of corresponding revenue, in the second quarter of fiscal 2002. The
increase in gross margin and gross margin percentage is due to a lower level of
third-party hardware support costs and improved leveraging of personnel costs,
offset by lower revenues caused by a shrinking client base.

Selling and Marketing Expenses. Selling and marketing expenses increased 84.2%
to $4.3 million in the second quarter of fiscal 2003 from $2.3 million in the
second quarter of fiscal 2002. Selling and marketing expenses for our newly
acquired unemployment cost management services businesses were approximately
$3.1 million for the second quarter of fiscal 2002. Therefore, on a pro-forma
basis selling and marketing expenses decreased approximately 20.4% in the second
quarter of fiscal 2003 as compared to pro-forma fiscal 2002, due to the
integration and consolidation of sales and marketing organizations within the
two unemployment cost management services companies. As a percentage of
revenues, such expenses decreased to 14.6% in the second quarter of fiscal 2003
from 23.7% in the second quarter of fiscal 2002. The decrease in expense as a
percentage of revenues is due to the greater rate of increase in our revenues
compared to personnel and related costs.

General and Administrative Expenses. General and administrative expenses
increased 207.9% to $6.2 million in the second quarter of fiscal 2003 from $2.0
million in the second quarter of fiscal 2002. Of this increase, $3.3 million is
due to the addition of our newly acquired unemployment cost management services
businesses. After excluding the results of these additions, our general and
administrative expenses related to our traditional businesses increased
approximately $900,000, due to the increased infrastructure costs of a growing
business and workforce. As a percentage of revenues, such expenses increased to
21.1% in the second quarter of fiscal 2003 from 20.5% in the second quarter of
fiscal 2002. This increase is due primarily to the newly acquired unemployment
cost management services businesses historically having higher general and
administrative expenses as a percentage of revenue compared to our traditional
businesses. We expect to see this percentage improve throughout the fiscal year
as we continue to consolidate the cost structure of the acquired businesses.
Additionally, the increase in general and administrative expenses in our
traditional businesses as a percentage of revenues is due to the revenue levels
in human resources and benefits application services, that were lower than
anticipated.

Non-Recurring Charges. During the quarter ended September 30, 2001, we
reorganized our sales and delivery operations and refocused our product lines
related to our human resources and benefit applications and customer premises
systems businesses. In conjunction with the reorganization, we reduced our
workforce by approximately 17%, closed certain regional sales offices and
wrote-down hardware inventory and capitalized software. As a result of these
actions, we incurred restructuring charges of $1.9 million associated with the
write-off of capitalized software, $349,000 related to employee severance costs
and $337,000 related to office closing costs. These items are reflected in the
line item "restructuring charge" on the statement of operations for the three
months ended September 30, 2001 and $565,000 is reflected in accrued expenses on
the balance sheet as of September 30, 2001. Additionally, we incurred a charge
of $307,000 related to the write-down of certain hardware inventory items. This
charge is reflected as a separate component of cost of goods sold on the
statement of operations for the three months ended September 30, 2001.

Other Income (Expense), Net. Other income (expense), net decreased to $378,000
of other expense in the second quarter of fiscal 2003 from $476,000 of other
income in the second quarter of fiscal 2002, due to a shift from a net

28

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

investing position to a net borrowing position. This is due to the financing
related to our acquisitions of the unemployment cost management services
businesses.

Income Tax Expense. Our effective income tax rate increased to 38.3% in the
second quarter of fiscal 2003 from 37.1% in the second quarter of fiscal 2002.
This change reflects the effect of tax-exempt interest earned on state and
federal tax-free municipal securities during the last month of the second
quarter of fiscal 2002.

SIX MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2001

Revenues. Total revenues increased 200.4% to $58.3 million in the first half of
fiscal 2003 from $19.4 million in the first half of fiscal 2002.

Revenues from The Work Number services increased 26.9% to $16.2 million in the
first half of fiscal 2003 from $12.8 million in the first half of fiscal 2002,
due to an increase in the number of employment records in the database and
related transaction volume, new clients gained from continued marketing to
employers and verifiers and, to a lesser extent, an increase in pricing during
the preceding year.

Revenues from unemployment cost management services for the first half of fiscal
2003 of $36.0 million represent revenues from our acquisition of both The Frick
Company and the unemployment cost management business of GatesMcDonald & Company
on March 27, 2002. This represents an increase of approximately 2.3% on a
pro-forma basis compared to the first half of fiscal 2002.

