TALX CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2004

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

As of September 30, 2003, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $313.0 million. For
purpose of this calculation only, without determining whether the following are
affiliates of the registrant, the registrant has assumed that (i) its directors
and executive officers are affiliates and (ii) entities controlled by such
persons are affiliates.

As of June 1, 2004 there were 13,670,344 shares of the registrant's Common
Stock outstanding, net of treasury shares held by the Company.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's 2004 Annual
Meeting of Shareholders, which definitive proxy statement will be filed within
120 days of the end of the registrant's fiscal year, are incorporated by
reference into Part III of this Annual Report on Form 10-K.

PART I

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 and cash flows, including without limitation, forward looking statements
under "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations." All statements other than statements of historical facts
included in this Form 10-K 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) the risks associated with pending investigations, and possible
future proceedings as a result of matters related to our recent financial
statement restatements;

(2) the risk to our future growth due to our dependence on our ability
to effectively integrate acquired companies and capitalize on cross-selling
opportunities;

(3) risks related to our ability to increase the size and range of
applications for The Work Number database and successfully market current
and future services and our dependence on third party providers to do so;

(4) the risk that our revenues from The Work Number may fluctuate in
response to changes in certain economic conditions such as residential
mortgage activity and employment trends;

(5) risks relating to the dependence of the market for The Work Number
on mortgage documentation requirements in the secondary market and the risk
that our revenues and profitability could be significantly harmed if those
requirements were relaxed or eliminated;

(6) risks associated with our ability to prevent breaches of
confidentiality as we perform large-scale processing of verifications;

(7) risks associated with our ability to maintain the accuracy,
privacy and confidentiality of our clients' employee data;

(8) risks associated with future challenges regarding applicability of
the Fair Credit Reporting Act or any new privacy legislation or
interpretation of existing laws;

(9) risks associated with changes in economic conditions or
unemployment compensation laws; and

(10) the risk of interruption of our computer network and telephone
operations, including potential slow-down or loss of business as potential
clients review our operations.

See "Item 1 -- Business -- Risk Factors" for a more detailed description of
many of these and other risk factors. You should read this Form 10-K completely
and with the understanding that our actual results may be materially different
from what we expect. We do not undertake any obligation to 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.

ITEM 1. BUSINESS

OVERVIEW

We are the leading provider of automated employment and income verification
and unemployment cost management services and a leader in providing human
resources/payroll business process outsourcing. Our services use web access,
interactive voice response, fax, document imaging and other technologies to
enable
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mortgage lenders, pre-employment screening companies, employees, employers and
other authorized users to obtain employee human resources and payroll
information and allow employees and their managers to review and modify
information in the human resources and payroll management information systems on
a self-service basis. Further, we provide unemployment insurance claims
processing and unemployment tax planning and management services to a broad
range of employers. We typically serve large organizations, including
approximately two-thirds of Fortune 500 companies and a number of federal, state
and local government agencies. Our strategy is to position TALX with a suite of
services that either deliver or use payroll data. We describe these services as
payroll-data-centric, and we believe that we are well positioned in the market
with those capabilities. We interact with various payroll systems and payroll
services, but are virtually independent of the payroll solutions our clients
select.

As used in this Form 10-K the terms "TALX," "we," "our," and "us" and other
similar terms refer to TALX Corporation, unless we specify otherwise.

TALX(R) is our registered trademark, and The Work Number For Everyone(R),
The Work Number(R), UC eXpress(R), W-2 eXpress(R), eChoice(R), FasTime(R), and
Advanced HR Solutions(R), are our registered service marks. TALXWare is our
trademark and ePayroll and FasCast are our service marks. All other trade names,
trademarks and product names in this Form 10-K are the property of their
respective owners.

We are incorporated under the laws of the state of Missouri. Our executive
offices are located at 1850 Borman Court, St. Louis, Missouri, 63146 and our
telephone number is (314) 214-7000.

AVAILABLE INFORMATION

Our Internet website address is http://www.talx.com. We have made copies of
the following reports available free of charge through our Internet website, as
soon as reasonably practicable after they have been filed with or furnished to
the Securities Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934: our annual report on Form 10-K; quarterly
reports on Form 10-Q; current reports on Form 8-K; and amendments to those
reports. Information on our website does not constitute part of this Report.

RESTATEMENTS OF FINANCIAL STATEMENTS

2004 RESTATEMENT

In January 2004, we restated certain historical financial statements as a
result of adjustments related to our customer premises systems business. The
restatement was necessary because an internal accounting review in the third
quarter of fiscal 2004 showed that certain revenues for customer premises
systems contracts were recorded earlier than was appropriate under the
percentage of completion methodology used for this line of business. Although we
ultimately realized the revenues from the transactions under review, our
financial results were not accurately presented, requiring the restatement. The
resulting restatement affected fiscal years ended March 31, 1999 through 2003
and the first two quarters of fiscal year 2004.

Additionally, we corrected three errors related to bill and hold
arrangements on hardware and software transactions arising out of the customer
premises systems line of business during the fiscal years ended March 31, 2000
and 2001. These adjustments resulted in movements of revenue and related costs
between quarters for each year. There was no impact to the annual financial
results of either fiscal year.

The restatement had practically no cumulative impact on our financial
results or our financial condition. It had the effect of reducing revenues by
$955,000 for fiscal years 1999, 2000 and 2001 and increasing revenues by a
similar amount in fiscal years 2002 and 2003. The impact on the fiscal years
presented, 2001, 2002 and 2003, was a reduction of revenue in 2001 of $358,000
and an increase of revenues in 2002 and 2003 of $610,000 and $384,000,
respectively. In addition to the revenue adjustments, the related commissions
associated with the revenues were adjusted accordingly and the income taxes
provisions were amended to reflect the impact of these restatements. The annual
impact to diluted earnings per share was a reduction to fiscal year 1999 of
$0.03, an increase to fiscal year 2000 of $0.01, a reduction to fiscal year 2001
of $0.02 and increases to fiscal years 2002 and 2003 of $0.03 and $0.01,
respectively.
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Our review focused on contracts in which revenue was realized in fiscal
2000 and subsequent periods as reliable historical data was not available for
earlier periods. Accordingly, our review included contracts for which services
were initiated in periods prior to fiscal 2000. The review of certain contracts
resulted in cumulative adjustments for periods prior to fiscal 2000 which have
been attributed to fiscal 1999, the earliest fiscal period presented for
financial disclosure purposes. While it is possible that certain of these
adjustments related to periods prior to fiscal 1999, data was not available to
accurately support the specific allocation to such prior periods. Such data was
not available as we had modified our systems during fiscal 1999 and have not
retained sufficient comparable data for contracts entered into prior to the
modification. While further review may have resulted in adjustments to increase
revenue in 2000 by decreasing revenues in prior periods, based on the review
performed, management believes that further adjustments were not supportable.

The adjustments also impacted our balance sheet based on the respective
revenue amounts, resulting in a restatement of our work in progress and deferred
revenues. In addition, accrued expenses were restated to give effect to the
impact on accrued commissions, and deferred income taxes were rested for the
related tax effect.

See our Form 10-K/A for the fiscal year ending March 31, 2003 regarding the
impact of our prior restatement on our consolidated statements of operations and
balance sheets. The prior restatement had no impact on our total cash flows from
operating activities, investing activities or financing activities.

2002 RESTATEMENT

In response to inquiries made by the Securities and Exchange Commission
during the course of its investigation, we reviewed, during our December 2002
quarter, the accounting treatment for two items in the year ended March 31,
2001. In December 2002 we restated certain of our previously issued financial
statements. 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 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 decided to record the entire expense in the
quarter ended March 31, 2001.

The effect of these restatements on the statement of earnings was 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 also considered recent guidance
from the SEC staff concerning the accounting for service transactions across
many industries, and 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 for use by our clients through the end of the service period.
Previously, we had consistently recorded revenues as services were provided.

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 per share.

See our Form 10-K/A for the period March 31, 2002 regarding the impact of
our prior restatement on our consolidated statements of operations and
consolidated balance sheets. The prior restatement had no impact on our total
cash flows from operations, investing activities or financing activities.

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RECENT DEVELOPMENTS

SALE OF HUMAN RESOURCES AND BENEFITS APPLICATION SERVICES BUSINESS

On April 21, 2003, the Board of Directors granted management the authority
to dispose of the Human Resources and Benefits Application Services business.
Accordingly, it was determined that this business met the requirements to be
presented as a discontinued operation.

On April 22, 2003 we transferred substantially all of the assets of our
Human Resources and Benefits Application Services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone. Workscape,
Inc. hired all of the employees directly related to the benefits enrollment
business.

The transaction was structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2.0 million and $6.0 million. While the contract did not specify
a minimum guaranteed amount, we secured a $2.0 million note from Workscape, Inc.
and as of June 1, 2004 we had received $1.0 million of principal and $98,000 of
interest payments in connection with the note.

All assets and liabilities of this business, both the portion of the
business transferred under contract to Workscape, Inc. (approximately 90% of the
assets) and the portion that has not yet been sold, along with related
transaction costs, were recorded on our consolidated balance sheet as net assets
of business held for sale. We recorded cash received under the asset purchase
agreement first to reduce the recorded value of net assets of business held for
sale and then to reflect gain on the sale of the business.

In connection with the transfer, we are providing Workscape, Inc., for
agreed-upon fees, with various transition services related to the operation of
the benefits enrollment business until December 31, 2005, or until certain
transferred client contracts have expired or been terminated. These fees, offset
by costs to deliver the service, were recorded first to reduce the recorded
value of net assets of business held for sale and then to reflect gain on the
sale of the business.

The historical results of operations for this business have been
reclassified to earnings (loss) from discontinued operations on our consolidated
statement of earnings.

ACQUISITION OF THE UNEMPLOYMENT COST MANAGEMENT SERVICES, EMPLOYMENT
VERIFICATION AND PRE-APPLICANT SCREENING BUSINESSES OF SHEAKLEY-UNISERVICE,
INC. AND SHEAKLEY INTERACTIVE SERVICES, LLC.

Pursuant to an asset purchase agreement dated March 22, 2004, effective
April 1, 2004, we purchased substantially all of the assets and assumed certain
of the liabilities of the unemployment compensation, employment verification and
pre-applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC. The acquired businesses
provide unemployment cost management services, to a broad customer base. This
unemployment cost management services business will operate through our
wholly-owned subsidiary, TALX Employer Services, LLC. The employment
verification services and pre-applicant screening services will operate as a
part of The Work Number Services.

The purchase price was approximately $40 million, including transaction
costs, and was paid in cash, which was financed, as discussed below in "Item
7 -- Management's Discussion and Analysis of Financing Condition and Results of
Operations -- Liquidity and Capital Resources." Under the asset purchase
agreement, Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC are
required to indemnify us for certain pre-closing liabilities and obligations of
the business, subject to certain limitations. An escrow account, maintained by a
bank pursuant to the terms of an escrow agreement, is also available until March
31, 2005 to satisfy the indemnification obligations of Sheakley-Uniservice, Inc.
and Sheakley Interactive Services, LLC under the asset purchase agreement,
subject to certain limitations described in the asset purchase agreement. For
such purposes, $1.0 million of the purchase price was paid into the escrow
account. In connection with the asset purchase agreement, the parties executed a
transition services agreement under

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which Sheakley-Uniservice, Inc. will provide certain services to us for up to
two years. The services are intended to provide for the orderly transition of
the acquired businesses and the employees of such businesses from
Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC to us.

SERVICES AND PRODUCTS

We provide services that enable both large and mid-size corporations, as
well as government agencies, to outsource the performance of business processes
that would otherwise be performed by their own human resources or payroll
departments. Our services offer web access, interactive voice response, fax,
document imaging 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 and
payroll management information systems on a self-service basis.

Our services and products fall within three general categories: The Work
Number services, unemployment cost management services and maintenance and
support related to our former customer premises systems business. We
discontinued the operation of our Human Resources and Benefits Application
Services business in the first fiscal quarter, retaining certain contracts to
administer other human resources services for three clients, which we expect
will either terminate or be assigned within the next 6 months. For additional
information, see "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

THE WORK NUMBER SERVICES

Responding to inquiries to verify employment and income information,
printing and distributing pay stubs and annual W-2 forms, collecting
time-reporting data 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-related business process outsourcing 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. Additionally, all services in The Work
Number suite of services provide secure web access for managers to obtain
management reports, approve certain transactions and exercise important control
functions.

The Work Number. Mortgage lenders, pre-employment screeners, credit
issuers, collection agencies, 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. The Work Number is an outsourced service that
enables employers to direct the third-party verifier to our website or to a toll
free telephone number to confirm the employee's employment status and income for
the past three years. Prior to February 2004, verifiers could also access this
information through a 1-900 telephone number through AT&T. AT&T discontinued
providing 1-900 services during February 2004. Prior to this discontinuation, we
moved the majority of 1-900 users to alternative methods of accessing the
service. Subsequent to February, we established a new 1-900 service with MCI for
the small customer base that prefers the 1-900 number method of access.

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The Work Number provides the following benefits to employers, employees and
third-party verifiers:

We generate substantially all of The Work Number revenues from
transaction-based fees charged to mortgage lenders, pre-employment screeners,
credit issuers, collection agencies, social service agencies 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 on the date the client is live on our system.

As of March 31, 2004, The Work Number database contained approximately 90.1
million employee records and had contracts to receive an additional 7.1 million
records. The Work Number database is updated on an ongoing basis as employers
electronically transmit data directly to us each payroll period. Employers
contract to provide this data for specified periods, generally three years.

W-2 eXpress. W-2 eXpress is a suite of services relating to the initial
distribution (either printed or electronic), reissue 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 (both electronically and in paper form through a business alliance) to
employees and provide an automated process to enable employees to request
corrections to their W-2 forms and obtain additional copies via the web,
telephone or direct download into their tax software. This suite of services
allows complete employee self service without requiring direct interaction with
the employer's payroll staff.

For employers, the primary benefits of our W-2 eXpress services include:

- simplifying the task of generating thousands of W-2 statements within a
narrow time period each year;

- reducing staff and other resources that must be allocated to the
production and distribution of W-2 statements and the reissue of
corrected statements;

- automating the process for collecting correction requests; and

- providing a mechanism for employees to completely bypass the paper W-2
process and receive their W-2's in a completely electronic manner.

The majority of W-2 eXpress clients are billed based upon either the number
of unique W-2s or 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 for use 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 (or Paperless Pay) is another outsourcing service we
offer to existing clients of The Work Number and other larger employers.
ePayroll is a suite of payroll self-service applications that enables employees,
via the Internet or by telephone, to receive pay statement information, to
access current and historical payroll information, to review and change direct
deposit account information, and to review and change W-4 information.
Additionally, during fiscal year 2004, ePayroll has been expanded to allow
employees

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to enroll in selected paycard services chosen by their employer, which allows
employees to eliminate paper checks and receive their payroll through direct
deposits to their paycard.

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 as well as reduce the cost to distribute paper
pay advices.

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 web and are used by large employers
and the temporary staffing industry. FasTime clients are billed for initial set
up fees. 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 for use 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 SERVICES

We also provide unemployment cost management services under the name UC
eXpress, through our wholly-owned subsidiary TALX UCM Services, Inc. UC eXpress
is a comprehensive suite of services designed to reduce the cost of processing
unemployment claims by human resource departments and to better manage the tax
rate that employers are assessed for unemployment taxes. UC eXpress utilizes
document imaging, web access, fax and interactive voice response to speed the
processing of unemployment claims with the goal of resisting claims for
unemployment compensation which are not meritorious that have been filed with
state agencies by separated employees. UC eXpress services are aimed at
relieving human resource departments of the administrative burden of managing
unemployment claims. Following an employee separation, UC eXpress services
respond on behalf of our client to an unemployment claim filed by the separated
employee. 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; and

- 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. Following the acquisition of Johnson and Associates, which was
effective July 1, 2003, our UC eXpress tax services offerings were expanded to
include processing of the work opportunity ("WOTC") and welfare to work ("WtW")
tax credits, which are designed to provide incentives to employers
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for hiring individuals who have traditionally faced difficulties in securing
employment. Our services include assisting employers with integrating WOTC/WtW
processing into the current hiring process as well as processing all necessary
forms to identify all potential qualifiers for hiring tax credits.

We charge clients fees pursuant to multi-year contracts, generally billed
monthly or quarterly. Many 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, including our new hiring tax credit consulting and administration
business, is recognized when those criteria are met.

MAINTENANCE AND SUPPORT SERVICES RELATED TO OUR FORMER CUSTOMER PREMISES
SYSTEMS BUSINESS

We previously offered our products and services exclusively through
licensed software specifically developed for each customer, and installed these
systems at the customer's site. In 2000 we discontinued sales to new customers.
Today, we provide system enhancements to existing 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. During 2003, we notified our
maintenance clients of our intention to discontinue all support services
effective June 2005.

