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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------

                                   FORM 10-K

                            ------------------------
(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934
 
                 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1996
 
                                       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: 0-20735
 
                                 RESTRAC, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                    DELAWARE                                            04-2935271
         (STATE OR OTHER JURISDICTION OF                     (IRS EMPLOYER IDENTIFICATION NO.)
         INCORPORATION OR ORGANIZATION)

                 3 ALLIED DRIVE
                   DEDHAM, MA                                              02026
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                            (ZIP CODE)

</TABLE>
                                 (617) 320-5600
                        (REGISTRANT'S TELEPHONE NUMBER)
 
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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 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 the 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.[X]
 
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on November 15,
1996 , as reported on NASDAQ National Market System was approximately
$26,100,000. Shares of Common Stock held by each executive officer and director
and by each person who owned 5% or more of the outstanding Common Stock as of
such date have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes .
 
The number of shares of the registrant's $0.01 par value Common Stock
outstanding on December 19, 1996, was 7,894,936.
 
Part III incorporates by reference from the definitive proxy statement for the
registrant's fiscal 1996 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
 
This report consists of 30 sequentially numbered pages, with the Index to
Exhibits commencing on page 28 and the Index to Consolidated Financial
Statements commencing on page F-1.
 
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                                 RESTRAC, INC.
 
                                   FORM 10-K
 
                               TABLE OF CONTENTS
 
                                     PART I
 
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ITEM                                                                                       PAGE
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   1.  Business.........................................................................     2
   2.  Properties.......................................................................    15
   3.  Legal Proceedings................................................................    15
   4.  Submission of Matters to a Vote of Securities Holders............................    15

                                            PART II
   5.  Market for Registrant's Common Stock and Related Stockholder Matters.............    16
   6.  Selected Consolidated Financial Data.............................................    17
   7.  Management's Discussion and Analysis of Financial Condition and Results of
       Operations.......................................................................    18
   8.  Financial Statements and Supplementary Data......................................    25
   9.  Changes in and Disagreements with Accountants on Accounting and Financial
       Disclosure.......................................................................    25

                                           PART III
  10.  Directors and Executive Officers of the Registrant...............................    26
  11.  Executive Compensation...........................................................    26
  12.  Security Ownership of Certain Beneficial Owners and Management...................    26
  13.  Certain Relationships and Related Transactions...................................    26

                                            PART IV
  14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................    27
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                                     PART I
 
STATEMENTS MADE OR INCORPORATED IN THIS FORM 10-K INCLUDE A NUMBER OF
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. FORWARD
LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS
"ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE", AND WORDS OF SIMILAR
IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING
THE COMPANY'S FUTURE PERFORMANCE. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED
"FACTORS AFFECTING FUTURE OPERATING RESULTS" ON PAGE 24 OF THIS FORM 10-K.
 
ITEM 1.  BUSINESS
 
OVERVIEW
 
     Restrac, Inc. ("the Company"), designs, develops, markets, implements and
supports HR staffing software to automate the recruitment, selection and
placement of an organization's workforce. The Company's staffing software
enables organizations to strategically manage their human capital by reducing
hiring and placement costs, decreasing time to fill positions and providing more
effective skills management and worker deployment. The Company's
products -- Restrac Hire and Resume Reader for PeopleSoft -- provide HR
departments with client/server solutions to quickly and efficiently build and
search comprehensive "pools" of resume skills data to find the workers they
need, while also managing the workflow of the staffing process.
 
     The Company's current software offerings are open, client/server
applications that utilize standard industry communications protocols, such as
TCP/IP, allowing for high performance, scaleable implementations across local
area networks, wide area networks, the Internet and intranets. The Company's
software supports industry standards, such as Microsoft Windows and most leading
relational databases (including Oracle, Microsoft SQLServer and Sybase), server
platforms (including Windows NT and many UNIX variants), e-mail systems
(including Microsoft Mail and Lotus cc:Mail) and desktop productivity tools
(including Lotus Notes and Microsoft Word). This open architecture has
facilitated integration with other systems providing customers with integrated,
multi-vendor solutions to meet their specific needs.
 
     Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to approximately 220
customers. Approximately 200 other organizations continue to use the Company's
earlier DOS-based recruiting and succession planning products. Within these
organizations, there are over 4,500 licensed users of the Company's products.
The Company's products are primarily licensed by large corporate employers
experiencing accelerated growth, significant reorganization or downsizing or a
scarcity of skilled labor, or by companies reengineering their HR function to
reduce costs. Due to its flexible skills management and search capabilities, the
Company's software is also licensed by consulting firms and providers of
full-time, contract or temporary labor. Twenty-eight of the 50 most profitable
U.S. companies cited in Fortune magazine's 1996 "Fortune 1000" report use the
Company's software. The Company's customer base includes Hewlett-Packard
Company, American Express, British Telecom, AT&T, Intel Corporation, Johnson &
Johnson and Levi Strauss & Co.
 
     The Company was incorporated in 1982 as a Massachusetts corporation and was
reincorporated as a Delaware corporation in 1994. Restrac Securities
Corporation, a wholly-owned subsidiary of Restrac, Inc., was incorporated in
September 1996 as a Massachusetts securities corporation for the purpose of
holding and managing certain of the Company's cash and cash equivalents.
 
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INDUSTRY BACKGROUND
 
     The management of human capital is increasingly being viewed as a business
imperative and has emerged in recent years as a key element of corporate
strategy. Recruiting and deploying the most qualified employees is now being
recognized as critical to an organization's long-term success. In addition,
intensifying global competition, shortened product lifecycles and the need to
improve operating efficiencies have caused organizations to search for more
efficient ways to employ and deploy a more dynamic and skilled workforce. As a
result, HR departments have come under pressure to improve the quality of the
candidates they hire, to shorten the time to fill open positions and to reduce
the costs associated with staffing.
 
     Historically, the recruitment, hiring and deployment of an organization's
workforce has been an inefficient, expensive and time-consuming process.
Industry sources estimate that the average cost to hire a salaried exempt
employee from outside the company in 1994 was $8,566 and ranged as high as
$15,766 in skilled industries such as electronics. In recent years, the average
company hired approximately 14% of its workforce externally and redeployed
approximately 7% of its internal workforce annually. The complexities and
inefficiencies inherent in the hiring process have resulted in a plethora of
recruiting and employment agencies charging fees representing as much as 30% of
an employee's starting annual salary, contributing to the hiring costs described
above. Despite the widespread use of such agencies, in 1994, companies took an
average of 41 days to hire an employee. The inefficiencies and costs associated
with the hiring process are particularly acute problems for large organizations
with 1,000 or more employees, of which there are estimated to be more than
15,000 in the United States.
 