Revenues from human resources and benefits application services increased 26.0%
to $3.4 million in the first half of fiscal 2003 from $2.7 million in the first
half of fiscal 2002. This was due to an increase in the number of clients to
whom services were available in this six month period, compared to the
comparable prior year period, offset somewhat by fewer overall clients due to
client attrition not being replaced by new sales. This softening of new sales is
due to the poor economic conditions which began affecting our sales performance
in the second quarter of fiscal 2002.

Revenues from customer premises systems decreased 55.2% to $900,000 in the first
half of fiscal 2003 from $2.0 million in the first half of fiscal 2002. This
decrease is due to a shift in our focus away from selling in-house systems to
our human resources and benefits application services.

Revenues from maintenance and support related to the customer premises systems
decreased 6.0% to $1.8 million in the first half of fiscal 2003 from $2.0
million in the first half of fiscal 2002, reflecting the support provided to a
shrinking installed base as we shift our strategy towards providing similar
solutions through application services.

We anticipate revenues from customer premises systems and maintenance and
support will continue to decrease from current levels as we have discontinued
sales to new clients and continue to emphasize The Work Number services and
unemployment cost management services.

Gross Margin. Total gross margin increased 236.2% to $29.4 million in the first
half of fiscal 2003 from $8.7 million in the first half of fiscal 2002. As a
percentage of total revenues, gross margin increased to 50.4% in the first half
of fiscal 2003 from 45.1% in the first half of fiscal 2002.

The Work Number services gross margin increased 22.5% to $10.4 million, or 64.0%
of corresponding revenue, in the first half of fiscal 2003 from $8.5 million, or
66.2% of corresponding revenue in the first half of fiscal 2002. The increase in
gross margin was due primarily to revenue increases. The gross margin percentage
decreased due to the inclusion of Ti3, which has a lower gross margin than our
traditional The Work Number services, for the full first half of fiscal 2003,
versus only the second quarter of fiscal 2002. Also, costs related to personnel
and infrastructure increased slightly in the first quarter of fiscal 2003 to
accommodate possible future electronic payroll services clients.

29

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unemployment cost management services gross margin was $17.2 million, or 47.8%
of corresponding revenue in the first half of fiscal 2003. We believe that this
gross margin percentage is relatively consistent with the comparable year-ago
period for these businesses on a stand-alone basis. We expect to realize
improvements in the gross margin percentage throughout the fiscal year as we
continue to consolidate the cost structure of the acquired businesses.

Human resources and benefits application services gross margin increased to
$26,000, or 0.8% of corresponding revenue, in the first half of fiscal 2003 from
($1.1) million, or (42.8)% of corresponding revenue in the first half of fiscal
2002. This increase in gross margin and gross margin percentage is principally
due to a higher level of revenues and better leveraging of fixed infrastructure
costs as services were available to a greater number of clients in this six
month period, compared to the comparable prior year period. Because of the
seasonal variations in our service offerings, gross margins in this revenue line
are lower in the first, second, and fourth fiscal quarters and are substantially
higher in our third fiscal quarter each year. This is because fixed
infrastructure and personnel costs are incurred relatively evenly through the
year, while revenues are seasonally higher in the third fiscal quarter.

Customer premises systems gross margin decreased 8.2% to $324,000, or 36.0% of
corresponding revenue, in the first half of fiscal 2003 from $353,000, or 17.6%
of corresponding revenue in the first half of fiscal 2002. The decrease in gross
margin is due to a certain level of fixed personnel costs in place to support
this business, even as revenues continue to decline. The increase in gross
margin percentage is due to the elimination of amortization of capitalized
software, that remained during the first quarter of fiscal 2002 as we were
shifting our business focus to The Work Number services and human resources and
benefits application services.

Maintenance and support gross margin increased 6.6% to $1.5 million, or 79.7% of
corresponding revenue, in the first half of fiscal 2003, from $1.4 million, or
70.3% of corresponding revenue, in the first half of fiscal 2002. The increase
in gross margin and gross margin percentage is due to a lower level of
third-party hardware support costs and improved leveraging of personnel costs,
offset by lower revenues caused by a shrinking client base.