SALES AND MARKETING

We employ a direct sales force in conjunction with strategic marketing
alliances. We use our direct sales force and strategic alliances to develop
relationships with large employers, typically having over 3,500 employees. In
addition, we use our strategic alliances to help us to identify potential
clients for The Work Number services among mid-sized employers, typically having
between 1,000 and 3,500 employees. In our unemployment cost management business,
our direct sales force sells to employers typically having over 3,500 employees
and we use strategic alliances with third party providers to sell to employers
with fewer than 3,500 employees.

DIRECT SALES FORCE

Our sales, service and marketing effort relies on a team approach
consisting of approximately 144 professionals in 33 U.S. cities, including
regional sales vice presidents, regional sales directors, regional client
relationship directors, regional sales managers, sales representatives, client
relationship managers, account managers, product managers, product consultants
and marketing personnel. Our sales representatives qualify companies as viable
potential clients and establish appointments for our regional sales managers.
Our regional sales directors and regional sales managers are responsible for
presenting our service offerings to prospective clients and negotiating for the
sale of our services. Our product managers oversee product direction and provide
sales assistance. Our regional client relationship directors, client
relationship managers and account managers service existing clients. Product
consultants provide technical assistance to regional sales managers and
prospective clients during the sales process. Our marketing personnel develop
market strategies and support the sales force at all levels.

Additionally we have a team dedicated to the management of our alliance
relationships. This team includes alliance sales managers, alliance account
managers and integration project managers. The alliance sales managers are
responsible for generating sales through the development and management of
existing alliance relationships. The alliance account managers are responsible
for servicing our alliance relationships, and integration managers are
responsible for developing technical integration with our alliance
relationships.

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STRATEGIC MARKETING ALLIANCES

We have established alliances with leading providers of related human
resources outsourcing services with the goal of building the database of records
for The Work Number and UC eXpress services relating to employees of both large
and mid-sized employers. These alliances include:

- Hewitt Associates LLC: Hewitt Associates is a global management
consulting firm specializing in human resource services that has agreed
to make The Work Number available to its clients. For example, The Work
Number is directly accessible by employees of Hewitt's clients through an
employee portal that incorporates a seamless link to our website for The
Work Number. In exchange, we have agreed, among other things, to share
revenue with Hewitt resulting from its referrals.

- Ceridian Corporation: Ceridian is a national human resource outsourcing
company that has agreed to make The Work Number and unemployment cost
management services available to its clients in exchange for a share of
the revenue generated by such activities.

These and other strategic marketing alliances, such as Towers Perrin,
Mellon HR Services, Convergys Corporation, PayMaxx, Checkpoint HR, Comdata and
Money Network, are generally governed by non-exclusive contractual arrangements
that remain in effect for specified periods. The success of these alliances
generally will depend on the interest and commitment of these companies in
promoting and coordinating product development and marketing efforts with us,
which is entirely at their discretion. Some of these companies maintain similar
relationships with some of our competitors and compete directly with us in
certain applications.

COMPETITION

We believe the principal competitive factors in our markets include:

- service and product quality, reliability and performance;

- breadth of service offerings;

- functionality and ease of use;

- company reputation for integrity and confidentiality;

- company financial strength; and

- cost of the service or product.

Our primary competitors relating to The Work Number services and
unemployment cost management services are Employers Unity and Jon-Jay
Associates, which are unemployment cost management companies that also offer
employment and income verification services. One of our marketing partners,
Ceridian, offers services that are similar to a few of The Work Number services.
However, large employers are the primary market segment for The Work Number
services and we believe there is only limited overlap in the marketplace with
Ceridian's small to mid-size employer focus. Additionally, we are aware of a
number of employers who have established similar systems for their internal use
and believe additional competitors may emerge.

We believe that we compete favorably in the key competitive factors that
affect our markets for The Work Number services and our unemployment cost
management services. However, our markets are still evolving and we may not be
able to compete successfully against current or future competitors. Many of our
existing and potential competitors have significantly greater financial,
marketing, technical and other resources than we do. In addition, many of our
competitors have well-established relationships with our current and potential
clients and extensive knowledge of our markets. It is possible that new
competitors or alliances among competitors will emerge and rapidly acquire
market share. Moreover, our competitors may consolidate with each other, or with
other companies, giving them even greater capabilities with which to compete
against us.

9

TECHNOLOGY AND PRODUCT DEVELOPMENT

Each of our business lines is based on databases we construct and
applications we build to access and manipulate data. Our unemployment cost
management services are run on industry standard databases and internally
developed applications. Historically, our other services have been run on
industry standard databases and we have used a combination of Microsoft
technologies and a proprietary integrated visual development environment and
software system known as TALXWare to build our applications. TALXWare utilizes
the Microsoft Windows NT and Windows 2000 operating systems and is designed to
support the creation and management of self-service solutions. We are currently
in the process of migrating most of the applications for The Work Number to the
Microsoft.Net platform.

We also license and integrate complementary technologies into our products
including:

- speech recognition;

- text-to-speech;

- facsimile; and

- terminal emulation.

We license these technologies from third-party suppliers pursuant to
non-exclusive license or resale agreements or purchase the technologies under
open market arrangements and then integrate them into our products.

We have directed our development efforts toward enhancing and developing
new offerings for The Work Number services and the UC eXpress services. The most
recent enhancements include extending the features and capabilities of The Work
Number database, through new verification types, our W-2 eXpress and ePayroll
paystub/direct deposit services, the addition of new integrated and batch
interfaces and the expansion of our social services data. Additionally, we have
focused our efforts on enhancing and expanding our UC eXpress in-house claims
processing system.

We incurred product development costs of $2.0 million, $4.8 million and
$6.3 million in fiscal years 2002, 2003 and 2004, respectively. As of March 31,
2004, our total product development staff consisted of 50 full-time employees
and 1 part-time employee. We believe that significant investments in product
development are required to remain competitive.

PROPRIETARY RIGHTS

Our success and ability to compete is dependent in part upon our ability to
protect and maintain our proprietary rights to our intellectual property. We
regard our trademarks and our other intellectual property as having significant
value and as being important factors in the development and marketing of our
products.

We currently rely on a combination of trademark, trade secret and copyright
laws and restrictions on disclosure to establish and protect our intellectual
property. We have obtained a trademark registration for the name TALX and a
trademark registration for The Work Number for Everyone, The Work Number,
eChoice, FasTime, UC eXpress, W-2 eXpress and Advanced HR Solutions with the
United States Patent and Trademark Office. In addition, TALXWare is our
trademark, and FasCast is our service mark.

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code, access to our databases, and the disclosure and use of other
proprietary information. However, these measures provide only limited protection
of our intellectual property rights. In addition, we may not have signed
agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate
protection in all circumstances.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or otherwise obtain or use technology that we regard as
proprietary. We cannot assure you that the steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of our
technology or that our

10

competitors will not independently develop techniques that are similar or
superior to our technology. Any failure to adequately protect our proprietary
rights could result in our competitors offering similar products, potentially
resulting in loss of competitive advantage and decreased revenues. In addition,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Litigation
of this type could result in substantial costs and diversion of resources and
could significantly harm our business.

Interactive voice response technology is characterized by the existence of
a large number of patents and frequent litigation based on allegations of patent
infringement. Third-parties have asserted in the past and, from time to time,
may assert in the future, patent, copyright, trademark and other intellectual
property rights to technologies that are important to our business. In one case,
we entered into a license agreement to use various interactive voice response
and computer telephony integration technologies under which we made an initial
payment and will pay future royalties. Further, we have not conducted a search
to determine whether the technology included in our products infringes or
misappropriates intellectual property held by other third-parties. In addition,
because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which could relate
to our products. Any claims asserting that our systems infringe or may infringe
proprietary rights of third-parties, if determined adversely to us, could
significantly harm our business.

CLIENTS

As of March 31, 2004, The Work Number database contained employee records
from over 1,000 clients, representing approximately 90.1 million present and
former employees. Additionally, as of that date, we had contracts with new
clients to provide 7.1 million records of present and former employees in
backlog. These clients typically employ over 5,000 employees. Our clientele
includes approximately two-thirds of the Fortune 500 companies and a number of
federal, state and local government agencies. Our clients operate in a wide
variety of industries, including financial services, telecommunications
services, retail, consumer products, health care, temporary services and
government. As of March 31, 2004, our unemployment cost management business had
over 5,200 clients of various sizes and operated in a broad range of industries.
No client accounted for more than 10% of total revenues in any of the fiscal
years 2002, 2003 or 2004.

EMPLOYEES

As of March 31, 2004, we employed approximately 1,102 full-time and 43
part-time employees.

We have never had a work stoppage, and no employees are represented by a
labor organization. We consider our employee relations to be good.

RISK FACTORS

You should carefully consider the following factors and other information
in this Form 10-K in evaluating our company:

WE MAY BE SUBJECT TO ADDITIONAL REGULATORY PROCEEDINGS AS A RESULT OF OUR
RECENT FINANCIAL STATEMENT RESTATEMENTS.

In January 2004, we filed restated financial statements for the fiscal
years ended March 31, 1999 through March 31, 2003 and for the first two quarters
of fiscal 2004. In addition, we announced the resignation of Executive Vice
President Craig N. Cohen. Mr. Cohen had previously served as chief financial
officer from January 1994 to May 2003 and as vice president of application
services and software from May 1999 to May 2003.

In December 2002, we filed restated financial statements for each of the
quarters ended June 30, 2000 through June 30, 2002 and for the fiscal years
ended March 31, 2001 and 2002.

As of the date hereof, the SEC is investigating our accounting for certain
items, including those which were the subject of the restatements. It is
possible that the SEC will begin a regulatory proceeding or
11

enforcement action against us. The commencement of any such proceeding or
action, or the application of any remedies, could harm our business and
financial condition.

OUR FUTURE GROWTH WILL DEPEND ON OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUIRED
COMPANIES AND CAPITALIZE ON ANTICIPATED CROSS-SELLING OPPORTUNITIES.

Pursuant to an asset purchase agreement dated March 22, 2004, effective
April 1, 2004, we purchased substantially all of the assets and assumed certain
of the liabilities of the unemployment compensation, employment verification and
pre-applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC (together, "Sheakley"),
with the expectation that the transaction will result in certain benefits,
including, without limitation, cost savings, operating efficiencies,
cross-selling opportunities, revenue enhancements and other synergies. Achieving
the benefits of these transactions will depend in part upon the integration of
the business of Sheakley and The Work Number line of products and services in an
efficient manner, and there can be no assurance that this will occur. The
consolidation of operations will require substantial attention from management.
The diversion of management attention and any difficulties encountered in the
integration processes could have a material adverse effect on the revenues,
levels of expenses and operating results of the combined companies. There can be
no assurance that we complete the consolidation on a timely basis or that the
combined companies will realize all of the anticipated benefits.

OUR FUTURE GROWTH IS SUBSTANTIALLY DEPENDENT ON OUR ABILITY TO INCREASE THE
SIZE AND RANGE OF APPLICATIONS FOR THE WORK NUMBER DATABASE.

In order to successfully grow our business, we will have to make The Work
Number and related business process outsourcing services increasingly attractive
to a greater number of large organizations, their employees and third-party
information verifiers. To achieve this goal, we believe that we will need to
increase the number of employee records contained in The Work Number database,
the amount and type of information contained in those records and the number of
applications that make use of those records. Our strategy for increasing the
size of The Work Number database is based in part on strategic alliances with
several providers of payroll and human resources outsourcing services. Our
success will depend on the interest and commitment of these providers, which is
entirely at their discretion. Some of these companies compete with us in certain
applications. Our strategy is also based in part on strategic acquisitions of
businesses with databases of employee information, such as our acquisition of
the Sheakley business. If we are unable to attract and retain a sufficient
number of employer clients, if we cannot persuade them to include a greater
amount of information in the employee records they provide us, or if we fail to
develop additional applications to use this information, we may not achieve our
growth objectives.

OUR REVENUES FROM THE WORK NUMBER MAY FLUCTUATE IN RESPONSE TO CERTAIN
ECONOMIC CONDITIONS SUCH AS RESIDENTIAL MORTGAGE ACTIVITY AND EMPLOYMENT
TRENDS.

A significant portion of our revenues from The Work Number depends on
residential mortgage-related and employment-related activity. We charge a fee
for each request from mortgage lenders and pre-employment screeners to verify
employment and income information. Therefore, a decrease in activity within
either of these segments would reduce our overall number of transactions per
record. This reduction in transactions, whether due to increases in interest
rates or otherwise, could cause our revenues and profitability to be harmed.
During fiscal year 2004, revenues for The Work Number services have been
adversely affected by a slowdown in the refinancing segment of the mortgage loan
market.

THE MARKET FOR THE WORK NUMBER DEPENDS IN PART ON THE REQUIREMENTS ESTABLISHED
BY PURCHASERS IN THE SECONDARY MORTGAGE MARKET, AND OUR REVENUES AND
PROFITABILITY WOULD BE SIGNIFICANTLY HARMED IF THESE REQUIREMENTS WERE RELAXED
OR ELIMINATED.

We believe that residential mortgage lenders are among the most active
users of The Work Number. They utilize our services to verify employment, income
and related information. The demand for this verification is driven in part by
the requirements of the Federal National Mortgage Association, which is also
12

known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, which is
also known as Freddie Mac, the leading purchasers of residential mortgages in
the United States. These agencies currently require specific information,
including independent verification of employment and income data for the past
two calendar years and a current payroll period in connection with mortgages
they purchase having a loan-to-value in excess of 75%. Accordingly, most lenders
seek this information from mortgage applicants. If Fannie Mae or Freddie Mac
were to reduce the requirement for employment and income data or eliminate the
requirement for independent verification thereof, our revenues and profitability
would be significantly harmed.

AS WE PERFORM LARGE-SCALE PROCESSING OF VERIFICATIONS, THERE IS AN INCREASED
RISK OF BREACH OF CONFIDENTIALITY, WHICH MAY RESULT IN DAMAGE CLAIMS AND LOSS
OF CUSTOMERS.

As we seek to increase the use of the Work Number database by verifiers
with frequent need of verification, we plan to use new methods of verification.
These verifiers may be large mortgage lenders, pre-employment screeners, social
services agencies, child support enforcement agencies, debt collectors or other
volume verifiers. These volume verifiers may obtain verifications in large
volume or "batch" transactions using different means and requiring less proof of
authorization than smaller verifiers. We expect that these volume verifiers will
enter into contracts by which they agree that they will not use the income
verification service unless they have been authorized by the employee to do so,
or have legal authority to obtain the information. Many of the industries that
utilize The Work Number for large scale processing of verifications have high
turnover which may lead to the verifier failing to terminate access privileges
to The Work Number in a timely manner. We have the ability to conduct regular
audits of these volume verifiers to ensure compliance with documentation
requirements. However, there is a risk that the verifier may not have the
requisite authority, and that there may be claims for breach of privacy or
confidentiality against TALX, claims for damages by employees and employers and
resulting loss of employer relationships, which could significantly harm our
results of operations.

IF WE ARE UNABLE TO MAINTAIN THE ACCURACY, PRIVACY AND CONFIDENTIALITY OF
EMPLOYEE INFORMATION IN THE WORK NUMBER AND OUR OTHER DATABASES, WE MAY FACE
SIGNIFICANT CLAIMS AND OUR REPUTATION COULD BE HARMED.

The Work Number services depends on the accuracy of highly confidential
employment and income history and other information which employers provide to
us and which we convert for use in The Work Number and our other services.
Although we have a number of protective measures in place, any inaccuracies in
such information -- whether in the recording of such information, the
unauthorized access to information, or otherwise -- or our inability to keep
such information confidential, may give rise to claims against us and adversely
affect market acceptance of The Work Number and our other services. Our
financial condition, results of operations and reputation may be significantly
harmed if any asserted claims were ultimately decided against us.

OUR FUTURE PERFORMANCE WILL BE DEPENDENT ON SUCCESSFUL INTEGRATION OF
ACQUISITIONS.

We expect a portion of our growth to come from business acquisitions which
we recently consummated or which we may consummate in the future. Such
acquisitions involve certain operational, legal and financial risks. Operational
risks include the possibility that an acquisition does not ultimately provide
the benefits originally anticipated by our management, while we continue to
incur operating expenses to provide the services formerly provided by the
acquired company. Legal risks involve contract and regulatory issues. For
example, some employers may not consent to the transfer of ownership of their
contracts by which the unemployment cost management services are provided, and
some states' unemployment compensation commissions may require changes to powers
of attorney by which the employer authorizes processing of claims. In the event
of any loss of employer-customers or our inability to appear before state
unemployment commissions, our business and results of operations may be
materially adversely affected. Financial risks involve the incurrence of
indebtedness as a result of the acquisitions and the consequent need to service
that indebtedness. In addition, the issuance of stock in connection with
acquisitions dilutes the voting power and may dilute the economic interests of
existing shareholders. In carrying out our acquisition strategy, we attempt

13

to minimize the risk of unexpected liabilities and contingencies associated with
acquired businesses through planning, investigation and negotiation, but there
can be no assurance that we will be successful in doing so, nor can there be any
assurance that we will be successful in identifying attractive acquisition
candidates or completing additional acquisitions on favorable terms.