     These costs and inefficiencies are due in large part to the difficulty that
organizations have in managing data on workers' skills and to a complex staffing
process which typically involves significant data collection, numerous manual
functions and the coordination of activities among many participants both within
and outside the organization. Organizations need to collect and manage extensive
skills data on their own employees as well as an even larger applicant pool in
order to manage hiring, redeployment, attrition, turnover and growth.
Historically, organizations seeking to fill a position would receive numerous
applications and resumes that were, once the position had been filled, either
discarded or stored in a manner that did not allow the organization to
effectively access and search this data when it sought to fill additional
positions in the future.
 
     The typical staffing process is initiated by a hiring manager who fills out
a job requisition form to define the job's skill requirements, duties, pay and
other parameters. Copies of the requisition are routed to finance and accounting
and a compensation specialist for budget and salary approvals. An internal
recruiter then generates applicants through job advertising, requiring the
coordination of recruitment advertising firms, employment agencies, outplacement
companies and college placement offices. Recruiters must read and categorize
incoming resumes and, with the aid of administrators, copy, file and distribute
the appropriate resumes to managers. Follow-up letters are typically sent to
applicants. Recruiters and administrators then coordinate and track the
selection process with the applicants, hiring manager and an interviewing team.
This process typically requires the completion of multiple forms for interview
scheduling, skills assessment and feedback, reference checking, testing, equal
opportunity compliance and job offers and may involve the coordination of
outside suppliers for credit checking, testing and assessment and relocation.
Each division within an organization may have its own staffing process,
resulting in further inefficiencies and complicating the creation of
consolidated governmental compliance and management reports.
 
     In order to address the challenges of hiring and deploying workers, HR
departments have begun to automate the staffing process. Until recently, the
only staffing software applications available were applicant tracking systems,
which were primarily designed to perform record-keeping functions and did not
offer automated workflow or resume searching capabilities. These applicant
tracking applications traditionally operated on centralized mainframe or
mini-computer systems, although such applications today are also being deployed
with client/server-based human resource
 
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information systems. These applications, however, are ill-suited for capturing
and managing the vast amount, variety and diverse formatting of skills,
experience and education information supplied by candidates. Coding this
information is generally a manual process which is cumbersome, time-consuming
and costly. Moreover, because the candidate information is recorded in an
oversimplified format, searches of this information typically yield poor
results. A more effective solution would allow organizations to easily collect
and manage large amounts of unstructured skills and experience data on both job
candidates and their current workforce and perform sophisticated structured
searches on this data to select the best candidates.
 
     The development of distributed client/server computing and enabling
technologies such as document scanning, optical character recognition (OCR) and
concept-based text searching have created a technological framework for the
efficient collection of staffing information and its dissemination among
recruiters, managers and, with the emergence of the Internet, other members of
the extended enterprise. Client/server technology not only permits any member of
the organization to effectively collect information relating to a particular
job, applicant or employee, but also gives other members of the organization in
geographically dispersed locations rapid access to that information and enables
them to participate in the hiring process. In addition, the proliferation of
Internet career sites is a dramatic recent development which creates a
significant new forum for the exchange of candidate and job information. These
new technologies, together with the increased emphasis on the strategic
management of human capital, have created a demand for a new generation of human
resource staffing systems.
 
THE RESTRAC SOLUTION
 
     The Company's staffing software enables organizations to strategically
manage their human capital by reducing hiring and placement costs, decreasing
time to fill positions and providing more effective skills management and worker
deployment. The Company's software provides HR departments with client/server
solutions to quickly and efficiently build and search comprehensive electronic
pools of resume skills data to find the workers they need, while also managing
the workflow of the staffing process. Key attributes of the Restrac solution are
as follows:
 
     Sophisticated Skills Management and Selection.  The Company's software uses
a sophisticated search process to rapidly identify and rank qualified candidates
based on skills criteria determined by the user. User searches are enhanced by
the Company's integrated skills library, which translates high-level job
requirements into the words and synonyms commonly used by candidates on resumes.
These same capabilities facilitate the quick and efficient management and
redeployment of an organization's existing workforce in response to job
openings, downsizings and restructurings.
 
     More Efficient Staffing Process.  The Company's software incorporates a
user-friendly, process-oriented GUI and is designed to reduce the time required
to fill positions by prompting users to advance candidates through the staffing
process. Such automatic workflow notifications reduce delays typical to the
staffing process and eliminate redundancies. The Company's software also
integrates with e-mail and interactive voice response technologies to facilitate
access to and participation in the staffing process. The Company's software can
be easily adapted by the customer to its own staffing requirements without
extensive customization. In addition, the Company's software eliminates the time
and expense associated with maintaining multiple parallel databases to track
different aspects of the staffing process.
 
     Comprehensive, Reusable Candidate Pools.  The Company's software uses
resume scanning and integrated e-mail input from intranets or the Internet to
create consolidated, reusable candidate pools that can be shared throughout the
organization. Manual input is virtually eliminated, allowing organizations to
collect and store skills and experience data on hundreds of thousands of
candidates. The Company's software is designed to provide a shared, re-useable
pool of candi-
 
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dates, limiting the need for organizations to use employment agencies and
advertising to source candidates.
 
     Open, Rapidly Deployable and Scaleable Technology.  The Company's software
is based on an open, client/server architecture that supports industry
standards, such as Microsoft Windows and most leading relational databases,
server platforms, e-mail systems and desktop productivity tools. The customer's
implementation cycle, including hardware implementation and basic process
reengineering, is typically less than three months. The Company's software is
scaleable from the departmental level to multi-site, enterprise-wide
implementations and is designed to easily incorporate new technologies as they
become available.
 
     Reduced Costs.  By providing an easily-accessible, shared, re-useable pool
of candidates, the Company's software allows organizations to significantly
reduce recruitment advertising costs and employment agency fees. In addition,
the Company's software is designed to reduce HR headcount and increase recruiter
productivity through the elimination of manual entry of resume information and
by increasing the efficiency of the hiring process.
 
STRATEGY
 
     The Company's objective is to become the leading provider of human resource
staffing software. To achieve this objective, the Company has adopted the
following strategies:
 
     Expand Presence in Principal Markets.  The Company's Restrac Hire product
has achieved a leading market position among large organizations (1,000+
employees), which are estimated to represent over 15,000 companies in the United
States alone. The Company believes that only a small portion of such large
organizations currently use automated staffing software, and the Company plans
to expand its established market position among such organizations by leveraging
its existing customer base and expanding its sales and marketing efforts.
 
     Offer Self-Service Solutions.  The Company's software is currently used
primarily by HR departments. In response to the increasing dispersion of the
staffing process outside of HR departments, the Company intends to enhance its
software to allow line managers, employees and job candidates to directly access
staffing information. Such self-service solutions should significantly expand
the Company's potential user-base while further reducing the administrative
demand on HR departments.
 
     Expand Markets to Include Smaller Organizations.  The Company intends to
expand the markets for its software to smaller organizations with 100 to 1,000
employees (of which there are estimated to be over 100,000 in the United States)
by adapting its current products and by offering customers access to staffing
solutions on a transaction-fee basis. Such offerings should allow smaller
organizations to take advantage of the Company's technologies without the
associated infrastructure investment necessary to support a client/server
application.
 