Selling and Marketing Expenses. Selling and marketing expenses increased 102.5%
to $9.2 million in the first half of fiscal 2003 from $4.5 million in the first
half of fiscal 2002. Selling and marketing expenses for our newly acquired
unemployment cost management services businesses were approximately $6.3 million
for the first half of fiscal 2002. Therefore, on a pro-forma basis selling and
marketing expenses decreased approximately 15% in the first half of fiscal 2003
as compared to pro-forma fiscal 2002, due to the integration and consolidation
of sales and marketing organizations within the two unemployment cost management
services companies. As a percentage of revenues, such expenses decreased to
15.8% in the first half of fiscal 2003 from 23.4% in the first half of fiscal
2002. The decrease in percentage of revenues is due to the greater rate of
increase in our revenues as compared to personnel and related costs.

General and Administrative Expenses. General and administrative expenses
increased 259.6% to $12.1 million in the first half of fiscal 2003 from $3.4
million in the first half of fiscal 2002. Of this increase, $6.8 million is due
to the addition of our newly acquired unemployment cost management services
businesses. After excluding the results of these additions, our general and
administrative expenses related to our traditional businesses increased
approximately $1.9 million, due to the increased infrastructure costs of a
growing business and workforce. As a percentage of revenues, such expenses
increased to 20.8% in the first half of fiscal 2003 from 17.3% in the first half
of fiscal 2002. This increase is due primarily to the newly acquired
unemployment cost management services businesses historically having higher
general and administrative expenses as a percentage of revenue compared to our
traditional businesses. We expect to see this percentage improve throughout the
fiscal year as we continue to consolidate the cost structure of the acquired
businesses. Additionally, the increase in general and administrative expenses in
our traditional businesses as a percentage of revenues is due to the revenue
levels in human resources and benefits application services, that were lower
than anticipated.

Non-Recurring Charges. During the quarter ended September 30, 2001, we
reorganized our sales and delivery operations and refocused our product lines
related to our human resources and benefit applications and customer premises
systems businesses. In conjunction with the reorganization, we reduced our
workforce by approximately 17%, closed certain regional sales offices and
wrote-down hardware inventory and capitalized software. As a result of

30

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

these actions, we incurred restructuring charges of $1.9 million associated with
the write-off of capitalized software, $349,000 related to employee severance
costs and $337,000 related to office closing costs. These items are reflected in
the line item "restructuring charge" on the statement of operations for the six
months ended September 30, 2001 and $565,000 is reflected in accrued expenses on
the balance sheet as of September 30, 2001. Additionally, we incurred a charge
of $307,000 related to the write-down of certain hardware inventory items. This
charge is reflected as a separate component of cost of goods sold on the
statement of operations for the six months ended September 30, 2001.

Other Income (Expense), Net. Other income (expense), net decreased to $710,000
of other expense in the first half of fiscal 2003 from $599,000 of other income
in the first half of fiscal 2002, due to a shift from a net investing position
to a net borrowing position. This is due to the financing related to our
acquisitions of the unemployment cost management services businesses.

Income Tax Expense. Our effective income tax rate increased to 38.4% in the
first half of fiscal 2003 from 32.6% in the first half of fiscal 2002. This
change is primarily due to the impact of the restatement of earnings during the
prior year period. The tax benefit recorded during the second quarter of fiscal
2002 caused the six month effective rate to fall to 32.6%.

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have financed our operations through cash flows from
operations, except as described below.

On August 8, 2001 we completed a secondary stock offering of 2,950,000 shares of
our common stock, including 200,000 shares of a selling shareholder, resulting
in gross proceeds to the Company of $83.1 million. Additionally, we incurred
$644,000 of costs related to the transaction which were offset against the
proceeds. The share amounts discussed above do not include the effect of the 10%
stock dividend declared on September 6, 2001.

Our working capital was $3.0 million at March 31, 2002 and ($1.9) million at
September 30, 2002. Total working capital decreased during the six months ended
September 30, 2002 due principally to payments made related to our March 27,
2002 acquisitions and increases in deferred revenue and the current portion of
long-term debt. At September 30, 2002, almost $9.0 million of current
liabilities represent deferred revenue instead of payment obligations. As a
result, based on cash and cash equivalents on hand together with anticipated
cash flows from operations, we believe we have sufficient liquidity to pay our
obligations as they become due.

Our accounts receivable decreased from $12.5 million at March 31, 2002 to $11.9
million at September 30, 2002, due primarily to improved collections of accounts
receivable within our unemployment cost management services segment.