IF THE FAIR CREDIT REPORTING ACT APPLIES TO THE WORK NUMBER SERVICES, OUR
BUSINESS AND REVENUES WILL BE HARMED.

The Fair Credit Reporting Act, which we refer to as the FCRA, may apply to
The Work Number services, which would have an adverse impact on us. The FCRA
applies to "consumer reporting agencies" that engage in the practice of
"assembling or evaluating" consumer credit information. While we take the
position that The Work Number services do not cause us to be a consumer
reporting agency and that the FCRA does not apply to The Work Number services,
consumers or the Federal Trade Commission, which enforces the FCRA, could take
the position that the FCRA does apply to us and seek to require us to comply
with the FCRA and seek penalties and damages. Among other provisions, the FCRA
requires that a consumer reporting agency determine that there be a "permissible
purpose" before disclosing a consumer report and furnish certain notices and
information in writing to consumers as consumer reports are used. If required,
we would have difficulty complying with these procedures; The Work Number
services are designed to operate via interactive voice response and the
Internet, instead of paper. Further, we might have to eliminate certain types of
transactions, resulting in loss of revenue. As a result, it is difficult to
estimate the ultimate impact on us in the event the FCRA were deemed to apply to
The Work Number services.

PRIVACY LEGISLATION OR INTERPRETATIONS OF EXISTING LAWS COULD RESTRICT OUR
BUSINESS.

Personal privacy has become a significant issue in the United States. Some
commentators, privacy advocates and government bodies have recommended
limitations on, or taken actions to limit, the use of personal information by
those collecting this information. For example, in 1999, Congress enacted the
Gramm-Leach-Bliley Act, which contains provisions protecting the privacy of
consumer non-public personal information collected by financial institutions.
Additionally, federal privacy regulations relating to the use and disclosure of
individually identifiable health information were recently issued by the
Department of Health and Human Services pursuant to the Health Insurance
Portability and Accountability Act of 1996. These privacy regulations could
impose additional costs and could limit our use and disclosure of such
information. Some states have also enacted consumer and health information
privacy protection laws.

If new statutes or regulations were adopted that restricted our business,
or existing statutes or regulations were deemed to apply to us, we may be
required to change our activities and revise or eliminate our services, which
could significantly harm our revenues and operations.

CHANGES IN ECONOMIC CONDITIONS OR CHANGES TO UNEMPLOYMENT COMPENSATION LAWS
COULD LIMIT UNEMPLOYMENT COMPENSATION CLAIMS, CAUSING EMPLOYERS TO QUESTION
THE VALUE OF UNEMPLOYMENT COMPENSATION MANAGEMENT AND LIMITING OPPORTUNITIES
FOR TAX PLANNING.

The difficult economic environment and consequent staff reductions by many
employers have resulted in an increase in unemployment compensation claims, and
employers have more readily recognized the value of our unemployment
compensation management and unemployment compensation tax planning services. As
economic conditions improve, and claims decrease, employers may question the
value of these services. If economic conditions do not improve, states with
significant budget challenges may take legislative or regulatory steps to reduce
unemployment benefits or to close tax-planning opportunities, which could reduce
the opportunities for service to employers. In such situations, our revenues
could be harmed. As a result of uncertain economic conditions we experienced
lower revenue levels in our unemployment cost management services business
during fiscal year 2004. The UC eXpress revenue stream is characterized by
annual retainers that provide a revenue base with upside potential through
contingency billings from tax consulting or through additional billings if
claims processed, or the performance measures, exceed contractually set levels.
During fiscal year 2004, uncertain economic conditions contributed to a
reduction in activity in our unemployment tax

14

consulting business and current claims activity has been less than expected.
Consequently, we did not realize the anticipated additional billings.

If new statutes or regulations were adopted that restricted our business,
or existing statutes or regulations were deemed to apply to us, we may be
required to change our activities and revise or eliminate our services, which
could significantly harm our revenues and operations.

INTERRUPTIONS TO OUR COMPUTER NETWORK OR TELEPHONE OPERATIONS COULD
SIGNIFICANTLY HARM OUR REVENUES AND INDUSTRY REPUTATION.

Significant portions of our operations depend on our ability to protect our
computer equipment and the information stored in our data processing centers
against damage from fire, power loss, telecommunications failures, unauthorized
intrusion and other events. We have data processing centers located in St.
Louis, Missouri; Columbus, Ohio; Cleveland, Ohio; and Plano, Texas, which areas
have historically been vulnerable to natural disasters and other risks, such as
floods, earthquakes and tornadoes. We back-up software and related data files
regularly and store the back-up files off-site at a nearby secure facility. A
portion of the data is also replicated to an off-site storage area network for
high availability. We cannot assure you that these measures will eliminate the
risk of extended interruption of our operations. We also rely on local and long-
distance telephone companies to provide dial-up access, Internet and corporate
intranet access to our services. We have not established an alternative disaster
recovery facility, which would serve to protect us from losses of employee
record information due to damage to our data storage facilities. Any damage or
failure that interrupts our operations or destroys some or all of our database
of employee records could have a material adverse effect on our revenues,
profitability and industry reputation.

OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH
COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.

Our revenues, margins and results from operations have fluctuated in the
past, and may continue to fluctuate in the future due to a number of factors.

For The Work Number, these factors include residential mortgage activity
and interest rate levels. Revenues generated from our W-2 eXpress service are
affected by seasonality, as revenues are primarily earned in our fourth fiscal
quarter. For all of our service offerings, other factors that can cause our
operating results to fluctuate include:

- new product introductions or announcements by us or our competitors;

- market acceptance of new services;

- pricing pressure;

- the hiring and training of additional staff;

- the length of the sales cycle; and

- general economic conditions.

We cannot assure you that we will be able to sustain our level of total
revenue or our historical rate of revenue growth on a quarterly or annual basis.
It is likely that, in some future quarters, our operating results will fall
below our targets and the expectations of stock market analysts and investors.
In such event, the price of our common stock could decline significantly.

IF WE ARE UNABLE TO SUCCESSFULLY INTRODUCE NEW BUSINESS PROCESS OUTSOURCING
SERVICES AND ENHANCED FUNCTIONALITY TO KEEP PACE WITH RAPID TECHNOLOGICAL
CHANGES THAT CHARACTERIZE OUR MARKETS, OUR RESULTS OF OPERATIONS WOULD BE
SIGNIFICANTLY HARMED.

The business process outsourcing industry is characterized by rapidly
changing technology and our future success will depend upon our ability to keep
pace with technological developments. In particular, the market

15

for self-service applications through the Internet and corporate intranets using
browser software is rapidly evolving.

To remain competitive, we must continually change and improve our services
and products in response to changes in operating systems, application software,
computer and telephony hardware, communications, database and networking
systems, programming tools and computer language technology. Additionally, we
must also introduce new business process outsourcing services and add
functionality to existing services in response to changing market conditions and
client demand.

The development of new, technologically advanced services and products is a
complex and uncertain process requiring high levels of innovation and highly
skilled engineering and development personnel, as well as the accurate
anticipation of technology and market trends.

If we are unable, for technical or other reasons, to develop and market new
business process outsourcing services or enhancements to existing services in a
timely and cost-effective manner, or if new business process outsourcing
services do not achieve market acceptance, we could lose revenues and our
competitive position could suffer.

WE DEPEND ON THIRD-PARTY SOFTWARE AND HARDWARE, WHICH EXPOSES US TO DISRUPTION
IF THOSE PRODUCTS ARE NO LONGER SUPPORTED OR DEVELOP DEFECTS.

Our services and products involve integration with both operating systems
and products developed by others. If any third-party software or hardware, such
as Microsoft Windows server products, Microsoft development tools, Oracle
database software, Sun Solaris, Informix database software, Intel Media
processing hardware or Sybase Power Builder development tools, become
unavailable for any reason, fail to integrate with our products or fail to be
supported by their respective vendors or to operate properly, we would have to
redesign our products. We cannot assure you that we could accomplish any
redesign in a cost-effective or timely manner. Further, if third-parties release
new versions of these systems or products before we develop products compatible
with such new releases, demand for our services and products might decline,
thereby harming our revenues and profitability.

We believe that if any supplier agreement expires or is canceled or
otherwise terminated, or if a third-party supplier refuses to sell to us, we
could locate any number of different suppliers. However, it would require a
significant amount of time to integrate the relevant technology from the new
supplier, which would result in a significant delay in our ability to offer the
particular enhancement. We could also experience difficulties integrating the
new supplier's technology with our products. We cannot assure you we could
accomplish any such integration in a cost-effective manner. Significant delays
in the offering of service or product enhancements due to integration of
technology from new suppliers could significantly harm our revenues and
profitability.

OUR SERVICES AND PRODUCTS MAY CONTAIN DEFECTS OR LACK ADEQUATE SECURITY WHICH
MAY CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT OUR ATTENTION FROM PRODUCT
DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF CUSTOMERS.

As a result of their complexity, business process outsourcing services and
hardware and software products may contain undetected errors or failures when
first introduced or as new versions are released. We cannot assure you that,
despite testing by us and our clients, errors will not occur in services and
systems after implementation. The occurrence of such errors could result in
potential security issues or loss or delay in market acceptance of our services
or products, which could significantly harm our revenues and our reputation.

Internet or other users could access without authorization or otherwise
disrupt our Internet and corporate intranet applications. Such unauthorized
access and other disruptions could jeopardize the security of information stored
in and transmitted through the computer systems of our clients, which could
result in significant liability to us, could cause the loss of existing clients
and could discourage potential new clients.

16

BECAUSE OF INTENSE COMPETITION FOR TRAINED PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL ON A COST-EFFECTIVE BASIS.

Our success depends in large part upon our ability to identify, hire,
retain and motivate highly-skilled employees. Competition for highly-skilled
employees in our industry is intense. In addition, employees may leave our
company and subsequently compete against us. Our failure to attract and retain
these qualified employees could significantly harm our ability to develop new
products and maintain customer relationships.

Moreover, companies in our industry whose employees accept positions with
competitors frequently claim that those competitors have engaged in unfair
hiring practices. We may be subject to such claims as we seek to retain or hire
qualified personnel, some of whom may currently be working for our competitors.
Some of these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims, regardless of
their merits. Such claims could also discourage potential employees who
currently work for our competitors from joining us.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT
IN SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS.

Other parties have asserted in the past, and may assert in the future,
patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. For example, we have entered
into a license to use various interactive voice response and computer telephony
technologies that required us to make an initial payment and to pay future
royalties. Further, we have not conducted a search to determine whether the
technology we have in our products infringes or misappropriates intellectual
property held by other third-parties. We cannot provide assurance that others
will not claim that we are infringing their intellectual property rights or that
we do not in fact infringe those intellectual property rights.

Any claims asserting that our products infringe or may infringe proprietary
rights of third-parties, if determined adversely to us, could significantly harm
our results of operations. Any claims, with or without merit, could:

- be time-consuming;

- result in costly litigation;

- divert the efforts of our technical and management personnel;

- require us to develop alternative technology, thereby resulting in delays
and the loss or deferral of revenues;

- require us to cease marketing business process outsourcing services
containing the infringing intellectual property;

- require us to pay substantial damage awards;

- damage our reputation; or

- require us to enter into royalty or licensing agreements which may not be
available on acceptable terms, if at all.

In the event a claim against us were successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our revenues, results
of operations and competitive position would be harmed.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
RESULTS OF OPERATIONS AND REPUTATION.

Our success and ability to compete is dependent in part on our ability to
protect and maintain our proprietary rights to our intellectual property. We
currently rely on a combination of trade secret, trademark and copyright laws to
establish and protect our intellectual property.

17

We generally enter into confidentiality agreements with our officers,
employees and consultants. We also generally limit access to and distribution of
our source code, access to our databases and the disclosure and use of our other
proprietary information. However, these measures provide only limited protection
of our intellectual property rights. In addition, we may not have signed
agreements containing adequate protective provisions in every case, and the
contractual provisions that are in place may not provide us with adequate
protection in all circumstances. Further, we have not included copyright notices
on all of our copyrightable intellectual property. Any infringement of our
proprietary rights could result in significant litigation costs, and any failure
to adequately protect our proprietary rights could result in our competitors
offering similar products, potentially resulting in the loss of one or more
competitive advantages and decreased revenues.

Despite our efforts to protect our proprietary rights, existing trade
secret, copyright, patent and trademark laws afford us only limited protection.
Others may attempt to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. Accordingly, we may
not be able to prevent misappropriation of our technologies or to deter others
from developing similar technologies. Further, monitoring the unauthorized use
of our products and other proprietary rights is difficult. Litigation may be
necessary to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. Litigation of this type
could result in substantial costs and diversion of resources and could
significantly harm our results of operations and reputation.

WE FACE COMPETITION FROM A BROAD RANGE OF COMPANIES, INCLUDING LARGE AND
WELL-ESTABLISHED FIRMS.

The markets for our services and products are extremely competitive and
subject to rapid technological change.

We consider the primary competitors to The Work Number and the unemployment
cost management business to be Employers Unity and Jon-Jay Associates, which are
unemployment cost management providers offering employment and income
verification services. Additionally, we are aware of a number of employers who
have established similar systems for their internal use and believe additional
competitors may emerge.

Increased competition could result in price reductions, reduced gross
margins and loss of market share, any of which could significantly harm our
results of operations. Additionally, we may be required to increase spending in
response to competition in order to pursue new market opportunities or to invest
in research and development efforts, and, as a result, our operating results in
the future may be adversely affected. We cannot assure you that we will be able
to compete successfully against current and future competitors or that
competitive pressures we face will not significantly harm our results of
operations.

PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND MISSOURI LAW MAY
MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, DESPITE THE POSSIBLE
BENEFITS TO OUR SHAREHOLDERS.

A number of provisions of our articles of incorporation and bylaws and
Missouri law could make it difficult for a third party to acquire, or discourage
a third party from attempting to acquire, control of us. These provisions:

- provide for a classified Board of Directors;

- limit the right of shareholders to remove directors or change the size of
the Board of Directors;

- limit the right of shareholders to fill vacancies on the Board of
Directors;

- limit the right of shareholders to act by written consent and to call a
special meeting of shareholders or propose other actions;

- provide that the bylaws may be amended only by the majority vote of the
Board of Directors and shareholders will not be able to amend the bylaws
without first amending the articles of incorporation;

- require a higher percentage of shareholders than would otherwise be
required to amend, alter, change or repeal certain provisions of our
articles of incorporation and bylaws;

18

- authorize the issuance of preferred stock with any voting rights,
dividend rights, conversion privileges, redemption rights and liquidation
rights, and other rights, preferences, privileges, powers,
qualifications, limitations or restrictions as may be specified by our
Board of Directors, without shareholder approval; and

- restrict specified types of "business combinations" and "control share
acquisitions," as well as regulate some tender offers.

These provisions may:

- have the effect of delaying, deferring or preventing a change in our
control despite possible benefits to our shareholders;

- discourage bids at a premium over the market price of our common stock;
and

- harm the market price of our common stock and the voting and other rights
of our shareholders.

OUR STOCK PRICE IS VOLATILE AND COULD DROP UNEXPECTEDLY.

The market price of our common stock has been volatile. The price could
continue to be subject to wide fluctuations due to factors including:

- actual or anticipated variations in our operating results;

- announcements of technological innovations or new services or contracts
by us or our competitors;

- developments with respect to patents, copyrights or proprietary rights;

- changes in financial estimates by securities analysts;

- conditions and trends in outsourcing of unemployment cost management,
human resources and payroll services; and

- general economic and market conditions.

The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies. Often these fluctuations have been unrelated or
disproportionate to the operating performances of those companies.

Broad market and industry factors may significantly affect the market price
of our common stock, regardless of our actual operating performance. Declines in
the market price of our common stock could also harm employee morale and
retention, our access to capital and other aspects of our business.

BECAUSE OUR SHARE PRICE IS VOLATILE, WE MAY BE THE TARGET OF SECURITIES
LITIGATION, WHICH IS COSTLY AND TIME-CONSUMING TO DEFEND.

In the past, following periods of volatility in the market price of a
company's securities, shareholders have often instituted class action securities
litigation against those companies. We are currently defending against such
claims, although a settlement was reached on May 5, 2004, subject to final court
approval. See "Item 3 -- Legal Proceedings." Such litigation could result in
substantial costs and a diversion of management attention and resources, which
would significantly harm our profitability and reputation. These market
fluctuations, as well as general economic, political and market conditions such
as recessions or international currency fluctuations, may adversely affect the
market price of our common stock.