     Pursue Internet Opportunities.  The Company believes that the emergence of
the Internet creates opportunities to streamline the connection between job
seekers and employers. By enabling a new, more efficient channel of
communication, the Internet can allow information about jobs to be more widely
distributed and permit easy, on-line application by job seekers. The Company
believes that its high-volume, unstructured search technologies and the
utilization of TCP/IP, the Internet communications protocol, in its software
should facilitate the Company's development of staffing solutions which are
accessible across intranets and over the Internet. The Company has enhanced its
software to allow users to directly post jobs and receive applications via
Internet career sites. In conjunction with the development of this enhancement,
the Company has entered into strategic relationships with Career Mosaic, The
Monster Board, IntelliMatch, Inc., CareerWEB, Adams JobBank, E-Span, 4Work,
Inc., and the Online Career Center, and intends to enter into similar
arrangements with other career sites. In addition, the Company is currently
exploring other strategies to capitalize on opportunities offered by the
Internet.
 
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     Leverage Strategic Relationships.  The Company has established a number of
relationships both to leverage marketing channels and complementary technologies
and to meet customer demands for open, integrated, multi-vendor solutions. The
Company's partners include leading technology vendors such as Verity, Inc.
which, as part of an OEM relationship, provides its text search software for
integration with the Company's internally-developed skills library. The Company
also has a relationship with PeopleSoft, a leading HR management system vendor,
under which PeopleSoft jointly markets the Company's Resume Reader for
PeopleSoft product as an integrated solution with its HRMS product. The Company
believes that its strategic relationships allow it to bring products to market
more quickly and enhance its image as a provider of industry standard automated
staffing products. The Company intends to continue to pursue the establishment
of such relationships to take advantage of emerging technologies and marketing
opportunities.
 
     Develop International Presence.  The Company believes that the growing
globalization of the workforce combined with the increasing standardization of
regulations across the European Community will provide it with significant
opportunities to continue its international expansion. The Company markets its
software in Canada and the United Kingdom. In addition, the Company has
developed a localized version of its software specifically for the United
Kingdom and intends to develop additional localized versions to accommodate
different business practices and foreign languages.
 
PRODUCTS
 
     The Company's principal products are Restrac Hire and Resume Reader for
PeopleSoft, which is sold in conjunction with PeopleSoft's HRMS product.
 
     RESTRAC HIRE
 
     The Company's primary product, Restrac Hire, automates the applicant
sourcing and selection functions in the staffing process and supports industry
standards such as Microsoft Windows and most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase), server platforms (including
Windows NT and many UNIX variants), e-mail systems (including Microsoft's Mail
and Lotus cc:Mail) and desktop productivity tools (including Lotus Notes and
Microsoft Word). System prices vary based on a customer's configuration and
range from approximately $60,000 to $1 million. Implementation services, which
are not included in the license fee, generally amount to an additional 25% of
the license fee. Maintenance for the first year is included in the license fee
and is renewable on an annual basis thereafter, at approximately 15% of the
license fee.
 
     Restrac Hire is comprised of three bundled functional modules: Skill
Server, Candidate Finder and Recruiting Workbench.
 
     Skill Server.  The Company's Skill Server module automates the collection
of worker skills data by integrating scanning and OCR technologies for the
processing of paper or faxed resumes. Using Skill Server, electronic resumes can
also be received and input through e-mail, commonly available World-Wide Web
("Web") browsers and PC-based kiosk stations. Skill Server retains an electronic
image of the original resume as well as a text file which is made available for
searching the candidate pool. Managers can conduct a comprehensive search of
this candidate pool by using Candidate Finder before seeking candidates from
external sources.
 
     Candidate Finder.  The Company's Candidate Finder module provides users
with a search capability to rapidly identify and rank qualified job candidates
based upon skills criteria determined by the user, using the Company's extensive
skills library and Verity's text search software. Candidate Finder presents
users with an intuitive, flexible GUI for defining job requirements by clicking
on relevant skills from the Company's extensive skills library and reviewing
selected candidates' resumes and skills. Once a candidate is selected, Candidate
Finder automatically initiates the staffing process in the Recruiting Workbench
module.
 
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     Recruiting Workbench.  The Company's Recruiting Workbench, which provides
database management and workflow functionality, automates the staffing process,
including: requisition management for job openings, job advertising, candidate
screening, interview scheduling, reference checking, correspondence, cost
tracking and government compliance reporting. Recruiting Workbench is designed
to guide users through each step in the staffing process. Activity history,
current status and pending actions are displayed for each candidate. Integrated
business rules and workflow processes help prevent common errors and delays
which can often result in poor selection results and extended placement times.
Recruiting Workbench also contains a report writer which allows users to
generate management reports, including standard reports used to benchmark
effectiveness or demonstrate compliance with Equal Employment Opportunity (EEO)
requirements.
 
     RESUME READER FOR PEOPLESOFT
 
     The Company's open architecture, which accommodates integration with other
HR software solutions, has allowed the Company to create a plug-in product that
offers high volume resume-scanning, skills management and search capabilities to
users of PeopleSoft's HRMS product. Resume Reader for PeopleSoft incorporates
the Skill Server and Candidate Finder modules of Restrac Hire.
 
CUSTOMER SERVICES
 
     The Company believes that superior customer service and support are
critical to customer satisfaction. As of September 30, 1996, the Company's
customer service organization was led by a Vice President and included 55 total
people who were assigned to one of four groups -- Account Management,
Professional Services, Technical Support and Outsourced Services -- as well as
administrative support personnel.
 
     Account Management.  As of September 30, 1996, the Company had 7 Account
Managers who were responsible for coordinating the corporate resources necessary
to ensure customer satisfaction. An Account Manager is assigned to each new
Restrac customer and oversees all aspects of the customer relationship. The
Company believes that its Account Manager program has helped it establish a high
degree of customer satisfaction.
 
     Professional Services.  The Professional Services Group, which was
comprised of 32 people as of September 30, 1996, manages system implementation,
provides additional services such as process design and system tailoring and
provides basic and advanced training both on-site during system implementation
and at the Company's Corporate Training Center throughout the year. In order to
ensure an effective and timely implementation, the implementation process is
coordinated by a Restrac project manager. The customer's implementation cycle is
typically less than three months, including hardware implementation and basic
process reengineering.
 
     Technical Support.  The Technical Support Group, which was comprised of 12
people as of September 30, 1996, provides daily assistance to customers with
maintenance agreements through the Company's support help line. More than 95% of
customers who have purchased the Company's client/server, Windows-based products
since their introduction are currently under maintenance agreements. The Company
provides support Monday through Friday from 8:00 a.m.-8:30 p.m. Eastern Time as
well as 4:00 a.m.-8:00 a.m. Eastern Time to support the Company's European
customers.
 