Our capital expenditures were $2.6 million during the six months ended September
30, 2002. These capital expenditures were principally for computer equipment and
integrating the operational infrastructure for our unemployment cost management
services segment. At September 30, 2002, we had no significant capital spending
or purchase commitments other than normal purchase commitments and commitments
under facilities and operating leases, but would expect capital expenditures to
increase during the next two fiscal years, as we continue to integrate the
operations of our acquisitions.

In November 2000, our board of directors authorized us to repurchase up to
400,000 shares of our stock in the open market, or through privately negotiated
transactions over the following two-year period. In November 2001, this plan was
extended to November 2004, and the number of shares was increased to one
million. We repurchased 311,000 shares during the six months ended September 30,
2002. Cumulative shares repurchased amount to 608,500. Share amounts are
reported on a pre-dividend basis. Except for the 279,651 shares remaining in the
treasury at September 30, 2002, all shares repurchased have been reissued in
connection with employee stock option exercises and employee stock purchase plan
purchases. On September 5, 2002, our board of directors approved a new stock
repurchase plan, authorizing us to repurchase up to one million shares during
the 36 month period ending September 30, 2005. As of September 30, 2002 no
shares have been repurchased under this plan.

31

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the quarter ended September 30, 2002, we continued our quarterly dividend
program, declaring a $0.03 dividend on our common stock.

We believe that our working capital, together with our anticipated cash flows
from operations should be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months.

In connection with the acquisitions of The Frick Company and the unemployment
cost management business of GatesMcDonald & Company, on March 27, 2002, pursuant
to a loan agreement dated as of March 27, 2002, (the "Loan Agreement"), we
obtained secured financing consisting of a $30,000,000 term loan (the "Term
Loan") and a $10,000,000 revolving credit facility (the "Revolving Credit
Facility") from LaSalle Bank National Association, as administrative agent and
lender, and Southwest Bank of St. Louis, as lender, and any other lenders that
may become party to the Loan Agreement (collectively, the "Lenders"). We used
the proceeds of the Term Loan to pay a portion of the purchase price for the
acquisitions; however, we have not borrowed under the Revolving Credit Facility.
We must repay principal of the Term Loan in quarterly installments, with the
final installment due on February 27, 2005. In addition, principal payments are
required out of excess cash flow. The Revolving Credit Facility also matures on
February 27, 2005.

The Term Loan and advances under the Revolving Credit Facility bear interest at
rates we select under the terms of the Loan Agreement, including a base rate or
eurodollar rate, plus an applicable margin. Until March 27, 2003, eurodollar
rate loans will bear interest at the applicable eurodollar rate plus 2.25% and
base rate loans will bear interest at the applicable base rate. After that, the
applicable margin for eurodollar rate loans will vary from 2.00% to 2.25%, and
the applicable margin for base rate loans will remain at 0.00%, in each case
based upon our ratio of total indebtedness to EBITDA. We may make prepayments
under the Term Loan during the first twelve months after the closing date
without penalty, except that we will be obligated to pay a $600,000 prepayment
premium under certain limited circumstances. In addition, if William W. Canfield
ceases serving as our chief executive officer during the first 24 months after
closing, and we do not retain a substitute satisfactory to the Lenders within
120 days, then we are required to repay all outstanding loans, including both
the Term Loan and Revolving Credit Facility.

The Loan Agreement is secured by pledges of our stock in, and guarantees of, our
subsidiaries and security interests in substantially all of our, and our
subsidiaries', assets.

The Loan Agreement includes certain covenants, including, without limitation,
restrictions on the use of proceeds of the Term Loan and loans made under the
Revolving Credit Facility. The Term Loan was to be used solely to pay a portion
of the purchase price for the acquisitions of the Frick Company and the
unemployment cost management business of GatesMcDonald & Company. The proceeds
of loans made under the Revolving Credit Facility may be used solely for working
capital, permitted capital expenditures, as the source for payment of our
obligations with respect to certain existing letters of credit, to pay the
transaction cost of the Loan Agreement, and to finance certain permitted
acquisitions. The Loan Agreement also requires compliance with certain financial
covenants based on our minimum net worth, minimum EBITDA, our ratio of total
indebtedness to EBITDA and our ratio of EBITDA to fixed charges. The Loan
Agreement further requires compliance with certain operating and other covenants
which limit, among other things, the incurrence of additional indebtedness by us
and our subsidiaries, the amount of capital expenditures to be made by us and
our subsidiaries, sales of assets and mergers and dissolutions, impose
restrictions on distributions to shareholders, change of control of TALX,
investments, acquisitions and liens, and which require compliance, in all
material respects, with material laws. The Loan Agreement also contains various
representations and warranties, including among other things, the accuracy of
financial statements and other information delivered to the Lenders, the absence
of changes which would have or would reasonably be likely to have a material
adverse effect (as customarily included in secured credit facilities of this
nature).