ITEM 2. PROPERTIES

We currently occupy approximately 305,000 square feet of office space in 29
buildings across the country. All of our facilities are leased and are utilized
primarily for general administrative, data processing and sales purposes. We
believe our facilities have been generally well maintained, are in good
operating condition and

19

are adequate for our current requirements. Additionally, we have approximately
54 employees, primarily sales-related, working out of their homes. The following
table includes descriptions of our significant facilities.

ITEM 3. LEGAL PROCEEDINGS

We are a defendant from time to time in lawsuits. 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 our 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 our 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 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. On or about April 14, 2002, a Consolidated Complaint was
filed. 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 Complaint 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, we 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 District Court issued a Memorandum and Order on March
31, 2003 granting in part and

20

denying in part the motion to dismiss. The Court's Order dismissed the
plaintiffs' claims under Section 10(b) and 20(a) of the Exchange Act of 1934.
The plaintiffs were granted leave to file an amended Consolidated Complaint on
or before May 30, 2003.

On May 29, 2003, plaintiffs in the several pending securities lawsuits
filed an Amended Consolidated Complaint ("Amended Complaint"). The Amended
Complaint amends the original Complaint by adding allegations pertaining to our
December 2002 restatement of financials and expanding the Putative Class Period
to include all persons who purchased or otherwise acquired shares of our common
stock between April 25, 2001 and November 14, 2002 ("Amended Putative Class
Period"). The Amended Complaint alleges, among other things, that certain
statements in the registration statement and prospectus for our August 2001
secondary common stock offering, as well as other statements made by us and/or
the Individual Defendants during the Amended Putative Class Period, were
materially false and misleading because we capitalized instead of expensed $1.6
million related to a patent technology license agreement executed in March 2001;
expensed approximately $158,000 in bonus payments to executive officers in the
first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001;
improperly recognized revenue and expenses during the Amended Putative Class
Period; and miscalculated diluted earnings per share during the Amended Putative
Class Period. All of these matters were the subject of our 2002 restatement of
financials described in our Form 10-K/A for the year ended March 31, 2002. The
Amended Complaint also alleges, as did the original Complaint, that we did not
properly account for certain software and inventory, did not reflect certain
write-offs, and did not accurately disclose certain business prospects. The
Amended Complaint 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 July 30,
2003, the defendants filed a motion to dismiss the Amended Complaint. On
September 26, 2003, plaintiffs filed their opposition to the motion to dismiss.
On October 29, 2003, defendants filed their reply in support of the motion to
dismiss. The Court has not yet ruled on the motion.

On May 5, 2004 we reached an agreement with the plaintiffs to settle all
pending class action lawsuits. The settlement calls for payment of $5.75
million, which will be made by our insurance carriers and will not impact
earnings. There were, however, approximately $500,000 of additional legal costs
that were included in expenses for the fourth quarter of the fiscal year 2004.
As of the year ended March 31, 2004 we recorded a liability for $5.75 million in
accrued expenses and other liabilities representing the amount we owe under the
settlement agreement. Additionally, we recorded $5.75 million in prepaid
expenses and other current assets representing the amount we will receive from
our insurance companies. The agreement is subject to certain conditions,
including judicial approval, and a potential additional payment depending on the
amount of certain claims. We believe that any additional payment, if required,
would not be material. However, our expectations are subject to the risks that
the court will not approve our class action settlement, that claimants request
exclusion from the settlement that hold a larger than anticipated number of
shares, or that the claims analysis on which we relied is inaccurate, and a
larger than expected number of claims is submitted which could require us to
make an additional payment. On May 24, 2004, the court entered an order
preliminarily approving the settlement and setting October 6, 2004 as the date
for a hearing on final approval of the settlement. In the interim, notice of the
settlement will be given to class members, and they will have an opportunity to
opt out or to file objections to the settlement. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation if the settlement is not approved by the court. An unfavorable
outcome could have a material adverse impact on our business, financial
condition and results of operations.

As previously disclosed, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. 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 (who has resigned from the Company) related to
two matters, and requesting that we and such executive officers submit responses
to the letter. 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

21

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 prior restatement, as disclosed in our Form 10-K/A for the year
ended March 31, 2002. We and the individuals have filed separate responses to
the Wells letter. Since the time of the Wells submissions, the Commission is
continuing its investigation of our accounting for certain items, including
those which were the subject of the restatements discussed below. The remedies
the Commission may consider, if appropriate, include an injunction against us
and the individuals and an officer and director bar and disgorgement and civil
money penalties against us and/or the individuals.

In the settlement of the civil suit referred to above, we released our
insurance providers from related claims against our applicable insurance
policies. Any fines or penalties assessed by the SEC against us, along with any
further defense costs incurred by us in connection with the SEC investigation,
either on our own behalf or as indemnification on behalf of William W. Canfield
or Craig N. Cohen, and any future related litigation will be borne by us and
will not be covered by insurance. In addition, to the extent we are required to
indemnify Messrs. Canfield or Cohen against any fines or penalties assessed
against either of them, those amounts will be borne by us and not be covered by
insurance. The application of any of the foregoing remedies, or the commencement
of any regulatory proceeding or enforcement action, could harm our business and
financial condition.

As previously disclosed, we have filed restated financial statements for
the fiscal years ended March 31, 1999 through March 31, 2003 and for each of the
first two quarters of fiscal 2004. In December 2002, we filed restated financial
statements for each of the quarters ended June 30, 2000 through June 30, 2002
and for the fiscal years ended March 31, 2001 and 2002. As a result of this new
restatement, we could become subject to additional regulatory proceedings.

As required under our articles of incorporation, we are obligated to
indemnify and advance expenses of each of the Individual Defendants, as officers
and/or directors of the Company to the fullest extent permitted by Missouri law,
in connection with the above matters, subject to their obligations to repay
amounts advanced under certain circumstances. Stifel, Nicolaus & Company and
A.G. Edwards & Sons, Inc. have made demands on the Company to indemnify and
advance expenses to them in connection with these matters.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of these types are expensive and, until
settled or otherwise resolved, will require that we devote substantial resources
and executive time to defend these proceedings.

In addition to matters set forth above, we are also party to other lawsuits
and claims that arise in the ordinary course of conducting our business. In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims will not have a material adverse
effect on our consolidated financial position or results of operations.

22

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the Nasdaq National Market under the symbol
"TALX." The following table sets forth the high and low sales prices of our
common stock as reported by the Nasdaq National Market for each of the quarters
since the beginning of fiscal 2003 through the end of fiscal 2004.

On June 1, 2004, the last reported sale price on the Nasdaq National Market
for our common stock was $23.51 per share. As of June 1, 2004, there were
approximately 120 holders of record of our common stock.

During fiscal 2001, we began paying dividends on our common stock on a
quarterly basis. The following table sets forth dividends declared per share of
common stock for the periods indicated:

Any future determination to pay dividends will be at the discretion of our
Board of Directors and will depend upon our earnings, capital requirements and
operating and financial condition and such other factors as the board may deem
relevant. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"
regarding certain contractual restrictions on our ability to pay dividends.

23

The following table provides information about our purchases during the
quarter ended March 31, 2004 of equity securities that are registered by us
pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

- ---------------

(1) On September 5, 2002, our Board of Directors authorized us to repurchase up
to one million shares of our common stock in the open market or through
privately negotiated transactions during the 36 month period ending
September 30, 2005, subject to market conditions and other factors. Under
this plan, we repurchased 131,211 shares during the year ended March 31,
2004. No shares were repurchased during the quarter ended March 31, 2004.
Cumulative shares repurchased under this plan amount to 306,211.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

This section presents our selected historical financial data and certain
additional information. You should read carefully the financial statements
included in this Form 10-K, including the notes to the consolidated financial
statements, in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected data in this
section is not intended to replace the financial statements. As discussed below,
on April 22, 2003, we sold substantially all of the assets of our Human
Resources and Benefits Application Services business. During July 2001 we
acquired Ti3, Inc. and during March 2002, we acquired Frick and the GM
Unemployment Compensation Business. Effective April 1, 2004, we acquired certain
businesses of Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC.

We derived the financial data presented below for, and as of the end of,
each of the years in the five-year period ended March 31, 2004 from our
consolidated financial statements. The consolidated financial statements as of
March 31, 2004 and 2003 and for each of the years in the three-year period ended
March 31, 2004 contained herein have been audited by KPMG LLP, independent
registered public accounting firm. The financial information set forth below
reflects the classification of the database, document services and Human
Resources and Benefits Application Services businesses as discontinued
operations.

- ---------------

(1) Our recent restatement, discussed above, resulted in a review focused on
contracts in which revenue was realized in fiscal 2000 and subsequent
periods as reliable historical data was not available for earlier periods.
Accordingly, our review included contracts for which services were initiated
in periods prior to fiscal 2000. The review of certain contracts resulted in
cumulative adjustments for periods prior to fiscal 2000 which have been
attributed to fiscal 1999, the earliest fiscal period presented for
financial disclosure purposes. While it is possible that certain of these
adjustments related to periods prior to fiscal 1999, data was not available
to accurately support the specific allocation to such prior periods. Such
data was not available as we had modified our systems during fiscal 1999 and
have not retained sufficient comparable data for contracts entered into
prior to the modification. While further review may have resulted in
adjustments to increase revenue in 2000 by decreasing revenues in prior
periods, based on the review performed, management believes that further
adjustments were not supportable.

(2) Basic and diluted earnings per share have been computed using the number of
shares of common stock and common stock options and warrants outstanding.
The weighted average number of shares was based on common stock outstanding
for basic earnings per share and common stock outstanding and common stock
options and warrants for diluted earnings per share in periods when such
common stock options and warrants are not antidilutive.

26

(3) Represents aggregate employment records included in The Work Number database
and employment records under contract that have not yet been converted to
the database.

ITEM 7. 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-K for the year ended March
31, 2004.

OVERVIEW

We are the leading provider of automated employment and income verification
and unemployment cost management services and a leader in providing human
resources/payroll business process outsourcing. Our services use web access,
interactive voice response, fax and other technologies to enable mortgage
lenders, pre-employment screening companies, employees, employers and other
authorized users to obtain employee human resources and payroll information and
allow employees and their managers to review and modify information in the human
resources and payroll management information systems on a self-service basis.
Further, we provide unemployment insurance claims processing and unemployment
tax planning and management services to a broad range of employers. We typically
serve large organizations, including approximately two-thirds of Fortune 500
companies and a number of federal, state and local government agencies. Our
strategy is to position TALX with a suite of services that either deliver or use
payroll data. We describe these services as payroll-data-centric, and we believe
that we are well positioned in the market with those capabilities. We interact
with various payroll systems and payroll services, but are virtually independent
of the payroll solutions our clients select.

We believe fiscal 2004 was a successful year in spite of mixed economic
conditions. We continued to execute our payroll-centric strategy and consolidate
our acquisitions, thereby delivering value to our shareholders. Most
importantly, we were able to capitalize on our cross-selling opportunities,
strengthening customer relationships, particularly by introducing the
unemployment cost management client base to additional TALX capabilities. Our
earnings from continuing operations increased 12 percent to $12.5 million, or
$0.88 per diluted share, from $11.2 million, or $0.79 per diluted share, for
fiscal 2003. Revenues rose 7 percent to $124.4 million from $115.9 million.

The Work Number services closed out the year with a record quarter for
revenues. For the year, this business generated revenue growth of 30 percent,
attributable in part to the continued broadening of our verifier base, expanding
transactions beyond mortgage and refinancing activity. During the year we have
increased transaction levels in other markets such as pre-employment screening,
finance, collections and social services. Additionally, the fiscal 2004 gross
margin for this business improved 430 basis points to 70.1 percent from 65.8
percent the year before. Much of that improvement resulted from the increased
use of cost-effective web-based programs to deliver employment verification,
time reporting and electronic payroll services.

The total number of employment records on The Work Number services
increased to 90.1 million at March 31, 2004 from 76.4 million a year ago,
representing an 18 percent gain. Total employment records under contract,
including those in contract backlog to be added to the database, increased 19
percent to 97.2 million at March 31, 2004 from 82.0 million a year earlier.

Overall uncertain economic conditions contributed to a decline in fiscal
2004 revenues in the unemployment cost management services business. This
business experienced a slowdown in activity within the tax consulting unit and
lower overall claims volumes, which limited the ability to generate additional
revenues over contracted limits. While the revenue levels were not up to our
expectations, the addition of the unemployment cost management business has been
an important contributor to our overall profitability as well as to the growth
in The Work Number services, resulting from selling those services to our
unemployment cost management services client base. Gross margin in the
unemployment cost management business remained consistent at 48.4 percent for
the 2004 fiscal year compared to 48.6 percent in the prior year. With the
operational integration substantially complete, we are now realizing cost
savings. In the fourth quarter of fiscal 2004 we experienced our second
sequential quarter of gross margin improvement in the unemployment cost

27

management services business and we expect this improvement to continue in
fiscal 2005 through new and ongoing process improvement initiatives.

Pursuant to an asset purchase agreement dated March 22, 2004, effective
April 1, 2004, we purchased substantially all of the assets and assumed certain
of the liabilities of the unemployment compensation, employment verification and
pre-applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC. The acquired businesses
provide unemployment cost management services, employment verification services
and pre-applicant screening services to a broad customer base. This business
will continue to operate through our wholly-owned subsidiary, TALX Employer
Services, LLC. Total revenues for these businesses were approximately $18
million for calendar year 2003.

The purchase price was approximately $40 million, including transaction
costs, and was paid in cash, which was financed, as discussed in "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The asset purchase agreement
requires Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC to
indemnify us for certain pre-closing liabilities and obligations of the
business, subject to certain limitations. An escrow account, to be maintained by
a bank pursuant to the terms of an escrow agreement, is also available until
March 31, 2005 to satisfy the indemnification obligations of
Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC under the asset
purchase agreement, subject to certain limitations described in the asset
purchase agreement. For such purposes, $1.0 million dollars of the purchase
price was paid into the escrow account. In connection with the asset purchase
agreement, the parties executed a transition services agreement under which
Sheakley-Uniservice, Inc. will provide certain services to us for up to two
years. The services are intended to provide for the orderly transition of the
acquired businesses and the employees of such businesses from Sheakley-
Uniservice, Inc. and Sheakley Interactive Services, LLC to us.

On April 22, 2003 we transferred substantially all of the assets of our
Human Resources and Benefits Application Services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone. Workscape,
Inc. hired all of the employees directly related to the benefits enrollment
business.

The transaction was structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2.0 million and $6.0 million. While the contract did not specify
a minimum guaranteed amount, we secured a $2.0 million note from Workscape, Inc.
and as of June 1, 2004 we had received $1.0 million of principal and $98,000 of
interest payments in connection with the note.

All assets and liabilities of this business, both the portion of the
business transferred under contract to Workscape, Inc. (approximately 90% of the
assets) and the portion that has not yet been sold, along with related
transaction costs, were recorded on our consolidated balance sheet as net assets
of business held for sale. We recorded cash received under the asset purchase
agreement first to reduce the recorded value of net assets of business held for
sale and then to reflect gain on the sale of the business.

In connection with the transfer, we are providing Workscape, Inc., for
agreed-upon fees, with various transition services related to the operation of
the benefits enrollment business until December 31, 2005, or until certain
transferred client contracts have expired or been terminated. These fees, offset
by costs to deliver the service, were recorded first to reduce the recorded
value of net assets of business held for sale and then to reflect gain on the
sale of the business.

The historical results of operations for this business have been
reclassified to earnings from discontinued operations on our consolidated
statement of earnings.

28

RESTATEMENTS OF FINANCIAL STATEMENTS

2004 RESTATEMENT

In January 2004, we restated certain historical financial statements as a
result of adjustments related to our customer premises systems business. The
restatement was necessary because an internal accounting review in the third
quarter of fiscal year 2004 showed that certain revenues for customer premises
systems contracts were recorded earlier than was appropriate under the
percentage of completion methodology used for this line of business. Although we
ultimately realized the revenues from the transactions under review, our
financial results were not accurately presented, requiring the restatement. The
resulting restatement affected fiscal years ended March 31, 1999 through 2003
and the first two quarters of fiscal year 2004.

Additionally, we corrected three errors related to bill and hold
arrangements on hardware and software transactions arising out of the customer
premises systems line of business during the fiscal years ended March 31, 2000
and 2001. These adjustments resulted in movements of revenue and related costs
between quarters for each year. There was no impact to the annual financial
results of either fiscal year.