     Outsourced Services.  Outsourced Services were introduced by the Company in
July 1996 and, to date, consist primarily of scanning services provided
principally through a partnership arrangement with ScanCenters of America. The
Company plans to extend these services to include correspondence and other
administrative tasks associated with the staffing process. Revenue associated
with Outsourced Services through September 30, 1996 was not material.
 
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TECHNOLOGY
 
     In 1993, the Company introduced Restrac Hire, the industry's first
Windows-based client/server staffing system. The Company's Restrac Hire software
is based on the Company's unique client/server development platform, which can
accommodate changing customer needs and technical infrastructure, simplify the
deployment of the Company's client/server software, and enable the rapid
integration of leading edge technologies and other innovations. Key aspects of
the Company's development platform are as follows:
 
     Development Toolset.  The Company's development platform includes a unique
application toolset which allows it to create and change its interfaces through
high level "screen painting" rather than low level programming. This toolset
also accommodates the creation and editing of business and workflow rules.
Applications developed with the Company's toolset inherit its full
functionality, including features critical to sophisticated, mission-critical,
enterprise-wide applications. The Company also includes in its software a
scaled-down version of the Company's application development tool, which allows
customers to make interface changes to accommodate their specific staffing
processes without compromising the integrity of the system.
 
     Data Model.  The Company's software includes an open, flexible and
extensible model for enterprise staffing that can operate in multiple standard
SQL databases. The model incorporates the Company's expertise in staffing
process modeling and allows for effective workflow and third-party integration.
 
     Centralized Administration and Security.  The Company's development
platform includes functionality for application deployment and version control,
reducing costs through centralized management by allowing the application to be
configured and updated automatically from a central location. The Company's
products also include security features to control user access. Access to
information and functionality is configured based on the user's login, allowing
users to access their recruiting desktop from anywhere in the system and further
securing against unauthorized access.
 
     Support for Heterogeneous Computing Environments.  The Company's
development platform is designed to enable applications developed on the
platform to operate in diverse computing environments. The platform supports
Microsoft Windows on the client as well as most leading relational databases
(including Oracle, Microsoft SQLServer and Sybase) and server platforms
(including Windows NT and many UNIX variants). The Company's products use the
industry-standard TCP/IP protocol, which allows the Company to develop
applications which operate over local area networks, wide area networks,
intranets and the Internet.
 
     Advanced Technology Integration.  The Company has designed its development
platform to facilitate the integration of advanced technologies while insulating
the user from the complexities associated with multiple interfaces,
import/export utilities and switching between different applications. The
Company's products take advantage of Verity's text search software, TASC's
imaging technology and Caere's OCR technology.
 
PRODUCT DEVELOPMENT
 
     The Company believes that its future success will depend upon its ability
to enhance its existing software and develop and introduce new products and
functionalities which keep pace with rapid changes in the marketplace. The
Company has made increasing investments in its engineering and quality groups to
enhance product functionality, improve performance and expand the ability of its
software to interoperate with third-party software. Research and development
expenses totalled $2,341,000, $1,365,000, and $1,343,000, for fiscal years 1996,
1995, and 1994, respectively. While the Company expects that certain of its new
products and functionalities will be developed internally, the Company may,
based on timing and cost considerations, expand its product offerings through
acquisitions or strategic relationships. Software products as complex as those
currently under development by the Company are subject to frequent delays and
there can be no assurance that the
 
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Company will not encounter difficulties that could delay or prevent the
successful and timely development, introduction and marketing of these potential
new products.
 
     The Company is currently developing several potential new products and
technologies, including capabilities which will enable organizations to deploy
Restrac Hire over an intranet, with access provided by a standard Web browser or
in conjunction with Lotus Notes. The Company plans to offer customers access to
staffing solutions on a transaction-fee basis. Such transaction-fee offerings
and other adaptations to the current products are intended to allow smaller
organizations to take advantage of the Company's technologies without the
associated infrastructure investment necessary to support a client/server
application. The Company is currently undertaking development efforts to enable
solutions in combination with the myriad of Internet-hosted pools of candidates
that are continuing to emerge from sources such as Internet career sites,
colleges and graduate schools and professional organizations. The Company is
also planning to integrate foreign language capabilities into its products.
 
SALES AND MARKETING
 
     The Company currently markets its products and services through a direct
sales force in North America and the United Kingdom and also markets its Resume
Reader for PeopleSoft product through a joint marketing arrangement with
PeopleSoft. The Company supports its sales force through comprehensive marketing
programs which include telemarketing, public relations, direct mail,
advertising, seminars, trade shows, ongoing customer communication programs and
strategic relationships. While the sales cycle varies from customer to customer,
it typically spans four to nine months from generation of a lead from one of
these sources to execution of a license agreement. The Company's sales force is
structured regionally and, as of September 30, 1996, included three area
directors -- two domestic and one international. A third domestic area director
was added October 1, 1996, increasing the total to four. The sales staff is
managed through sales and service offices in Dedham, Massachusetts, Palo Alto,
California and Reading, England and through sales personnel located in Chicago,
Illinois, Dallas, Texas, Flemington, New Jersey and Atlanta, Georgia. As of
September 30, 1996, the Company's sales and marketing organization consisted of
42 employees, including 16 sales representatives, several of whom were hired in
the fourth quarter to fill territories established for fiscal 1997. Additional
sales locations added after September 30, 1996 include Seattle, Washington,
Denver, Colorado and Toronto, Ontario.
 
     Restrac seeks to build goodwill with its customers by playing an active
role in its user community. Since 1994, the Company has hosted an annual Users
Conference, a three-day event that provides an environment of extensive learning
and peer networking. In addition, five user-hosted conferences are conducted
annually, organized regionally into East, South, Midwest, West and UK user
groups. The Company has also formed a Client Advisory Board to further guide
product strategy.
 
CUSTOMERS
 
     Since the introduction of Restrac Hire in 1993, the Company has licensed
its client/server, Windows-based staffing software to approximately 220
customers. Approximately 200 other organizations continue to license the
Company's earlier DOS-based recruiting and succession planning products. Within
these organizations, there are over 4,500 licensed users of the Company's
products. Twenty-eight of the 50 most profitable U.S. companies cited in Fortune
magazine's 1996 "Fortune 1000" report use the Company's software. In fiscal
1996, no customer accounted for more than 10% of the Company's total revenue.
 