As a condition of our Term Loan Agreement, we were required to enter into an
interest rate swap agreement for 50% of our outstanding term loan as a means of
reducing our interest rate exposure. Pursuant to this requirement, we entered
into an interest rate swap contract on June 26, 2002 for a notional amount of
$14 million, which represented 50% of our outstanding term loan balance on that
date. Under this contract, we pay a fixed rate of 3.45% and receive a variable
rate of LIBOR, which is equal to the LIBOR rate utilized on our term loan. The
notional amount of our interest rate swap contract steps down according to the
same schedule as our term loan, maintaining a 50% hedged

32

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

position. All payment dates and maturity dates are the same as our term loan.
This strategy effectively converts 50% of our term loan into a fixed rate
instrument.

The interest rate swap and related gains and losses arising on the contract are
accounted for as a cash flow hedge in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Specifically, changes in the fair value of derivative
instruments designated as cash flow hedges are deferred and recorded in other
comprehensive income. These deferred gains or losses are recognized in income
when the transactions being hedged are completed. The ineffective portion, if
any, of these hedges is recognized in income currently.

As of September 30, 2002, the fair value of the interest rate swap in the amount
of $335,000 is included in accrued expenses and other liabilities. Interest
expense accrued on the swap contract was $61,000 for the first half of fiscal
2003.

We do not use financial instruments for trading or speculative purposes.

OTHER MATTERS

The Company is cooperating with a pending SEC investigation and is a defendant
in pending lawsuits which are described in note 8 of our Notes to Unaudited
Consolidated Financial Statements, which is incorporated by reference herein.

As described above, the Company is filing herewith restated financial statements
and has announced that it would restate its financial statements for each of the
quarters ended June 30, 2001 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002. As a result of the restatement, we could become
subject to additional litigation or regulatory proceedings or both. As of the
date hereof, we are not aware of any litigation having been commenced against us
related to this restatement. However, such litigation could be commenced against
us in the future and the plaintiffs who have filed lawsuits against us
previously could amend their complaints to include claims related to this
restatement, and if so, we could not predict the outcome of any such litigation
at this time. Additionally, the lenders under our March 27, 2002 Loan Agreement,
which is described more fully above under Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources, could seek to exercise remedies which may be available to them, such
as acceleration of our loan, in the event they determine that, as a result of
the restatement discussed above or the SEC investigation discussed above, we
have breached a covenant or representation and warranty in the Loan Agreement.
If an unfavorable result occurred in any such action, our business and financial
conditions could be harmed.

As of the date hereof, the SEC is investigating our accounting for two items
which are the subject of this restatement. At this time, we cannot predict
whether or not any additional regulatory investigation related to this
restatement will be commenced, or if it is, the outcome of any such
investigation. However, if any such investigation were to result in a regulatory
proceeding or action against us, our business and financial condition could be
harmed.

Regardless of the outcome of any litigation or regulatory proceedings,
litigation and regulatory proceeding of this type are expensive and will require
that we devote substantial resources and executive time to defend these
proceedings.

As a result of the delay in filing this Form 10-Q, The Nasdaq Stock Market
notified us that effective Tuesday, November 26, 2002, the letter "E" would be
appended to our trading symbol, signifying the delay. Similarly, The

33

TALX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nasdaq Stock Market informed us that we were not in compliance with the
requirements of NASD Marketplace Rule 4310(c)(14) because we had not then filed
the Form 10-Q. Our delay in filing the Form 10-Q was the only listing deficiency
cited by The Nasdaq Stock Market.

We requested an appeal hearing by The Nasdaq Stock Market, and have been
informed that our potential delisting is stayed, pending the review and
determination of a Nasdaq Listing Qualifications Panel. The hearing date has
been set for December 20, 2002. There can be no assurance that the panel will
grant the request for continued listing of our common stock.