The restatement had practically no cumulative impact on our financial
results or our financial condition. It had the effect of reducing revenues by
$955,000 for fiscal years 1999, 2000 and 2001 and increasing revenues by a
similar amount in fiscal years 2002 and 2003. The impact on the fiscal years
presented, 2001, 2002 and 2003, was a reduction of revenue in 2001 of $358,000
and an increase of revenues in 2002 and 2003 of $610,000 and $384,000,
respectively. In addition to the revenue adjustments, the related commissions
associated with the revenues were adjusted accordingly and the income taxes
provisions were amended to reflect the impact of these restatements. The annual
impact to diluted earnings per share was a reduction to fiscal year 1999 of
$0.03, an increase to fiscal year 2000 of $0.01, a reduction to fiscal year 2001
of $0.02 and increases to fiscal years 2002 and 2003 of $0.03 and $0.01,
respectively.

Our review focused on contracts in which revenue was realized in fiscal
2000 and subsequent periods as reliable historical data was not available for
earlier periods. Accordingly, our review included contracts for which services
were initiated in periods prior to fiscal 2000. The review of certain contracts
resulted in cumulative adjustments for periods prior to fiscal 2000 which have
been attributed to fiscal 1999, the earliest fiscal period presented for
financial disclosure purposes. While it is possible that certain of these
adjustments related to periods prior to fiscal 1999, data was not available to
accurately support the specific allocation to such prior periods. Such data was
not available as we had modified our systems during fiscal 1999 and have not
retained sufficient comparable data for contracts entered into prior to the
modification. While further review may have resulted in adjustments to increase
revenue in 2000 by decreasing revenues in prior periods, based on the review
performed, management believes that further adjustments were not supportable.

The adjustments also impacted our consolidated balance sheet based on the
respective revenue amounts, resulting in a restatement of our work in progress
and deferred revenues. In addition, accrued expenses were restated to give
effect to the impact on accrued commissions, and deferred income taxes were
restated for the related tax effect.

See our Form 10-K/A for the fiscal year ending March 31, 2003 regarding the
impact of our prior restatement on our consolidated statements of operations and
balance sheets. The prior restatement had no impact on our total cash flows from
operating activities, investing activities or financing activities.

2002 RESTATEMENT

In response to inquiries made by the Securities and Exchange Commission
during the course of its investigation, we reviewed, during our December 2002
quarter, the accounting treatment for two items in the year ended March 31,
2001. In December 2002, we subsequently restated certain of our previously
issued financial statements. 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 decided to expense the entire amount
in the March 2001 quarter. Certain bonus payments to the executive
29

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 decided to record
the entire expense in the quarter ended March 31, 2001.

The effect of these restatements on the consolidated statement of earnings
was 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.

See our Form 10-K/A for the fiscal year ending March 31, 2003 regarding the
impact of our prior restatement on our consolidated statements of operations and
balance sheets. The prior restatement had no impact on our total cash flows from
operating activities, investing activities or financing activities.

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.

Revenue from maintenance contracts is deferred and recognized ratably over
the maintenance period. We recognize hardware and software license revenue upon
shipment based on vendor-specific objective evidence. Revenues for professional
services are generally recognized as the services are performed. If there is a
significant uncertainty about the project completion or receipt of payment for
the professional services, revenue is deferred until the uncertainty is
sufficiently resolved. We estimate the percentage of completion on contracts
with fixed fees on a monthly basis utilizing hours incurred to date as a
percentage of total estimated hours to complete the project. If we do not have a
sufficient basis to measure progress towards completion, revenue is recognized
when the project is complete.

Deferred revenue represents the unearned portion of The Work Number setup
fees, UC eXpress and maintenance fees.

Commissions are paid based upon successful efforts and are deferred and
expensed over the related service period.

Business Combinations and Intangible Asset Valuation: 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".

30

Pursuant to an asset purchase agreement dated March 22, 2004, effective
April 1, 2004, we purchased substantially all of the assets and assumed certain
of the liabilities of the unemployment compensation, employment verification and
pre-applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC. These assets will be
recorded in accordance with 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. Through the use of an independent
business appraiser, we reviewed our goodwill and intangible assets as of
December 31, 2003 and determined that no impairment existed.

Capitalized Software: Software development costs are expensed as incurred
until technological feasibility is achieved, after which time 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 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 this Annual
Report on Form 10-K which contains accounting policies and other disclosures
required by accounting principles generally accepted in the United States of
America.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The provisions of SFAS No. 149 are generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material effect on our financial position, profitability or
liquidity.

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In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement affects the classification, measurement and disclosure requirements of
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 was effective for us for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatory redeemable financial instruments. The implementation
of SFAS No. 150 will not have a material effect on our financial condition or
results of operations.

In December 2003, the FASB issued Interpretation No. (FIN) 46 (revised
December 2003), "Consolidation of Variable Interest Entities (VIEs)," which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities," which was issued in
January 2003. We will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interest in VIEs created before
January 1, 2004, FIN 46R will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. We do not believe the implementation of FIN 46R will have a
material effect on our financial condition or results of operations.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
provides for additional disclosures regarding pension and other postretirement
benefits, generally effective for financial statements with fiscal years ending
after December 15, 2003. We have adopted the disclosure requirements of SFAS No.
132 (revised) effective December 31, 2003, as applicable.

RESULTS OF OPERATIONS

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

On April 22, 2003 we transferred substantially all of the assets of our
Human Resources and Benefits Application Services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. Accordingly, the historical results of operations for this business
have been reclassified to earnings from discontinued operations on our
consolidated statement of earnings.

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FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEARS ENDED MARCH 31, 2003
AND 2002

REVENUES.

Total revenues increased 7.3% to $124.4 million in fiscal 2004 from $115.9
million in fiscal 2003 and $35.4 million in fiscal 2002.

Revenues from The Work Number services increased 29.7% to $46.6 million in
fiscal 2004 from $35.9 million in fiscal 2003 and $27.2 million in fiscal 2002.
The increase is due primarily to an increase in transaction volume resulting
from marketing efforts directed to verifiers and employers, partially offset by
lower average transaction fees due to the increase in transactions from users
with volume pricing discounts and the impact of former 1-900 users moving to
other means of access. Also, we experienced increased transaction volumes due to
an increase in the number of employers and related employment records in the
database.

The mortgage industry and pre-employment screeners are the two primary
revenue generators for The Work Number. The balance between mortgage-related and
pre-employment-related verification revenues began to shift back from its widest
spread in the first quarter of fiscal 2004 towards a more traditional balance
towards the end of fiscal 2004. Additionally, during fiscal 2004 we gradually
increased revenues from collection companies and social services agencies. The
table below indicates the percentage of The Work Number revenues contributed by
types of verifiers during fiscal year 2003 and fiscal year 2004.

As of the end of fiscal year 2004, we had 90.1 million records live on the
service, an 18% increase from fiscal year 2003. Our live and backlog accounts
represented 97.2 million records.

Revenues from the "Paperless Pay" and FasTime services increased during
fiscal year 2004 and we expect they will continue to grow in fiscal year 2005 as
several large clients are coming on line. New contracts signed during fiscal
year 2003 contributed to a 44% growth in fiscal year 2004 FasTime revenues on a
year-over-year basis. In "Paperless Pay," both contracted business and the sales
pipeline gained momentum and current indications lead us to believe that the
revenue run-rate could double in this service over the next six to nine months.
This business generated 32% revenue growth for fiscal 2004. Surveys of major
employers indicate that many are focused on eliminating pay-stubs and paper
checks and replacing them with web-based pay-statements and pay-cards. We
believe we are well positioned to play a key role in that trend. Our W-2 eXpress
services also experienced a strong year. We had over 8.5 million W-2s live on
our system for fiscal 2004, representing an increase in excess of 40% over
fiscal 2003.

Revenues from unemployment cost management services ("UCeXpress") decreased
1.3% to $73.7 million in fiscal 2004 from $74.6 million in fiscal 2003 due
primarily to a reduced level of tax consulting contracts,

34

some pricing pressure in the claims processing business and the loss of some
smaller clients last year as we instituted certain minimum pricing policies,
partially offset by the addition of revenues from our acquisition of Johnson and
Associates and new sales. The UC eXpress revenue stream is one of multi-year
contracts that provide a solid revenue base with upside potential through
contingency billings from tax consulting or through additional billings if
claims processed, or other performance measures, exceed contractually set
levels. During the 2004 fiscal year, uncertain economic conditions contributed
to a reduction in activity in our tax consulting business. In addition, claims
activity was less than expected and we did not realize the anticipated
additional billings.

Revenues from customer premises systems decreased in fiscal 2004 as we have
been diminishing this business over the past several years. During fiscal 2003
we completely eliminated sales of customer premises systems.

Revenues from maintenance and support related to the customer premises
systems increased 13.2% to $4.1 million in fiscal 2004 from $3.6 million in
fiscal 2003 and $3.9 million in fiscal 2002. The increase was due to additional
revenue generated through services provided to clients that were outside of our
standard maintenance agreements. The increase was partially offset by lower
standard maintenance revenues caused by a shrinking client base. We anticipate
maintenance and support revenues will decrease over time from current levels as
our installed base continues to shrink as supported systems approach the end of
their life cycles. Additionally, during 2003, we notified our maintenance
clients of our intention to discontinue all support services effective June
2005.

GROSS MARGIN.

Total gross margin increased 11.9% to $71.1 million in fiscal 2004 from
$63.6 million in fiscal 2003 and $21.6 million in fiscal 2002. As a percentage
of total revenues, gross margin increased to 57.2% in fiscal 2004 from 54.8% in
fiscal 2003, but was still lower as compared to fiscal 2002. The decrease from
2002 is due to the addition of our unemployment cost management acquisitions
which were effective March 27, 2002. As indicated above, these businesses have a
lower overall gross margin than The Work Number Services. The unemployment cost
management services business has been an important contributor to our overall
profitability as well as to the growth in The Work Number Services due to
success in cross-selling The Work Number Services into the unemployment cost
management services client base.

The Work Number services gross margin increased 38.1% to $32.7 million in
fiscal 2004 from $23.6 million in fiscal 2003 and $17.9 million in fiscal 2002.
As a percentage of corresponding revenue, gross margin increased to 70.1% in
fiscal 2004 from 65.8% in fiscal 2003 and 65.7% in fiscal 2002. The increases in
gross margin and gross margin percentage were due primarily to higher revenue
levels as discussed above and

35

improved leveraging of our operational infrastructure. Additionally, more
transactions were performed over the Internet, which has a lower average
transaction cost compared to transactions performed through either our 900 or
800 telephone services.

Unemployment cost management services gross margin decreased 1.7% to $35.7
million, or 48.4% of corresponding revenue, in fiscal 2004 from $36.3 million,
or 48.6% of corresponding revenue, in fiscal 2003. This decrease in gross margin
and gross margin percentage is due primarily to temporary incremental costs
related to our efforts to consolidate the UCeXpress operational infrastructure
during the first half of the year. Our efforts to consolidate our operational
infrastructure were substantially concluded in the second half of fiscal 2004,
and we began to realize cost savings. We expect to see our margins improve as we
continue to identify and implement process improvement initiatives.

Maintenance and support gross margin decreased 3.6% to $2.8 million from
$2.9 million in fiscal 2003 and 2002. As a percentage of corresponding revenue,
gross margin decreased to 68.0% in fiscal 2004 from 79.8% in fiscal 2003 and
73.6% in fiscal 2002. These decreases are due to the fixed nature of personnel
and infrastructure costs even as our installed base continues to shrink. Also,
we incurred incremental personnel costs related to providing services outside of
our standard maintenance agreements.

Selling and Marketing Expenses. Selling and marketing expenses increased
26.2% to $23.9 million in fiscal 2004 from $18.9 million in fiscal 2003 and $6.3
million in fiscal 2002. As a percentage of revenues, such expenses increased to
19.2% in fiscal 2004 from 16.3% in fiscal 2003 and 17.9% in fiscal 2002. These
increases are due to increased costs related to our recent reorganization of the
sales and services teams. In addition to realigning our sales and service teams
into regions, we added personnel and related costs. Additionally, marketing
costs increased in fiscal 2004 as we increased our efforts to market to high
volume verifiers of The Work Number. The significant increase from fiscal 2002
to fiscal 2003 was due to the addition of sales and marketing personnel and
related costs from our March 2002 acquisitions.

General and Administrative Expenses. General and administrative expenses
increased 3.5% to $26.1 million in fiscal 2004 from $25.2 million in fiscal 2003
and $7.5 million in fiscal 2002. The increase in such expenses reflects the
increased infrastructure costs of a growing business and workforce. As a
percentage of revenues, such expenses decreased to 20.9% in fiscal 2004 from
21.7% in fiscal 2003 and 21.0% in fiscal 2002. This decrease is due primarily to
improved leveraging of personnel and infrastructure costs. Also, we experienced
cost savings as we consolidated certain back office functions related to our
acquisitions from March 2002. The significant increase from fiscal 2002 to
fiscal 2003 was due to the addition of general and administrative costs from our
March 2002 acquisitions. Although the majority of legal costs incurred in
relation to our class action lawsuits and SEC investigation have been paid by
our insurance carriers, certain legal costs in addition to accounting costs and
severance costs related to these matters have been expensed during fiscal years
2003 and 2004. We expect certain of these costs to continue, and possibly
increase, in fiscal year 2005.

Other Income (Expense), Net. Other income (expense), net totaled $845,000
of other expense in fiscal 2004 compared to $1.4 million of other expense in
fiscal 2003 and $1.6 million of other income in fiscal 2002. The decrease from
fiscal 2002 to fiscal 2003 was due to a shift from a net investing position to a
net borrowing position as we entered into a new credit facility to finance our
March 2002 acquisitions. The decrease from fiscal 2003 to fiscal 2004 was due to
a lower level of outstanding borrowings throughout fiscal 2004 compared to
fiscal 2003.

Restructuring and Other Charges. During the second quarter of fiscal year
2002, 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 consolidated statement of earnings for
the 2002 fiscal year. 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
36

component of cost of revenues on the consolidated statement of earnings for the
2002 fiscal year. There are no remaining liabilities at March 31, 2004 related
to the reorganization.

Income Tax Expense. Our effective income tax rate was 38.7%, 38.3% and
36.9% in fiscal 2004, 2003 and 2002, respectively. These increases are due
principally to increases in our federal and state income tax rates.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth (1) specified unaudited statement of
operations data for each of the four quarters in fiscal 2003 and fiscal 2004,
(2) the gross margin percentage for each of our revenue categories, and (3)
operating data expressed as a percentage of our total revenues. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements contained herein and include all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of such information when read in conjunction with our financial
statements and related notes included elsewhere in this Form 10-K. We believe
that quarter-to-quarter comparisons of our financial results should not
necessarily be relied upon as an indication of future performance.

On April 22, 2003, we sold substantially all of the assets of our Human
Resources and Benefits Application Services business and reflected such
operations as a discontinued operation for financial reporting purposes. During
March 2002, we acquired Frick and the GM Unemployment Compensation Business. On
July 1, 2003, we acquired Johnson and Associates. Effective April 1, 2004, we
purchased substantially all of the assets and assumed certain of the liabilities
of the unemployment compensation, employment verification and pre-applicant
screening businesses of Sheakley-Uniservice, Inc. and its wholly owned
subsidiary, Sheakley Interactive Services, LLC.

Our revenues, margins and operating results have fluctuated in the past,
and are likely to continue to fluctuate in the future, on an annual and
quarterly basis, as a result of a number of factors, most of which are outside
of our control, as discussed in "Item 1 -- Business -- Risk Factors -- Our
quarterly and annual operating results may fluctuate significantly, which could
cause our stock price to decline significantly."

SEASONALITY

Revenues generated from our W-2 eXpress service are particularly affected
by seasonality and are principally earned in our fourth fiscal quarter.

38

Revenues generated from our unemployment cost management services, which we
acquired in late March 2002, are generally higher in the third and fourth fiscal
quarters as certain client contracts allow us to bill additional fees based upon
actual annual claims volumes. Additionally, our tax planning business has an
inherent seasonality based upon the general nature of tax services.

CONTRACTUAL OBLIGATIONS

The following table summarizes certain of our contractual obligations as of
March 31, 2004.

- ---------------

(1) Under certain circumstances, principal payments are required out of excess
cash flow, as well as from the proceeds of certain asset dispositions and
from the proceeds of the issuance of equity and debt by us. In such
circumstances, the repayment of long-term debt obligations could be
accelerated.

Pursuant to an asset purchase agreement dated as of March 22, 2004, with an
effective date of April 1, 2004, we acquired substantially all of the assets and
assumed certain of the liabilities of the unemployment compensation, employment
verification and pre-applicant screening businesses (collectively, the
"Business") of Sheakley-Uniservice, Inc. and its wholly owned subsidiary,
Sheakley Interactive Services, LLC, for approximately $40 million, including
transaction costs, subject to certain post-closing adjustments. Of the purchase
price, $38.6 million is reflected on our consolidated balance sheet at March 31,
2004 as restricted cash, as payment was made on March 31, 2004, for an effective
date of April 1, 2004.

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have financed our operations through cash flows from
operating activities. In addition to cash provided by operating activities, we
have access to a revolving credit facility.