                                        9
<PAGE>   11
<TABLE> 
     The following is a partial listing of the Company's customers as of
September 30, 1996:
 
<CAPTION>
<S>                             <C>                             <C>
FINANCIAL SERVICES              HEALTHCARE/PHARMACEUTICALS      EMC
American Express                Abbott Laboratories             Genentech
Bank of America                 Baxter International            Hewlett-Packard
Banc One                        Bristol Myers Squibb            Intel
BankBoston                      Johnson & Johnson               Lucent Technologies
Fleet Bank                      The Mayo Clinic                 Lockheed
Merrill Lynch                   Memorial Sloan Kettering        Microsoft Corporation
M&T Bank                        PacifiCare                      Sequent Computers
Union Bank                      SmithKline Beecham              Stratus Computers
The World Bank                                                  U.S. Robotics Corporation
                                INSURANCE                       Vanstar
PUBLISHING/ENTERTAINMENT        Aetna Life and Casualty
Blockbuster Entertainment       Blue Cross/Blue Shield          CONSUMER
Conde Nast Publications         Cigna                           Anheuser-Busch
Gannett                         John Hancock                    British Airways Plc
The New York Times              Nationwide                      Campbell Soup Company
Paramount Pictures              Occidental Insurance            Canadian Tire
The Washington Post             Phoenix Home Life               Cargill
                                Prudential                      Delco
ENGINEERING/CONSULTING                                          Levi Strauss
Brown & Root                    TECHNOLOGY/COMMUNICATIONS       Mattel Toys
CH2M Hill                       AT&T                            Overnite Transportation
Logica                          Amdahl                          Reebok
Mason & Hanger                  The Boeing Company              Starbucks
Modern Engineering              British Telecom                 Toys R' Us
                                Cellular One                    the good guys!
                                Cray Computers
</TABLE>
 
     Examples of how the Company's customers have used Restrac software
successfully to address their needs are described below. The benefits achieved
by these customers will not necessarily be achieved by every customer.
 
     Overnite Transportation, a Union-Pacific company, employs 15,000 workers in
44 states. Overnite's decentralized organizational structure and reliance on
paper-based recruiting resulted in multiple redundant staffing efforts being
conducted in different offices. Prior to implementing the Company's products,
managers in the field would often initiate a new recruitment effort every time a
position opened, incurring advertising, agency and administrative expenses that
could have been avoided. Overnite implemented Restrac Hire at its corporate
office in 1994. Since then, Overnite has reportedly streamlined its recruiting
process, reduced advertising and relocation expenses by 20%, eliminated manual
tabulation of government reporting data and cut agency fees by 80%, resulting in
annual savings of $300,000 per year.
 
     Amdahl Corporation, a provider of hardware/software solutions and
consulting services to help organizations achieve productivity improvements in
information technology, employs more than 8,000 people worldwide. Amdahl's
growing consulting business places demand on staffing to find specialized
skills. In addition, a recent acquisition has added 2,000 employees to its
current employee base. Amdahl replaced its previous resume scanning system with
Restrac Hire in 1995, and has linked the Restrac product to its information
systems infrastructure to allow for greater productivity and to assist in the
integration of the additional employees.
 
     Logica plc, an international systems integrator with over 3,600 employees
in 18 countries, implemented Restrac products in the United States, the United
Kingdom and the Netherlands in 1995 to manage its global consulting business.
Resumes are collected from offices throughout the
 
                                       10
<PAGE>   12
 
world and consolidated to provide shared access for bidding on upcoming jobs and
staffing projects for which Logica has been engaged. Logica also has used the
Restrac system to direct projects to offices where the most appropriate skill
sets exist to increase effectiveness and reduce expenses.
 
     Brown & Root, a worldwide engineering and construction company which
employs 40,000 engineers, used Restrac Hire to identify and quickly deploy more
than 1,000 engineers in connection with the U.S. Department of Defense's Bosnian
recruitment effort. These engineers were needed to establish five military base
camps in and around Tuzla. Brown & Root was able to compile a list of personnel
with disparate skills such as telecommunications, construction, computer system
management and armored vehicle maintenance.
 
STRATEGIC RELATIONSHIPS
 
     The Company has established a number of relationships both to leverage
marketing channels and complementary technology and to meet customer demands for
open, integrated, multi-vendor solutions. Strategic partners are categorized
into three groups: Technology Partners, who provide the Company with innovative
technologies that are integrated into the Company's products; Joint Marketing
Partners, who provide the Company's customers with value-added software,
consulting or other services that are complementary to the Company's software
and services and that enable the Company's customers to better utilize the
Company's software; and ConnecTeam Partners, who develop and deliver integrated
products and/or services that are designed specifically for Restrac systems and
for which the Company receives a royalty. Examples of the Company's strategic
partners include:
 
     Verity, Inc.  The Company's software incorporates the text search software
tools developed by Verity, Inc., a Technology Partner, which allows Restrac
clients to search through vast amounts of candidate and job data, delivering
only the most relevant information directly to the desktop.
 
     PeopleSoft, Inc.  PeopleSoft, Inc., a leading worldwide provider of human
resource software, is a Joint Marketing Partner. In conjunction with the
Company's sales force, PeopleSoft markets the Company's Resume Reader for
PeopleSoft product, which integrates the Company's high-volume resume-scanning,
skills management and search technology with PeopleSoft's HRMS product. The
Company makes a royalty payment to PeopleSoft for each Resume Reader for
PeopleSoft product licensed.
 
     The Monster Board.  The Company has enhanced its software to allow users to
directly post jobs and receive applications via Internet career sites. In
conjunction with the development of this enhancement, the Company has entered
into a strategic relationship with The Monster Board, one of the largest
Internet career sites, pursuant to which the Company will receive a portion of
the fees paid to The Monster Board in connection with such postings.
 
     ESSENSE Systems, Inc.  ESSENSE Systems, Inc., a Restrac ConnecTeam Partner,
has developed a suite of kiosk and interactive voice response self-service
applications called Restrac ExprESS, which are specifically designed to operate
with the Company's software. Through the use of its advanced development
environment and server system and Edify Corporation's interactive voice response
technology, ESSENSE offers a complete multi-platform self-service solution for
Restrac customers, including desktop PC, kiosk and touch-tone telephone.
 
COMPETITION
 
     The marketplace for staffing solutions is intensely competitive and is
rapidly changing. The Company encounters direct competition from a number of
companies providing human resource staffing solutions, including (i) other human
resource staffing software companies, (ii) providers of general human resource
information systems, (iii) agencies providing or sourcing full-time, contract
and temporary labor, (iv) information systems departments of potential prospects
that develop
 
                                       11
<PAGE>   13
 
custom software, and (v) providers of other client/server application software
or document management systems.
 
     The Company's primary direct competitor is Resumix, Inc., which was
acquired by Ceridian, Inc. in 1995. The Company also competes directly against
other providers of human resource staffing software, most of which are small
privately held companies providing less functional products at lower prices. In
addition, vendors of general human resource information systems generally
include applicant tracking modules in their offerings which can compete with the
Company's products. Moreover, there can be no assurance that such vendors will
not develop and market products in direct competition with the Company. Some of
the Company's current and many of the Company's potential competitors, including
PeopleSoft, IBM and many other providers of general human resource information
systems, are large, publicly traded organizations with long operating histories
and access to significantly greater financial, technical, marketing and other
resources. As a result, they may be able to respond to market changes, emerging
technologies or changes in customer requirements more rapidly and devote more
resources to the development, marketing and sales of their products than the
Company. Competition may increase from new market entrants (particularly if the
market for automated staffing solutions continues to develop) or through
consolidations in the software industry and/or cooperative relationships among
companies or with third parties.
 