34

TALX CORPORATION AND SUBSIDIARIES
PART I - ITEMS 3 AND 4
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND
CONTROLS AND PROCEDURES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As discussed above, our Term Loan and advances under our Revolving Credit
Facility bear interest at rates we select under the terms of the Loan Agreement,
including a base rate or eurodollar rate, plus an applicable margin. Until March
27, 2003, eurodollar rate loans will bear interest at the applicable eurodollar
rate plus 2.25% and base rate loans will bear interest at the applicable base
rate. After that, the applicable margin for eurodollar rate loans will vary from
2.00% to 2.25%, and the applicable margin for base rate loans will remain at
0.00%, in each case based upon our ratio of total indebtedness to EBITDA.

As of September 30, 2002, we had $26 million principal outstanding on our term
loan, of which $13 million was hedged with an interest rate swap contract. On an
annual basis, a 100 basis point change in interest rates would result in an
approximate $130,000 change to our annual interest expense, based on net
variable borrowings of $13 million.

ITEM 4. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, management, including
the Company's Chairman, President and Chief Executive Officer and Vice President
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures with respect to
the information generated for use in this Quarterly Report. Based upon, and as
of the date of that evaluation, the Chairman, President and Chief Executive
Officer and Vice President and Chief Financial Officer concluded that the
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.

There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.

It should be noted that the Company's management, including the Chairman,
President and Chief Executive Officer and Vice President and Chief Financial
Officer, does not expect that the Company's disclosure controls and procedures
or internal controls will prevent all error and all fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

35

TALX CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 8 of our Notes to Unaudited Consolidated
Financial Statements is incorporated by reference herein.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

(a) The annual meeting of shareholders of the Company was held at 2:00
p.m., local time, on Thursday, September 5, 2002, in St. Louis,
Missouri.

(b) The Company's stockholders voted on the following matters:

Election of Director - William W. Canfield, a nominee of the Board of
Directors, was elected as director at the annual meeting. The number of
votes cast for the election of the nominee were 10,642,283, and the
number of votes withheld were 2,088,186.

Election of Director - Richard F. Ford, a nominee of the Board of
Directors, was elected as director at the annual meeting. The number of
votes cast for the election of the nominee were 12,700,525, and the
number of votes withheld were 29,944.

Ratification of Selection of Independent Auditors - The shareholders
ratified the appointment of KPMG LLP as the Company's independent
auditors to perform the audit of the Company's financial statements for
the year ending March 31, 2003. 12,300,521 votes were cast in favor of
the appointment, 428,788 votes were cast against, and there were 1,160
abstentions.

ITEM 5. OTHER INFORMATION

On November 12, 2002, the Board of Directors elected Tony G. Holcombe
as a Director of the Company.

On December 16, 2002, L. Keith Graves, Controller, was appointed
Principal Accounting Officer by the Board of Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) See Exhibit Index.

(b) Reports on Form 8-K

(i) There were no Current Reports on Form 8-K filed by the Company
during the quarter ended September 30, 2002. On November 15, 2002,
the Company filed a Current Report on Form 8-K under Item 9 to
report the issuance of a press release reporting the filing of a
Form 12b-25 relating to the late filing of this Form 10-Q.

36

TALX CORPORATION AND SUBSIDIARIES
SIGNATURES

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

TALX CORPORATION

Date: December 16, 2002 By: /s/ WILLIAM W. CANFIELD
-----------------------------------------
William W. Canfield
Chairman, President and
Chief Executive Officer

Date: December 16, 2002 By: /s/ L. KEITH GRAVES
-----------------------------------------
L. Keith Graves
Controller
(Principal Accounting Officer)

CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER

I, William W. Canfield, certify that:

1. I have reviewed this quarterly report on Form 10-Q of TALX
Corporation;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial

37

data and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By : /s/ William W. Canfield
------------------------
William W. Canfield
Chairman, President and Chief Executive Officer
December 16, 2002

TALX CORPORATION AND SUBSIDIARIES
SIGNATURES

CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER

I, Craig N. Cohen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of TALX
Corporation;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statement made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data

38

and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

By : /s/ Craig N. Cohen
------------------
Craig N. Cohen
Vice President and Chief Financial Officer
December 16, 2002

39

TALX CORPORATION AND SUBSIDIARIES
CERTIFICATIONS

EXHIBIT
NUMBER DESCRIPTION

3.1 Restated Articles of Incorporation, as amended, incorporated
by reference from Exhibit 3.1 to our Form 10-K for the fiscal
year ended March 31, 1997 (File No. 000-21465)

3.2 Bylaws, as amended and restated, incorporated by reference to
Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
period ended December 31, 2001 (File No. 000-21465)

11 Computation of Earnings (Loss) Per Share

99.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

40