Net cash provided by operating activities decreased to $21.6 million in
fiscal 2004 from $28.5 million in fiscal 2003. This decrease was primarily due
to changes in the components of working capital and payments of current
liabilities in fiscal 2004, including payment on an accrual for transition
services related to our March 2002 acquisitions.

Net cash used in investing activities increased to $48.3 million in fiscal
2004 from $26.7 million in fiscal 2003. This increase was primarily due to the
funding of our $38.6 million restricted cash position at March 31, 2004 related
to the acquisition of the unemployment compensation, employment verification and
pre-applicant screening businesses of Sheakley-Uniservice, Inc. and its wholly
owned subsidiary, Sheakley Interactive Services, LLC. This acquisition was
effective April 1, 2004. In fiscal 2003, investing activities reflect the
payment of $20.1 million related to our March 2002 acquisitions. Other uses of
cash for investing activities during fiscal 2004 included the acquisition of
Johnson and Associates for $1.7 million and capital expenditures, including
capitalized software, of $6.4 million. These capital expenditures were
principally for computer equipment and software. At March 31, 2004, 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 18 months as we
integrate the operations of our new acquisition.

Net cash provided by (used in) financing activities was $25.9 million
provided by financing activities in fiscal 2004 compared to $13.9 million used
in financing activities in fiscal 2003. This change was primarily due to $38.7
million new borrowings related to our Sheakley acquisition. Uses of cash for
financing activities

39

during fiscal 2004 included scheduled debt retirement payments of $10.8 million,
the repurchase of stock for $1.8 million and dividend payments of $2.4 million.

Our working capital increased to $6.0 million at March 31, 2004 from $1.6
million at March 31, 2003. This increase is primarily due to timing
considerations related to the billing cycle. At March 31, 2003 we had processed
more billings with deferred revenue impact than at March 31, 2004. Additionally,
working capital at March 31, 2003 was negatively impacted by approximately $1.5
million negative working capital related to assets sold as part of Human
Resources and Benefits Application Services business in April 2003. 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, for at least the next 12 months.

Our business strategy contemplates that we will consider acquisitions from
time to time. We cannot assure you that we will make any such additional
acquisitions or that any such acquisitions would be successful. We expect that
such acquisitions may require that we access additional credit. As described
below, our Loan Agreement will provide funding for certain possible future
acquisitions subject to certain conditions. Except in these circumstances, we
cannot assure you that additional credit would be available on acceptable terms.
Any such additional credit would increase the risks associated with leverage,
including our ability to service indebtedness and volatility of interest rates.

Our accounts receivable decreased to $15.5 million at March 31, 2004 from
$18.1 million at March 31, 2003, due primarily to strong collections in the last
quarter of fiscal 2004 and timing of year-end billings. Days sales outstanding
in accounts receivable improved to 42 days at March 31, 2004 compared to 49 days
at the end of the last fiscal year.

On September 5, 2002, our Board of Directors authorized us to repurchase up
to one million shares of our stock in the open market, or through privately
negotiated transactions during the 36 month period ending September 30, 2005,
subject to market conditions and other factors. Under this plan, we repurchased
131,211 shares during the year ended March 31, 2004. Cumulative shares
repurchased under this plan amount to 306,211. Except for the 301,041 shares
remaining in the treasury at March 31, 2004, all shares repurchased have been
reissued in connection with employee stock option exercises and employee stock
purchase plan purchases.

During fiscal 2004, we continued our quarterly dividend program, declaring
a $0.04 per share dividend in the first quarter and a $0.05 per share dividend
in each of the last three quarters.

In connection with the acquisitions of The Frick Company and the GM
Unemployment Compensation Business, on March 27, 2002, pursuant to a loan
agreement dated as of March 27, 2002, (the "2002 Loan Agreement"), we obtained
secured financing consisting of a $30.0 million term loan (the "2002 Term Loan")
and a $10.0 million revolving credit facility (the "2002 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 "2002 Lenders"). We
used the proceeds of the 2002 Term Loan to pay a portion of the purchase price
for the acquisitions; however, we have not borrowed under the 2002 Revolving
Credit Facility. This 2002 Term Loan was repaid on March 31, 2004 with proceeds
from a new credit facility.

In connection with the acquisition of certain businesses of
Sheakley-Uniservice, Inc., we entered into an amended and restated loan
agreement dated as of March 31, 2004, (the "Loan Agreement"). Pursuant to the
Loan Agreement, we obtained secured financing consisting of a $58.0 million term
loan (the "Term Loan A"), a $10.0 million term loan (the "Term Loan B") and a
$15.0 million revolving credit facility (the "Revolving Credit Facility") from
LaSalle Bank National Association, as administrative agent and lender, and
Southwest Bank of St. Louis, National City Bank of Michigan/Illinois, Fifth
Third Bank and Merrill Lynch Business Financial Services, Inc., as lenders, and
any other lenders that may become party to the Loan Agreement (collectively, the
"Lenders"). We borrowed $50.0 million of Term Loan A and utilized the proceeds
of such borrowing to fund our restricted cash position in order to pay the
purchase price for the acquisition and to refinance the outstanding balance of
its previous credit facility. We have not borrowed under the Revolving Credit
Facility or under Term Loan B.

40

Under the terms of the Loan Agreement, we were permitted to use the
proceeds of the initial advance under Term Loan A solely to pay the purchase
price for the acquisition of certain businesses of Sheakley-Uniservice, Inc.,
and are permitted to use the remaining amount of Term Loan A and up to two
advances under Term Loan B on or before September 30, 2004 solely to pay for
certain approved acquisitions, which have not yet been negotiated. 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 letters of credit, to pay the transaction cost of
the Loan Agreement, to finance such approved acquisitions and permitted
acquisitions and to finance certain repurchases of our capital stock subject to
limitations and restrictions set forth in the Loan Agreement.

Principal of the Term Loan A must be repaid by us in quarterly installments
commencing June 30, 2004, with the final installment due on March 31, 2009.
Principal of the Term Loan B must be repaid by us in quarterly installments
commencing December 31, 2004, with the final balloon payment due on March 31,
2009. In addition, under certain circumstances principal payments are required
out of excess cash flow as well as from the proceeds of certain asset
dispositions and from the proceeds of the issuance of equity and of debt by us.
The Revolving Credit Facility also matures on March 31, 2009.

The Term Loans 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. The applicable margin
for eurodollar rate loans under the Revolving Credit Facility and Term Loan A
will vary from 1.75% to 3.25%, and the applicable margin for base rate loans
under the Revolving Credit Facility and Term Loan A will be either 0.00% or .25%
in each case based upon our ratio of total indebtedness to EBITDA (earnings
before interest, taxes, depreciation and amortization). The applicable margin
for eurodollar rate loans under Term Loan B will vary from 2.25% to 3.75%, and
the applicable margin for base rate loans under Term Loan B will be either .50%
or .75%, in each case based upon our ratio of total indebtedness to EBITDA. We
may make prepayments under the Term Loans and the Revolving Credit Facility
without penalty.

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

The Loan Agreement includes certain covenants, including, without
limitation, restrictions on the use of proceeds of the loans made under the Loan
Agreement, as described above. 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, and impose restrictions on distributions to shareholders, change
of control of us, investments, acquisitions and liens, and which require
compliance, in all material respects, with material laws. The Loan Agreement
generally prohibits the payment of cash dividends, except for cash dividends not
in excess of five cents per share per calendar quarter, up to a maximum of $3.5
million per fiscal year so long as we are not in default at the time of the
declaration. The Loan Agreement also contains various representations and
warranties, including, among others, the accuracy of financial statements and
other information delivered to the Lenders and 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).

Scheduled minimum long-term debt repayments are $10.0 million in fiscal
years 2005 through 2009, respectively. Payments are due in equal quarterly
amounts. We may accelerate credit facility repayments, depending on available
operating cash flow.

As a condition of the 2002 Term Loan Agreement, we were required to enter
into an interest rate swap 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
$14.0 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 2002
Term Loan. The notional amount of our interest rate swap contract steps down
according to the
41

same schedule as our 2002 Term Loan. All payment dates and maturity dates are
the same as our 2002 Term Loan. This strategy effectively converts a portion 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 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.

As discussed above, on March 31, 2004 we repaid our 2002 Loan Agreement and
entered into a new Loan Agreement. Effective March 31, 2004 our existing
interest rate swap was matched to our new Loan Agreement, and will remain until
original maturity.

As of March 31, 2004, the fair value of the interest rate swap in the
amount of $84,000 is included in accrued expenses and other liabilities.

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

OTHER MATTERS

We are cooperating with a pending SEC investigation and are a defendant in
pending lawsuits which are described in Note 16 of our Notes to Consolidated
Financial Statements.

On May 5, 2004 we reached an agreement with the plaintiffs to settle all
pending class action lawsuits. The settlement calls for payment of $5.75
million, which will be made by our insurance carriers and will not impact
earnings. There were, however, approximately $500,000 of additional legal costs
that were included in expenses for the fourth quarter of the fiscal year 2004.
As of the year ended March 31, 2004 we recorded a liability for $5.75 million in
accrued expenses and other liabilities representing the amount we owe under the
settlement agreement. Additionally, we recorded $5.75 million in prepaid
expenses and other current assets representing the amount we will receive from
our insurance companies. The agreement is subject to certain conditions,
including judicial approval, and a potential additional payment depending on the
amount of certain claims. We believe that any additional payment, if required,
would not be material. However, our expectations are subject to the risks that
the court will not approve our class action settlement, that claimants request
exclusion from the settlement that hold a larger than anticipated number of
shares, or that the claims analysis on which we relied is inaccurate, and a
larger than expected number of claims is submitted which could require us to
make an additional payment. On May 24, 2004, the court entered an order
preliminarily approving the settlement and setting October 6, 2004 as the date
for a hearing on final approval of the settlement. In the interim, notice of the
settlement will be given to class members, and they will have an opportunity to
opt out or to file objections to the settlement. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation if the settlement is not approved by the court. An unfavorable
outcome could have a material adverse impact on our business, financial
condition and results of operations.

As previously disclosed, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. 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 (who has resigned from the Company) related to
two matters, and requesting that we and such executive officers submit responses
to the letter. 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 prior restatement, as disclosed in our Form 10-K/A for the year
ended March 31, 2002. We and the individuals have filed separate responses to
the Wells letter. Since the time of the Wells submissions, the Commission is
continuing its investigation of our accounting for certain items,

42

including those which were the subject of the restatements discussed below. The
remedies the Commission may consider, if appropriate, include an injunction
against us and the individuals and an officer and director bar and disgorgement
and civil money penalties against us and/or the individuals.

In the settlement of the civil suit referred to above, we released our
insurance providers from related claims against our applicable insurance
policies. Any fines or penalties assessed by the SEC against us, along with any
further defense costs incurred by us in connection with the SEC investigation,
either on our own behalf or as indemnification on behalf of William W. Canfield
or Craig N. Cohen, and any future related litigation will be borne by us and
will not be covered by insurance. In addition, to the extent that we are
required to indemnify Messrs. Canfield or Cohen against any fines or penalties
assessed against either of them, those amounts will be borne by us and not be
covered by insurance. The application of any of the foregoing remedies, or the
commencement of any regulatory proceeding or enforcement action, could harm our
business and financial condition.

As previously disclosed, we have filed restated financial statements for
the fiscal years ended March 31, 1999 through March 31, 2003 and for each of the
first two quarters of fiscal 2004. In December 2002, we filed restated financial
statements for each of the quarters ended June 30, 2000 through June 30, 2002
and for the fiscal years ended March 31, 2001 and 2002. As a result of this new
restatement, we could become subject to additional regulatory proceedings.

As required under our articles of incorporation, we are obligated to
indemnify and advance expenses of each of the Individual Defendants, as officers
and/or directors of the Company to the fullest extent permitted by Missouri law,
in connection with the above matters, subject to their obligations to repay
amounts advanced under certain circumstances. Stifel, Nicolaus & Company and
A.G. Edwards & Sons, Inc. have made demands on the Company to indemnify and
advance expenses to them in connection with these matters.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of these types are expensive and, until
settled or otherwise resolved, will require that we devote substantial resources
and executive time to defend these proceedings.

In addition to matters set forth above, we are also party to other lawsuits
and claims that arise in the ordinary course of conducting our business. In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims will not have a material adverse
effect on our consolidated financial position or results of operations.

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As discussed above under "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," 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.

As of March 31, 2004, we had $50.0 million principal outstanding on our
Term Loan, of which $6.0 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 $440,000 change to our annual interest expense, based on net
variable rate borrowings of $44.0 million.

43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
TALX Corporation:

We have audited the accompanying consolidated balance sheets of TALX
Corporation (the Company) and subsidiaries as of March 31, 2003 and 2004, and
the related consolidated statements of earnings, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended March 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TALX
Corporation and subsidiaries as of March 31, 2003 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 5 to the consolidated financial statements, effective
April 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

/s/ KPMG LLP
- -----------------------
St. Louis, Missouri
May 6, 2004

45

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
46

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

See accompanying notes to consolidated financial statements.
47

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2002, 2003 AND 2004

See accompanying notes to consolidated financial statements.
48

TALX CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.
49

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2004

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) DESCRIPTION OF BUSINESS

We are a provider of automated employment and income verification,
unemployment cost management services and other 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 provide unemployment insurance claims
processing and unemployment tax planning and management to a broad range of
employers. Further, we allow employees to review and modify information in human
resources and payroll management information systems on a self-service basis.

Our services and software offer web access, interactive voice response,
fax, document imaging 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 a number of
Fortune 500 companies and federal, state and local government agencies.

(b) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of TALX
Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

(c) CASH AND CASH EQUIVALENTS

We consider all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.

(d) SHORT-TERM INVESTMENTS

Short-term investments at March 31, 2004 consist of highly liquid money
market account deposits. We classify our short-term investments in one of two
categories: available-for-sale or held-to-maturity. Held-to-maturity securities
are those securities which we have the ability and intent to hold until
maturity. All other securities are classified as available-for-sale. All of our
securities were classified as available-for-sale at March 31, 2004. Interest
income is recognized when earned. Short-term investments classified as
available-for-sale are stated at market value.

(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS

We evaluate the collectibility of accounts receivable based on a
combination of factors. In cases where we are aware of circumstances that may
impair a specific customer's ability to meet its financial obligations, we
record a specific allowance against amounts due, and thereby reduce the net
recognized receivable (i.e., net of deferred revenue) to the amount we
reasonably believe will be collected. For the remaining customers, we recognize
allowances for doubtful accounts based on the length of time the aggregate
receivables are outstanding, the current business environment and historical
experience.

(f) RESTRICTED CASH

Pursuant to an asset purchase agreement dated as of March 22, 2004, with an
effective date of April 1, 2004, we acquired substantially all of the assets and
assumed certain of the liabilities of the unemployment compensation, employment
verification and pre-applicant screening businesses (collectively, the
"Business") of Sheakley-Uniservice, Inc. and its wholly owned subsidiary,
Sheakley Interactive Services, LLC. Of the

50

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase price, $38.6 million is reflected on our consolidated balance sheet at
March 31, 2004 as restricted cash, to fund the acquisition with an effective
date of April 1, 2004. Restricted cash is classified as non-current as the
assets being acquired are primarily long-term in nature.

(g) PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Amortization of leasehold improvements
is computed using the straight-line method over the lesser of the useful life of
the asset or lease term.

(h) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Product development costs are charged to operations as incurred. Software
development costs are expensed as incurred until technological feasibility is
achieved, after which time 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 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.

(i) GOODWILL AND OTHER INTANGIBLE ASSETS

We have adopted the provisions of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" as of
April 1, 2002. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually. SFAS
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values.

(j) REVENUE RECOGNITION, WORK IN PROGRESS AND DEFERRED REVENUE

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.

Revenue from maintenance contracts is deferred and recognized ratably over
the maintenance period. We recognize hardware and software license revenue upon
shipment based on vendor-specific objective evidence. Revenues for professional
services are generally recognized as the services are performed. If there is a
significant uncertainty about the project completion or receipt of payment for
the professional services, revenue is deferred until the uncertainty is
sufficiently resolved. We estimate the percentage of completion on contracts
with fixed fees on a monthly basis utilizing hours incurred to date as a
percentage of total estimated hours to complete the project. If we do not have a
sufficient basis to measure progress towards completion, revenue is recognized
when the project is complete.

51

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred revenue represents the unearned portion of The Work Number setup
fees, UC eXpress and maintenance fees.

Commissions paid are deferred and expensed over the related service period.

(k) CONCENTRATION OF CREDIT RISK

We sell our services and software in a variety of industries. No client
represented over 10% of revenues in fiscal 2002, 2003 or 2004. We perform
periodic credit evaluations of our clients' financial conditions and generally
do not require collateral; however, for our maintenance business we maintain a
security interest in hardware until payment is received. Credit losses from
clients have been within our expectations, and we believe the allowance for
doubtful accounts adequately provides for any expected losses.