     The Company believes that the principal competitive factors affecting its
market include product functionality, breadth, ease of use, scalability and
flexibility, integration and interoperability with standard platforms and
operating systems and other software products, price, product reputation,
customer service and support, sales and marketing effectiveness and company
reputation. Although the Company believes it competes favorably with respect to
such factors, there can be no assurance that the Company can maintain this
position against current and potential competitors.
 
INTELLECTUAL PROPERTY
 
     The Company relies on a combination of copyright and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company believes that, due to the rapid pace of
technological innovation within its industry, the Company's ability to establish
and maintain a position of technology leadership in the industry is dependent
more upon the skills of its development personnel and its existing skills
library than upon the legal protections afforded its existing technology.
 
     The Company's success is dependent in part upon its proprietary software.
There can be no assurance that the Company's agreements with employees,
consultants and others who participate in the development of its software will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known. Furthermore,
there can be no assurance that the measures taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology.
 
     The Company is not aware of any patent infringement charge or any violation
of other proprietary rights claimed by any third party relating to the Company
or the Company's products. However, the computer technology market is
characterized by frequent and substantial intellectual property litigation.
Intellectual property litigation is complex and expensive, and the outcome of
such litigation is difficult to predict.
 
     The Company relies on Verity for text search software, TASC for image
compression and Caere for OCR technology. The Company's success will depend in
part on its continued ability to obtain and use licensed technology that is
important to the functionality of its products. An inability to continue to
procure or use such technology would likely have a material adverse effect on
the Company's business, financial condition and operating results.
 
                                       12
<PAGE>   14
 
EMPLOYEES
 
     As of September 30, 1996, the Company had 147 full time employees
consisting of 42 in sales and marketing, 29 in product development, 55 in client
services and 21 in corporate operations. The Company's employees are not
represented by any collective bargaining organizations, and the Company has
never experienced any work stoppages. The Company considers its relations with
its employees to be good.
 
EXECUTIVE OFFICERS AND DIRECTORS
 
<TABLE>
<CAPTION>
                NAME             AGE                         POSITION
                ----             ---                         --------
<S>                              <C>     <C>
Lars D. Perkins................  37      President, Chief Executive Officer and
                                         Chairman of the Board
Michael L. Amato...............  39      Vice President of Client Services
Charles A. Borwick.............  34      Vice President of Marketing
Raymond M. Desrochers..........  29      Vice President of Product Development & Quality
Cynthia G. Eades...............  40      Chief Financial Officer, Vice President of
                                         Finance and Treasurer
Martin J. Fahey................  42      Vice President and Chief Operating Officer
Thomas J. McCarthy III.........  34      Vice President of Sales
Robert J. Perry................  39      Vice President of Marketing
Rachael T. Shanahan............  30      Vice President of Business Development,
                                         General Counsel and Secretary
Russell J. Campanello..........  40      Director
A. Bruce Johnston..............  37      Director
J. Paul Costello...............  57      Director
</TABLE>
 
     Lars D. Perkins, co-founder of the Company, has served as President, Chief
Executive Officer and Chairman of the Board of the Company since 1986.
 
     Michael L. Amato has been the Company's Vice President of Client Services
since November 1994. From November 1988 to October 1994, Mr. Amato was Area
Manager for the Northeast Region of Innovative Information Systems, Inc., a
client/server systems integration company.
 
     Charles A. Borwick was elected Vice President of Marketing of the Company
in October 1995. From August 1993 to September 1995, Mr. Borwick served as the
Company's Vice President of Business Development; from June 1992 to July 1993,
he served as its Vice President of Client Services; and from January 1991 to May
1992, he served as Vice President of the Company's SuccessPlan product line. In
July 1996, Mr. Borwick began transitioning responsibility for the Company's
marketing organization to Martin J. Fahey, the Company's Chief Operating
Officer. Mr. Borwick resigned from the Company effective December 31, 1996.
 
     Raymond M. Desrochers was elected Vice President of Product Development and
Quality of the Company in October 1995. From April 1995 to October 1995, he
served as the Company's Director of Product Development and from October 1994 to
March 1995, he served as the Company's Manager of Software Development. Mr.
Desrochers was a senior software engineer for the Company from July 1992 to
September 1994. Prior to joining the Company in July 1992, he had been Software
Project Manager for New England Business Service, Inc., a company that provides
accounting software solutions to both small and medium-sized businesses, from
October 1991 to June 1992.
 
     Cynthia G. Eades joined the Company as Chief Financial Officer, Vice
President of Finance and Treasurer in December 1994. From February 1993 to
February 1994, she was Vice President and
 
                                       13
<PAGE>   15
 
Chief Financial Officer of Virtual World Entertainment, a developer and operator
of virtual reality entertainment centers. Prior to such time, Ms. Eades was
employed by Dun & Bradstreet Software Services, Inc., a business applications
software company, as Controller from October 1991 to February 1993 and Director
of Finance from June 1990 to October 1991. Ms. Eades is a Certified Public
Accountant and was employed by Price Waterhouse from June 1978 to June 1990.
 
     Martin J. Fahey joined the Company as Vice President and Chief Operating
Officer in May 1996. From January 1995 to May 1996, Mr. Fahey was an independent
consultant. From July 1991 to December 1994, he was Chief Executive Officer of
Vertigo Development, a multimedia company which Mr. Fahey co-founded. Mr. Fahey
was employed by Lotus Development Corporation, a software company, from January
1983 to June 1991, most recently as the Director of Spreadsheet Marketing. He
had previously served as the General Manager of the OS/2 Spreadsheet Group,
Director of Investor Relations, and Program Manager for the Advanced Products
Division.
 
     Thomas J. McCarthy III joined the Company as Vice President of Sales in
February 1995. From October 1994 to January 1995, Mr. McCarthy was Vice
President and General Manager of Padcom Inc., a clinical studies software
company, where he was responsible for all North American operations. Prior to
joining Padcom, Mr. McCarthy had been employed by Software 2000, Inc., a
business applications software company, as a regional manager from May 1993 to
September 1994, a district manager from September 1992 to April 1993 and an
account executive from January 1992 to August 1992. Mr. McCarthy was an account
executive at Dun & Bradstreet Software Services, Inc., a business applications
software company, from December 1989 to December 1991.
 
     Robert J. Perry assumed operational responsibility for the marketing
organization in November, 1996 and was elected to the office of Vice President,
Marketing effective as of January 1, 1997. Mr. Perry joined the Company in May
1996 as Director of Product Management. From November 1995 through May 1996, Mr.
Perry was an independent marketing and product management consultant. From
October 1983 to November 1995 Mr. Perry was employed by Lotus Development
Corporation most recently as Director of Advanced Corporate Technology Liaisons.
He had previously served as Director of Product Management for Notes, Director
of Product Management for Graphical Spreadsheets and Group Product Manager for
Spreadsheets.
 