(l) 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. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

(m) FAIR VALUE OF FINANCIAL INSTRUMENTS

We disclose estimated fair values for our financial instruments. A
financial instrument is defined as cash or a contract that both imposes on one
entity a contractual obligation to deliver cash or another financial instrument
to a second entity and conveys to that second entity a contractual right to
receive cash or another financial instrument from the first entity. Our
financial instruments include long-term debt and a revolving line of credit
facility. The carrying value of these commitments approximates fair value due to
their stated interest rates approximating market rates. These estimated fair
value amounts have been determined using available market information or other
appropriate valuation methodologies.

(n) DERIVATIVE FINANCIAL INSTRUMENTS

We use interest rate swap agreements as required under the terms of our
term loan and revolving credit facility (see Note 8). Our policy is to manage
interest costs using a mix of fixed and variable rate debt. Using interest rate
swap agreements, we agree to exchange, at specified intervals, the difference
between fixed and variable interest amounts calculated by reference to an
agreed-upon notional principal amount. We do not hold or issue any derivative
financial instruments for trading purposes.

(o) STOCK-BASED COMPENSATION

We account for stock-based compensation using the intrinsic value method in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation."

Since all of our options are granted with an option price equal to the
market price at the time of grant, we have not recognized any stock-based
employee compensation cost under our stock option plans. SFAS No. 123 requires
pro forma disclosure of the impact on earnings as if the compensation expense
for these plans had been determined using the fair value method. Compensation
cost is calculated under a straight line basis. The following table presents our
net earnings and earnings per share as reported and the pro forma

52

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts that would have been reported using the fair value method under SFAS No.
123 for the years presented:

The fair value of option grants for fiscal 2002, 2003 and 2004 is estimated
on the date of the grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: expected volatility of 59%, 80% and 70%
in fiscal 2002, 2003 and 2004, respectively; risk-free interest rate of 4.81%,
3.50% and 3.00% in fiscal 2002, 2003 and 2004, respectively; expected life of
5.0, 7.5 and 7.0 years in fiscal 2002, 2003 and 2004, respectively; and an
expected dividend yield of 3.50%, 1.20% and 0.90% in fiscal 2002, 2003 and 2004,
respectively.

(p) MANAGEMENT'S USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates. Estimates are used when accounting for depreciation,
amortization, allowance for doubtful accounts and income taxes as well as in the
evaluation of potential losses due to impairment or pending litigation.

(q) LITIGATION

We have legal contingencies that have a high degree of uncertainty. As
described in Note 16, certain allegations have been made against us that create
litigation contingencies. When a contingency becomes probable and estimable a
reserve is established in the consolidated financial statements. To the extent
not recoverable by directors' and officers' liability insurance coverage, legal
costs are expensed as incurred.

(r) EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings 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 per share. The weighted average number of shares is based on common
stock outstanding for basic
53

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings per share and common stock outstanding and common stock options and
warrants for diluted earnings per share in periods when such common stock
options and warrants are not antidilutive.

(s) BUSINESS SEGMENTS

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires companies to provide certain information about their
operating segments. With our acquisitions of two unemployment cost management
companies in March 2002 we began operating as two reportable segments:
Payroll-Based Services and Software and Unemployment Cost Management Services.

Effective April 1, 2003, we combined our sales, marketing and
administrative teams and no longer operate separate reportable segments. We now
operate as one reportable segment, as our business activities are not organized
on the basis of differences in related products and services or differences in
geographic areas of operations.

(t) RECLASSIFICATIONS

Certain balances in prior fiscal years have been reclassified to conform to
the presentation adopted in the current fiscal year. Additionally, on April 22,
2003 we transferred substantially all of the assets of our Human Resources and
Benefits Application Services business to Workscape, Inc., a Framingham,
Massachusetts-based provider of benefits and workforce management solutions.
Accordingly, the historical results of operations for this business have been
reclassified to earnings from discontinued operations on our consolidated
statement of earnings.

(2) ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

Billings to customers are made in accordance with the terms of the
individual contracts.

54

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table represents activity within our allowance for doubtful
accounts for the years ended March 31, 2002, 2003 and 2004:

(3) PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Depreciation and amortization expense related to property and equipment was
$2.5 million, $5.1 million and $4.9 million for the years ended March 31, 2002,
2003 and 2004, respectively.

55

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Product development costs and amortization of capitalized software
development costs for the years ended March 31, 2002, 2003 and 2004 are as
follows:

(5) GOODWILL AND OTHER INTANGIBLE ASSETS

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 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. Through the use of an independent business
appraiser, we reviewed our goodwill and intangible assets as of December 31,
2002 and 2003 and determined that no impairment existed.

56

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes goodwill and other intangible asset activity
for years ended March 31, 2003 and 2004 (dollars in thousands).

Amortization of other intangible assets is projected to be $1.3 million for
each of the fiscal years ended March 31, 2005 through 2009.

(6) ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities as of March 31, 2003 and 2004
consist of the following:

57

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

(1) On May 5, 2004 we reached an agreement with plaintiffs to settle all pending
class action lawsuits. The settlement calls for payment of $5.75 million,
which will be made by our insurance carriers and will not impact earnings.
Accordingly, we have recorded a liability for $5.75 million in accrued
expenses and other liabilities representing the amount we owe under the
settlement agreement. Additionally, we have recorded $5.75 million in
prepaid expenses and other current assets representing the amount we will
receive from our insurance companies.

(7) LONG-TERM DEBT

Long-term debt at March 31, 2003 and 2004 consists of:

In connection with the acquisitions of The Frick Company and the GM
Unemployment Compensation Business, on March 27, 2002, pursuant to a loan
agreement dated as of March 27, 2002, (the "2002 Loan Agreement"), we obtained
secured financing consisting of a $30.0 million term loan (the "2002 Term Loan")
and a $10.0 million revolving credit facility (the "2002 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 "2002 Lenders"). We
used the proceeds of the 2002 Term Loan to pay a portion of the purchase price
for the acquisitions; however, we have not borrowed under the 2002 Revolving
Credit Facility. This facility was repaid on March 31, 2004 with proceeds from a
new credit facility.

In connection with the acquisition of certain businesses of
Sheakley-Uniservice, Inc., we entered into an amended and restated loan
agreement dated as of March 31, 2004, (the "Loan Agreement"). Pursuant to the
Loan Agreement, we obtained secured financing consisting of a $58.0 million term
loan (the "Term Loan A"), a $10.0 million term loan (the "Term Loan B") and a
$15.0 million revolving credit facility (the "Revolving Credit Facility") from
LaSalle Bank National Association, as administrative agent and lender, and
Southwest Bank of St. Louis, National City Bank of Michigan/Illinois, Fifth
Third Bank and Merrill Lynch Business Financial Services, Inc., as lenders, and
any other lenders that may become party to the Loan Agreement (collectively, the
"Lenders"). We borrowed $50.0 million of Term Loan A and utilized the proceeds
of such borrowing to fund our restricted cash position in order to pay the
purchase price for the acquisition and to refinance the outstanding balance of
our previous credit facility. We have not borrowed under the Revolving Credit
Facility or under Term Loan B.

Under the terms of the Loan Agreement, we were permitted to use the
proceeds of the initial advance under Term Loan A solely to pay the purchase
price for the acquisition of certain businesses of Sheakley-Uniservice, Inc.,
and are permitted to use the remaining amount of Term Loan A and up to two
advances under Term Loan B on or before September 30, 2004 solely to pay for
certain approved acquisitions, which have not yet been negotiated. 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 letters of credit, to pay the transaction cost of
the Loan Agreement, to finance such approved acquisitions and permitted
acquisitions and to finance certain repurchases of our capital stock subject to
limitations and restrictions set forth in the Loan Agreement.

58

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Principal of the Term Loan A must be repaid by us in quarterly installments
commencing June 30, 2004, with the final installment due on March 31, 2009.
Principal of the Term Loan B must be repaid by us in quarterly installments
commencing December 31, 2004, with the final balloon payment due on March 31,
2009. In addition, under certain circumstances principal payments are required
out of excess cash flow as well as from the proceeds of certain asset
dispositions and from the proceeds of the issuance of equity and of debt by us.
The Revolving Credit Facility also matures on March 31, 2009.

The Term Loans 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. The applicable margin
for eurodollar rate loans under the Revolving Credit Facility and Term Loan A
will vary from 1.75% to 3.25%, and the applicable margin for base rate loans
under the Revolving Credit Facility and Term Loan A will be either 0.00% or .25%
in each case based upon our ratio of total indebtedness to EBITDA (earnings
before interest, taxes, depreciation and amortization). The applicable margin
for Eurodollar rate loans under Term Loan B will vary from 2.25% to 3.75%, and
the applicable margin for base rate loans under Term Loan B will be either .50%
or .75%, in each case based upon our ratio of total indebtedness to EBITDA. We
may make prepayments under the Term Loans and the Revolving Credit Facility
without penalty.

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

The Loan Agreement includes certain covenants, including, without
limitation, restrictions on the use of proceeds of the loans made under the Loan
Agreement, as described above. 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, and impose restrictions on distributions to shareholders, change
of control of us, investments, acquisitions and liens, and which require
compliance, in all material respects, with material laws. The Loan Agreement
generally prohibits the payment of cash dividends, except for cash dividends not
in excess of five cents per share per calendar quarter, up to a maximum of $3.5
million per fiscal year so long as we are not in default at the time of the
declaration. The Loan Agreement also contains various representations and
warranties, including, among others, the accuracy of financial statements and
other information delivered to the Lenders and 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).

Scheduled minimum long-term debt repayments are $10.0 million in fiscal
years 2005 through 2009, respectively. Payments are due in equal quarterly
amounts. We may accelerate credit facility repayments, depending on available
operating cash flow.

(8) DERIVATIVE FINANCIAL INSTRUMENT

As a condition of the 2002 Term Loan Agreement, we were required to enter
into an interest rate swap 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
$14.0 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 2002
Term Loan. The notional amount of our interest rate swap contract steps down
according to the same schedule as our 2002 Term Loan. All payment dates and
maturity dates are the same as our 2002 Term Loan. This strategy effectively
converts a portion of our term loan into a fixed rate instrument.

59

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The interest rate swap and related gains and losses arising on the contract
are accounted for as a cash flow hedge in accordance with 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.

As discussed in Note 9, on March 31, 2004 we repaid our 2002 Loan Agreement
and entered into a new Loan Agreement. Effective March 31, 2004 our existing
interest rate swap was matched to our new Loan Agreement, and will remain until
original maturity.

As of March 31, 2004, the fair value of the interest rate swap in the
amount of $84,000 is included in accrued expenses and other liabilities.

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

(9) LEASES

We have non-cancelable operating leases, primarily for office space and
office equipment, that expire through fiscal 2008. Total rent expense for
operating leases was $1.5 million, $5.0 million and $5.3 million in 2002, 2003
and 2004, respectively.

Amortization expense associated with assets acquired under capital leases
is included in total depreciation and amortization expense.

The following is a schedule, by year, of the future minimum payments, in
thousands, under operating leases as of March 31, 2004.

Fiscal Year:
2005...................................................... $ 4,282
2006...................................................... 4,050
2007...................................................... 2,139
2008...................................................... 881
2009...................................................... 427
Thereafter................................................ --
-------
Total minimum lease payments................................ $11,779
=======

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TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) INCOME TAXES

Income tax expense consists of the following:

Income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in 2002 and 2003 and 35% in 2004 to earnings from
continuing operations before income tax expense as a result of the following:

61

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31,
2003 and 2004 are presented below:

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.

(11) RESTRUCTURING AND OTHER CHARGE

During the second quarter of fiscal year 2002, 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 consolidated statement of earnings for the 2002 fiscal year.
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 revenues on the consolidated statement of earnings for the
2002 fiscal year. There are no remaining liabilities at March 31, 2004 related
to the reorganization.

62

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) SHAREHOLDERS' EQUITY

TALX has adopted a stock option plan for employees that provides for the
issuance of a maximum of 3,049,200 shares of common stock pursuant to incentive
or non-qualified options. Options are granted by the Board of Directors at
prices not less than fair market value as of the date of the grant. Options vest
20% per year and expire six to ten years after the date of the grant.

TALX has adopted a stock option plan for outside Directors that provides
for the issuance of a maximum of 145,200 shares of common stock. Options are
granted in the amount of 2,500 shares each to outside Directors at prices not
less than fair market value as of the date of the grant, which is April 1 of
each year. The options vest one year from the date of grant. Options outstanding
amount to 53,676 and 66,176 at March 31, 2003 and 2004, respectively.

Activity under the plans for the three years ended March 31, 2004 is as
follows:

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TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In May 1999, we entered into an agreement with a third party, under which
they provided us with strategic advisory services, including in connection with
our acquisition of Ti3. Pursuant to that agreement, we issued them warrants to
purchase a total of 45,375 shares of our common stock at an exercise price of
$4.82 per share. All 45,375 warrants are outstanding and exercisable at March
31, 2004.

During fiscal 1997, shareholders approved the TALX Corporation 1996
Employee Stock Purchase Plan (ESPP), which was amended in 1998 and 2000 and
amended and restated in 2001. The ESPP allows eligible employees the right to
purchase common stock on a quarterly basis at the lower of 85% of the market
price at the beginning or end of each three-month offering period. Of the
907,500 shares of common stock shares reserved for the ESPP, there were 405,425
shares remaining at March 31, 2004.

On September 5, 2002, our Board of Directors authorized us to repurchase up
to 1,000,000 shares of our stock in the open market, or through privately
negotiated transactions during the 36 month period ending September 30, 2005,
subject to market conditions and other factors. Under this plan, we repurchased
131,211 shares during the year ended March 31, 2004. Cumulative shares
repurchased under this plan amount to 306,211. Except for the 301,041 shares
remaining in the treasury at March 31, 2004, all shares repurchased have been
reissued in connection with employee stock option exercises and employee stock
purchase plan purchases.

During fiscal 2001, we began paying dividends on our common stock on a
quarterly basis. Dividends of $0.12, $0.13 and $0.19 per share were declared and
dividends of $0.12, $0.12 and $0.18 per share were paid to shareholders during
fiscal years 2002, 2003 and 2004, respectively. Any future determination to pay
dividends will be at the discretion of our Board of Directors and will depend
upon our earnings, capital requirements and operating and financial condition
and such other factors as the board may deem relevant.

(13) EARNINGS PER SHARE

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings 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 per share. The weighted average number of shares is based on common
stock outstanding for basic

64

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings per share and common stock outstanding and common stock options and
warrants for diluted earnings per share in periods when such common stock
options and warrants are not antidilutive. As of March 31, 2003 and 2004, stock
options to purchase 865,877 and 315,091 shares, respectively, were not dilutive
and, therefore, were not included in the computations of diluted earnings per
share amounts.

65

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) DISCONTINUED OPERATIONS

On April 21, 2003, the Board of Directors granted management the authority
to dispose of the Human Resources and Benefits Application Services business.
Accordingly, it was determined that this business met the requirements to be
presented as a discontinued operation.

On April 22, 2003 we transferred substantially all of the assets of our
Human Resources and Benefits Application Services business to Workscape, Inc., a
Framingham, Massachusetts-based provider of benefits and workforce management
solutions. The primary product of this line of services, the benefits enrollment
business, provides a customized solution for clients' employees to enroll in an
employer's benefits programs and make changes to their personal information and
benefits elections, all by means of the Internet or by telephone. Workscape,
Inc. hired all of the employees directly related to the benefits enrollment
business.

The transaction was structured as a transfer of assets under contract for
sale with no initial down-payment and the purchase price to be paid over a
three-year period, based on a client retention formula. Proceeds are anticipated
to be between $2.0 million and $6.0 million. While the contract did not specify
a minimum guaranteed amount, we secured a $2.0 million note from Workscape, Inc.
and as of June 1, 2004 we had received $1.0 million of principal and $98,000 of
interest payments in connection with the note.

All assets and liabilities of this business, both the portion of the
business transferred under contract to Workscape, Inc. (approximately 90% of the
assets) and the portion that has not yet been sold, along with related
transaction costs, were recorded on our consolidated balance sheet as net assets
of business held for sale. We recorded cash received under the asset purchase
agreement first to reduce the recorded value of net assets of business held for
sale and then to reflect gain on the sale of the business.

In connection with the transfer, we are providing Workscape, Inc., for
agreed-upon fees, with various transition services related to the operation of
the benefits enrollment business until December 31, 2005, or until certain
transferred client contracts have expired or been terminated. These fees, offset
by costs to deliver the service, were recorded first to reduce the recorded
value of net assets of business held for sale and then to reflect gain on the
sale of the business.

The historical results of operations for this business have been
reclassified to earnings from discontinued operations on our consolidated
statement of earnings.

The results of operations for this business for the years ended March 31,
2002, 2003 and 2004 were as follows:

(15) EMPLOYEE BENEFIT PLAN

We sponsor a profit-sharing/401(k) plan. The plan covers substantially all
of our employees. Employees may contribute up to 50% of pre-tax compensation to
the plan. We make contributions to the plan, subject to ERISA limitations, up to
2.4% of employees' earnings. There is a three-year graded vesting schedule for

66

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employer matching contributions. Participants direct the investment of both
employee deferral and employer matching contributions among a variety of
investment choices. The plan does not hold company stock. Total expense under
the plan for the years ended March 31, 2002, 2003 and 2004 was $322,000,
$762,000 and $831,000, respectively.

(16) COMMITMENTS AND CONTINGENCIES

We are a defendant from time to time in lawsuits. 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 our 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 our 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 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. On or about April 14, 2002, a Consolidated Complaint was
filed. 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 Complaint 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, we 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 District Court issued a Memorandum and Order on March
31, 2003 granting in part and denying in part the motion to dismiss. The Court's
Order dismissed the plaintiffs' claims under Section 10(b) and 20(a) of the
Exchange Act of 1934. The plaintiffs were granted leave to file an amended
Consolidated Complaint on or before May 30, 2003.

67

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On May 29, 2003, plaintiffs in the several pending securities lawsuits
filed an Amended Consolidated Complaint ("Amended Complaint"). The Amended
Complaint amends the original Complaint by adding allegations pertaining to our
December 2002 restatement of financials and expanding the Putative Class Period
to include all persons who purchased or otherwise acquired shares of our common
stock between April 25, 2001 and November 14, 2002 ("Amended Putative Class
Period"). The Amended Complaint alleges, among other things, that certain
statements in the registration statement and prospectus for our August 2001
secondary common stock offering, as well as other statements made by us and/or
the Individual Defendants during the Amended Putative Class Period, were
materially false and misleading because we capitalized instead of expensed $1.6
million related to a patent technology license agreement executed in March 2001;
expensed approximately $158,000 in bonus payments to executive officers in the
first quarter of fiscal 2002 instead of the fourth fiscal quarter of 2001;
improperly recognized revenue and expenses during the Amended Putative Class
Period; and miscalculated diluted earnings per share during the Amended Putative
Class Period. All of these matters were the subject of our 2002 restatement of
financials described in our Form 10-K/A for the year ended March 31, 2002. The
Amended Complaint also alleges, as did the original Complaint, that we did not
properly account for certain software and inventory, did not reflect certain
write-offs, and did not accurately disclose certain business prospects. The
Amended Complaint 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 July 30,
2003, the defendants filed a motion to dismiss the Amended Complaint. On
September 26, 2003, plaintiffs filed their opposition to the motion to dismiss.
On October 29, 2003, defendants filed their reply in support of the motion to
dismiss. The Court has not yet ruled on the motion.

On May 5, 2004 we reached an agreement with the plaintiffs to settle all
pending class action lawsuits. The settlement calls for payment of $5.75
million, which will be made by our insurance carriers and will not impact
earnings. There were, however, approximately $500,000 of additional legal costs
that were included in expenses for the fourth quarter of the fiscal year 2004.
As of the year ended March 31, 2004 we recorded a liability for $5.75 million in
accrued expenses and other liabilities representing the amount we owe under the
settlement agreement. Additionally, we recorded $5.75 million in prepaid
expenses and other current assets representing the amount we will receive from
our insurance companies. The agreement is subject to certain conditions,
including judicial approval, and a potential additional payment depending on the
amount of certain claims. We believe that any additional payment, if required,
would not be material. However, our expectations are subject to the risks that
the court will not approve our class action settlement, that claimants request
exclusion from the settlement that hold a larger than anticipated number of
shares, or that the claims analysis on which we relied is inaccurate, and a
larger than expected number of claims is submitted which could require us to
make an additional payment. Due to the inherent uncertainties of litigation, we
cannot accurately predict the ultimate outcome of the litigation if the
settlement is not approved by the court. An unfavorable outcome could have a
material adverse impact on our business, financial condition and results of
operations.

As previously disclosed, the Securities and Exchange Commission initially
commenced an investigation into our second fiscal quarter 2001 financial
results. We are cooperating fully with the investigation. 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 (who has resigned from the Company) related to
two matters, and requesting that we and such executive officers submit responses
to the letter. 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 prior restatement, as disclosed in our Form 10-K/A for the year
ended March 31, 2002. We and the individuals have filed separate responses to
the Wells letter. Since the time of the

68

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Wells submissions, the Commission is continuing its investigation of our
accounting for certain items, including those which were the subject of the
restatements discussed below. The remedies the Commission may consider, if
appropriate, include an injunction against us and the individuals and an officer
and director bar and disgorgement and civil money penalties against us and/or
the individuals.

In the settlement of the civil suit referred to above, we released our
insurance providers from related claims against our applicable insurance
policies. Any fines or penalties assessed by the SEC against us, along with any
further defense costs incurred by us in connection with the SEC investigation,
either on our own behalf or as indemnification on behalf of William W. Canfield
or Craig N. Cohen, and any future related litigation will be borne by us and
will not be covered by insurance. In addition, to the extent that we are
required to indemnify Messrs. Canfield or Cohen against any fines or penalties
assessed against either of them, those amounts will be borne by us and not be
covered by insurance. The application of any of the foregoing remedies, or the
commencement of any regulatory proceeding or enforcement action, could harm our
business and financial condition.

As previously disclosed, we have filed restated financial statements for
the fiscal years ended March 31, 1999 through March 31, 2003 and for each of the
first two quarters of fiscal 2004. In December 2002, we filed restated financial
statements for each of the quarters ended June 30, 2000 through June 30, 2002
and for the fiscal years ended March 31, 2001 and 2002. As a result of this new
restatement, we could become subject to additional regulatory proceedings.

As required under our articles of incorporation, we are obligated to
indemnify and advance expenses of each of the Individual Defendants, as current
or former officers and/or directors of the Company to the fullest extent
permitted by Missouri law, in connection with the above matters, subject to
their obligations to repay amounts advanced under certain circumstances. Stifel,
Nicolaus & Company and A.G. Edwards & Sons, Inc. have made demands on the
Company to indemnify and advance expenses to them in connection with these
matters.

Regardless of the outcome of any litigation or regulatory proceeding,
litigation and regulatory proceedings of these types are expensive and, until
settled or otherwise resolved, will require that we devote substantial resources
and executive time to defend these proceedings.

In addition to matters set forth above, we are also party to other lawsuits
and claims that arise in the ordinary course of conducting our business. In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims will not have a material adverse
effect on our consolidated financial position or results of operations.

(17) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for interest totaled $0, $1.3 million and
$756,000 for the years ended March 31, 2002, 2003 and 2004, respectively. Cash
paid during the year for income taxes totaled $1.0 million, $2.5 million and
$4.7 million for the years ended March 31, 2002, 2003 and 2004, respectively.

(18) RELATED PARTY TRANSACTION

James W. Canfield, the son of our Chairman, President and Chief Executive
Officer, is employed in a non-executive position with our Company as the
Director of ePayroll business development. Mr. Canfield has a current annual
salary of $107,000 and is eligible for a bonus of approximately $32,000 based
upon certain performance goals. This bonus can decrease or increase based on the
percentage achievement of these performance goals. Mr. Canfield is also eligible
annually for an award of stock options. Both the bonus and stock option awards
are granted under standard corporate compensation plans and are consistent with
payments made to directors at Mr. Canfield's level. For fiscal 2004, Mr.
Canfield received $95,400 in salary,

69

TALX CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$5,580 in bonus and 2,000 stock options for his services to the Company.
Additionally, during fiscal year 2004, Mr. Canfield was awarded 5,000 stock
options for fiscal year 2005.

(19) SUBSEQUENT EVENT

Pursuant to an asset purchase agreement dated as of March 22, 2004, with an
effective date of April 1, 2004, we acquired substantially all of the assets and
assumed certain of the liabilities of the unemployment compensation, employment
verification and pre-applicant screening businesses (collectively, the
"Business") of Sheakley-Uniservice, Inc. and its wholly owned subsidiary,
Sheakley Interactive Services, LLC, for approximately $40 million, including
transaction costs, subject to certain post-closing adjustments. The purchase
price was determined based on arms'-length negotiations, and was paid in cash,
which was financed, as discussed above in Note 7. On March 31, 2004, we borrowed
$50.0 million under Term Loan A to fund our restricted cash position to pay the
purchase price for the acquisition and to refinance the outstanding balance of
our previous credit facility. Of the purchase price, $38.6 million is reflected
on our consolidated balance sheet at March 31, 2004 as restricted cash to fund
the acquisition with an effective date of April 1, 2004.

The purchase of the Business was not consummated until April 1, 2004. On
March 31, 2004, our cash balances included $38.6 million proceeds from the
borrowings on Term Loan A. There are certain restrictions on the use of our
borrowings under Term Loan A, including the use of such borrowings to purchase
the Business. Accordingly, the $38.6 million cash from Term Loan A has been
presented in our consolidated balance sheet at March 31, 2004 as restricted
cash.

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed for the acquired Business as of April 1, 2004,
the effective date of the acquisition. We are currently in the process of
obtaining third-party valuations of certain intangible assets; thus, the
following allocations of purchase price are preliminary.

The asset purchase agreement provides for indemnification of the Company by
Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC for certain
pre-closing liabilities and obligations of the business, subject to certain
limitations. An escrow account, maintained by LaSalle Bank National Association
pursuant to the terms of an escrow agreement, is also available until March 31,
2005 to satisfy the indemnification obligations of Sheakley-Uniservice, Inc. and
Sheakley Interactive Services, LLC under the asset purchase agreement, subject
to certain limitations described in the asset purchase agreement. Of the
purchase price, $1.0 million dollars was paid into the escrow account.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Business purchased provides unemployment cost management services,
employment verification services and pre-applicant screening services to a broad
customer base. This business will continue to operate through our wholly-owned
subsidiary, TALX Employer Services, LLC.

In connection with the asset purchase agreement, the parties executed a
transition services agreement under which Sheakley-Uniservice, Inc. will provide
certain services to us for up to two years. The services are intended to provide
for the orderly transition of the Business and the employees of such Business
from Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC to us.

(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly data is set forth in the following tables.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management, including
our Chairman, President and Chief Executive Officer and our Chief Financial
Officer and Assistant Secretary, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures with respect to the
information generated for use in this Annual Report. Based upon, and as of the
date of that evaluation, the Chairman, President and Chief Executive Officer and
the Chief Financial Officer and Assistant Secretary concluded that the
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports we file or
submit 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.

Except as described below, there was no change in our internal control over
financial reporting during the fourth fiscal quarter for the fiscal year ended
March 31, 2004, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

It should be noted that while our management, including the Chairman,
President and Chief Executive Officer and the Chief Financial Officer and
Assistant Secretary, believe our disclosure controls and procedures provide a
reasonable level of assurance, they do not expect that our 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.

In January 2004, we announced that we were restating certain historical
financial statements as a result of adjustments related to our customer premises
systems business. The restatement was necessary because a recent internal
accounting review showed that certain revenues for customer premises systems
contracts were recorded earlier than was appropriate under the percentage of
completion methodology used for this line of business. Although we ultimately
realized the revenues from the transactions under review, our financial results
were not accurately presented, requiring the restatement. The resulting
restatement affected fiscal years ended March 31, 1999 through 2003 and the
first two quarters of fiscal 2004.

Additionally, we corrected three errors related to bill and hold
arrangements on hardware and software transactions arising out of the customer
premises systems line of business during the fiscal years ended March 31, 2000
and 2001. The impact of these corrections resulted in revenues and related costs
during fiscal 2000 and 2001 being recognized in different quarters than
originally reported. However, such adjustments had no impact on the fiscal 2000
or 2001 results.

Our review focused on contracts in which revenue was realized in fiscal
2000 and subsequent periods as reliable historical data was not available for
earlier periods. Accordingly, our review included contracts for which services
were initiated in periods prior to fiscal 2000. The review of certain contracts
resulted in cumulative adjustments for periods prior to fiscal 2000 which have
been attributed to fiscal 1999, the earliest fiscal period presented for
financial disclosure purposes. While it is possible that certain of these
adjustments

72

related to periods prior to fiscal 1999, data was not available to accurately
support the specific allocation to such prior periods. Such data was not
available as we had modified our systems during fiscal 1999 and have not
retained sufficient comparable data for contracts entered into prior to the
modification. While further review may have resulted in adjustments to increase
revenue in 2000 by decreasing revenues in prior periods, based on the review
performed, management believes that further adjustments were not supportable.

In addition, we announced the resignation of Executive Vice President Craig
N. Cohen. Mr. Cohen had previously served as chief financial officer from
January 1994 to May 2003 and as vice president of application services and
software from May 1999 to May 2003.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and executive officers of the Company is
contained under the caption "Nominees and Continuing Directors," the first
sentence and the last sentence under the caption "Committees and Meetings of the
Board of Directors -- Audit Committee," and the information under the captions
"Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance"
and "Code of Business Ethics" included in the Proxy Statement for the 2004
Annual Meeting of Shareholders, which information is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is contained under the caption
"Executive Compensation," "Compensation Committee Interlocks and Insider
Participation," "Equity Compensation Plan Information," "Shareholder Approved
Equity Compensation," "Non-Shareholder Approved Equity Compensation,"
"Employment and Severance Agreements" and "Director Compensation" included in
the Proxy Statement for the 2004 Annual Meeting of Shareholders, which is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and
management and related stockholder matters is contained under the captions
"Equity Compensation Plan Information," "Shareholder Approved Equity
Compensation," "Non-shareholder Approved Equity Compensation," "Common Stock
Ownership of Directors, Nominees and Officers," and "Common Stock Ownership of
Certain Beneficial Owners" included in the Proxy Statement for the 2004 Annual
Meeting of Shareholders, which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
contained under the caption "Certain Relationships and Related Party
Transactions" included in the Proxy Statement for the 2004 Annual Meeting of
Shareholders, which is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information regarding principal accounting fees and services is contained
under the caption "II. Ratification of Independent Auditors" included in the
Proxy Statement for the 2004 Annual Meeting of Shareholders, which is
incorporated herein by reference.

73

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements
See "Item 8 -- Index to Consolidated Financial Statements"

(2) Financial Statement Schedules
None; such schedules have been omitted because of the absence of
conditions under which they are required or because the information is
included in the financial statements or notes thereto.

(3) Exhibits
See Exhibit Index for the exhibits filed as part of or incorporated by
reference into this report.

We agree to furnish to the Securities and Exchange Commission a copy
of any long-term debt instruments for which the total amount of securities
authorized thereunder does not exceed 10% of the total assets of us and our
subsidiaries on a consolidated basis.

(b) Reports on Form 8-K

Current Report on Form 8-K furnished by the Company on January 5, 2004,
furnishing a press release issued by the Company to announce the Company's
restated results for the fiscal years ended March 31, 1999 through 2003 and the
first two quarters of fiscal 2004; the resignation of Executive Vice President
Craig N. Cohen; and updated financial guidance for fiscal 2004.

Current Report on Form 8-K filed by the Company on January 30, 2004,
furnishing a press release issued by the Company to announce third quarter
results.

Current Report on Form 8-K filed by the Company on March 24, 2004,
furnishing a press release issued by the Company to announce that it had
executed a definitive agreement to purchase substantially all of the assets of
the unemployment cost management and employment verification businesses of
Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC.

Current Report on Form 8-K filed by the Company on April 1, 2004,
furnishing a press release issued by the Company to announce that it had
completed the previously announced acquisition of substantially all of the
assets of the unemployment cost management and employment verification
businesses of Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC.

Current Report on Form 8-K filed by the Company on April 15, 2004,
disclosing the terms of the Company's acquisition of substantially all of the
assets of the unemployment cost management and employment verification
businesses of Sheakley-Uniservice, Inc. and Sheakley Interactive Services, LLC
and the amended and restated loan agreement.

Current Report on Form 8-K filed by the Company on May 13, 2004, furnishing
a press release issued by the Company to announce the Company's financial
results for the three months and fiscal year ending March 31, 2004.

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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

By: /s/ WILLIAM W. CANFIELD
------------------------------------
William W. Canfield
Chairman, President and Chief
Executive Officer (Principal
Executive Officer)

June 4, 2004

By: /s/ L. KEITH GRAVES
------------------------------------
L. Keith Graves
Chief Financial Officer and
Assistant Secretary (Principal
Financial and Accounting Officer)

June 4, 2004

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:

75

EXHIBIT INDEX

- ---------------

+ TALX Corporation undertakes to furnish supplementally a copy of any schedule
to the Securities Exchange Commission upon request.

++ Represents management contract or compensatory plan or arrangement.

* Certain portions of this agreement have been omitted pursuant to a
confidential treatment request and filed separately with the Securities and
Exchange Commission.