     Rachael T. Shanahan was elected Vice President of Business Development of
the Company in October 1995 and has served as the Company's Secretary since
January 1994 and its General Counsel since August 1993. Prior to such time, she
had been the Company's Contract Administrator/Legal Assistant since December
1990. Ms. Shanahan first joined the Company in 1988 as a systems specialist.
 
     Russell Campanello was elected as a director of the Company in October
1994. He has been Vice President of Human Development and Organizational
Productivity at Nets Inc., (formerly Industry.Net) a facilitator of electronic
commerce on the Internet, since February 1996. Prior to joining Nets Inc., Mr.
Campanello spent eight years as the Vice President of Human Resources of Lotus
Development Corporation.
 
     A. Bruce Johnston was elected as a director of the Company in January 1994.
Since January 1996, Mr. Johnston has been a Principal of TA Associates, Inc., a
private equity firm. From June 1992 to January 1996, Mr. Johnston was a Vice
President of TA Associates. Prior to such time, Mr. Johnston was a General
Manager of Lotus Development Corporation from June 1988 to June 1992. Mr.
Johnston also serves on the Boards of Directors of Expert Software, Inc. and
Trident International, Inc., both NASDAQ-traded public companies, as well as on
the Boards of Directors of several private companies.
 
     J. Paul Costello, co-founder of the Company and member of the Board of
Directors of the Company since its founding. Mr. Costello has served as
President of J. Paul Costello Associates, Inc., a consulting company, since 1969
and of Costello & Company, Inc., a contract recruiting company, since 1979. In
December 1992, he also was named President of Corporate Staffing
 
                                       14
<PAGE>   16
 
Center, Inc., a provider of outsourced staffing services to large corporate
clients. Mr. Costello has been a human resource management consultant for over
thirty years.
 
ITEM 2.  PROPERTIES
 
     The Company's corporate headquarters are currently located in Dedham,
Massachusetts, where it occupies approximately 24,000 square feet of office
space under a lease expiring in December 1996 . The Company has regional sales
and service offices on the West Coast and in the United Kingdom. The Company
occupies approximately 2,200 square feet of office space in Palo Alto,
California under a lease expiring in September 1997 and 400 square feet of
office space in Reading, England under a lease expiring in October 1997. The
Company also leases office space for its sales representatives in Chicago,
Dallas, Atlanta and Toronto, Ontario. During November 1996 the Company entered
into new leases for its corporate headquarters and for its Chicago office. The
new headquarters lease is for approximately 60,000 square feet of office space
located in Lexington, Massachusetts under a lease expiring in December 2003. The
expected move date is February 1997. The new Chicago lease is for approximately
5,500 square feet of office space under a lease expiring in February 2002. The
Company is also currently pursuing a new lease to expand its West Coast office.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     Not Applicable.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
     Not Applicable.
 
                                       15
<PAGE>   17
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND
        RELATED STOCKHOLDER MATTERS
 
MARKET PRICE OF COMMON STOCK
 
     The Company's common stock (NASDAQ symbol RTRK) began trading publicly in
the over-the-counter market through the NASDAQ National Market System on July
23, 1996. The following table sets forth, for the period indicated, the high and
low closing prices of the common stock as reported on the NASDAQ National Market
System. These prices do not include retail markups, markdowns, or commissions.
 
                               Common Stock Price
 
<TABLE>
<CAPTION>
                  FISCAL YEAR ENDED SEPTEMBER 30, 1996                      HIGH       LOW
-------------------------------------------------------------------------  ------     ------
<S>                                                                        <C>        <C>
Fourth Quarter (July 23, 1996-September 30, 1996)........................  $21.00     $10.00
</TABLE>
 
HOLDERS OF COMMON STOCK
 
     The closing sale price of the Common Stock on September 30, 1996 was
$18.75.
 
     As of December 19, 1996, there were approximately 52 shareholders of record
of the Company's Common Stock and 7,894,936 shares of common stock outstanding.
On December 19, 1996 the closing price reported on the NASDAQ National Market
System for the Common Stock was $5.125.
 
     The market price of the Company's Common Stock has fluctuated significantly
and is subject to significant fluctuations in the future.
 
DIVIDEND POLICY
 
     Common Stock.  The Company has never paid any cash dividends on the Common
Stock and does not anticipate paying such dividends in the foreseeable future.
The Company intends to retain any future earnings for use in the Company's
business. The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board of Directors.
 
     Redeemable Convertible Preferred Stock.  Upon closing of the initial public
offering of common stock, accumulated dividends of $568,526 remained outstanding
and were included in accrued expenses at September 30, 1996. In October 1996,
the Company paid these dividends to the preferred shareholders. During July
1996, as a result of the public offering the 556,155 shares of Preferred Stock
were automatically converted into 2,502,696 shares of common stock.
 
                                       16
<PAGE>   18
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE> 
     The selected financial data set forth below with respect to the Company's
statements of operations for the three fiscal years ended September 30, 1994,
1995 and 1996 and the balance sheets at September 30, 1995 and 1996 are derived
from the financial statements of the Company included elsewhere in this Form
10-K. The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto included elsewhere in this Form 10-K.
 

<CAPTION>
                                                         FISCAL YEAR ENDED SEPTEMBER 30,
                                                   --------------------------------------------
                                                    1992     1993     1994     1995      1996
                                                   ------   ------   ------   -------   -------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>      <C>      <C>      <C>       <C>
Statement of Operations Data:
  Revenue:
     Product revenue.............................  $2,365   $3,776   $6,816   $10,024   $13,265
     Services revenue............................   1,514    1,894    2,921     4,990     8,327
                                                   ------   ------   ------   -------   -------
          Total revenue..........................   3,879    5,670    9,737    15,014    21,592
                                                   ------   ------   ------   -------   -------
  Cost of revenue:
     Product revenue.............................     325      719    1,350     1,425     1,485
     Services revenue............................     746    1,362    1,589     2,984     4,827
                                                   ------   ------   ------   -------   -------
          Total cost of revenue..................   1,071    2,081    2,939     4,409     6,312
                                                   ------   ------   ------   -------   -------
  Gross margin...................................   2,808    3,589    6,798    10,605    15,280
                                                   ------   ------   ------   -------   -------
  Operating expenses:
     Research and development....................     515      674    1,343     1,365     2,341
     Sales and marketing.........................   1,145    1,553    3,335     5,978     8,004
     General and administrative..................   1,094    1,190    1,249     1,714     2,610
     Non-recurring charge........................      --       --       --     1,011        --
                                                   ------   ------   ------   -------   -------
          Total operating expenses...............   2,754    3,417    5,927    10,068    12,955
                                                   ------   ------   ------   -------   -------
  Income from operations.........................      54      172      871       537     2,325
  Other income (expense), net....................     (26)      24       73       138       326
                                                   ------   ------   ------   -------   -------
  Income before provision for income taxes.......      28      196      944       675     2,651
  Provision for income taxes.....................      15      107      338       274     1,167
                                                   ------   ------   ------   -------   -------
  Net income.....................................  $   13   $   89   $  606   $   401   $ 1,484
                                                   ------   ------   ------   -------   -------
  Pro forma net income per common and common
     equivalent share............................                             $   .06   $   .21
                                                                              -------   -------
  Pro forma weighted average number of common and
     common equivalent shares outstanding........                               6,949     7,212
                                                                              =======   =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                         FISCAL YEAR ENDED SEPTEMBER 30,
                                                   --------------------------------------------
                                                    1992     1993     1994     1995      1996
                                                   ------   ------   ------   -------   -------
                                                                  (IN THOUSANDS)
<S>                                                <C>      <C>      <C>       <C>      <C>
Balance Sheet Data:
  Cash and cash equivalents......................  $  272   $  200   $2,735    $2,967   $20,368
  Working capital................................    (227)    (315)   2,466     2,079    17,418
  Total assets...................................   1,616    2,609    6,150     9,139    26,310
  Total liabilities..............................   1,587    2,430    6,629     9,498     7,337
  Stockholders' equity (deficit).................      29      179     (479)     (359)   18,973
</TABLE>
 
                                       17
<PAGE>   19
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     The Company's products and the markets it serves have evolved and expanded
in concert with the rapid advancements in technology and the elevated focus on
human resource management. From its inception in 1982 through the first half of
fiscal 1993, the Company's product revenue consisted primarily of DOS-based
applicant tracking and succession planning systems. In June 1993, the Company
introduced a new generation of Windows-based, client/server staffing software,
which incorporates high-volume resume-scanning, skills management and search
capabilities.
 
     From its inception through fiscal 1993, the Company was essentially
self-financed. In January 1994, the Company raised approximately $3.2 million in
net proceeds from a preferred equity financing from various venture capital
funds, of which approximately $800,000 was used to redeem certain outstanding
shares of Common Stock. In July 1996, the Company successfully completed an
initial public offering of its common stock raising approximately $14.5 million
in net proceeds.
 
     At September 30, 1996 the Company had approximately 420 licensed customers,
approximately 220 of which were using its client/server, Windows-based software.
Prior to fiscal 1995, the Company focused primarily on the North American
market. To date, revenue from outside of North America has not exceeded 4% of
total revenue for any fiscal year.
 
     Total revenue consists of product revenue and services revenue. In recent
years, product revenue has represented approximately 60-70% of total revenue,
with services revenue accounting for approximately 30-40%. Product revenue is
primarily derived from perpetual end-user licenses to use the Company's
products. Through September 30, 1995, the Company's product revenue included
revenue from the resale of third-party scanning hardware. In October 1995, the
Company effectively stopped serving as a reseller of hardware. Scanning hardware
resale revenue represented 11%, 21% and 3% of total product revenue for fiscal
1994, 1995, and 1996, respectively. Royalty income is also included in product
revenue and accounted for less than 1% of total product revenue in all periods
presented except for fiscal 1994 when it was 4%. Royalty income consisted
primarily of royalties paid to the Company by PeopleSoft, Inc., in connection
with PeopleSoft's distribution of one of the Company's software products. The
relationship was restructured so that for periods subsequent to fiscal 1994, the
product is licensed to PeopleSoft customers directly by the Company, and the
Company makes royalty payments to, rather than receiving royalty payments from,
PeopleSoft. Services revenue consists of revenue from product support and
maintenance and installation, training and consulting services.
 
     Product revenue is recognized upon delivery, provided there are no
significant Company obligations remaining and collectibility is probable. Prior
to fiscal 1994, the Company recognized product revenue upon installation rather
than delivery, as its then current product releases required extensive
customization subsequent to delivery. Fiscal 1994 product revenue included
$1,262,000 in software license fees for products delivered in fiscal 1993 but
for which revenue was deferred until installation under this former business
practice. Revenue from product support and maintenance contracts is recognized
ratably over the applicable 12-month maintenance period. Since October 1, 1995,
the Company has included first year maintenance with the purchase of a system
license; however, for accounting purposes, 15% of the software license fee is
treated as a maintenance fee and is recognized ratably over the 12-month
maintenance period. Services revenue from installation, training and consulting
is recognized as the related services are performed. Deferred revenue represents
cash received by the Company in advance of product delivery or service
performance.
 
     In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company is required to
capitalize software development costs incurred after the establishment of the
technological feasibility of a project. Generally, the Company's products are
released soon after technological feasibility has been established. Conse-
 
                                       18
<PAGE>   20
 
quently, the Company has not capitalized any software development costs since
costs qualifying for capitalization have not been material.
 
     During November 1996 the Company entered into new leases for its corporate
headquarters and its Chicago office. The Company is also currently pursuing a
new lease to expand its West Coast office. The direct increase in facilities
costs associated with these leases will approximate $1.4 million per year as
compared to fiscal 1996. The increase for fiscal 1997 will approximate $1.0
million. Facilities costs are allocated among income statement expense
categories based principally on functional headcount.
 
RESULTS OF OPERATIONS

<TABLE> 
     The following table sets forth, for the periods indicated, the percentage
of total revenue represented by each item reflected in the Company's Statements
of Income.
 

<CAPTION>
                                                                       FISCAL YEAR ENDED
                                                                     ----------------------
                                                                         SEPTEMBER 30,
                                                                     ----------------------
    AS A PERCENTAGE OF TOTAL REVENUE:                                1994     1995     1996
    ---------------------------------                                ----     ----     ----
    <S>                                                              <C>      <C>      <C>
    Revenue:
      Product revenue..............................................   70%      67%      61%
      Services revenue.............................................   30       33       39
                                                                     ---      ---      ---
              Total revenue........................................  100      100      100
                                                                     ---      ---      ---
    Cost of revenue:
      Product revenue..............................................   14        9        7
      Services revenue.............................................   16       20       22
                                                                     ---      ---      ---
              Total cost of revenue................................   30       29       29
                                                                     ---      ---      ---
    Gross margin...................................................   70       71       71
                                                                     ---      ---      ---
    Operating expenses:
      Research and development.....................................   14        9       11
      Sales and marketing..........................................   34       40       37
      General and administrative...................................   13       11       12
      Non-recurring charge.........................................   --        7       --
                                                                     ---      ---      ---
              Total operating expenses.............................   61       67       60
                                                                     ---      ---      ---
    Income from operations.........................................    9        4       11
    Other income, net..............................................    1        1        2
                                                                     ---      ---      ---
    Income before provision for income taxes.......................   10        5       13
    Provision for income taxes.....................................    4        2        6
                                                                     ---      ---      ---
    Net income.....................................................    6%       3%       7%
                                                                     ===      ===      ===
</TABLE>
 
FISCAL 1996 COMPARED TO FISCAL 1995
 
     REVENUE
 
     Product Revenue.  Product revenue increased 32% to $13,265,000 for fiscal
1996 from $10,024,000 for fiscal 1995. Approximately 57% of the growth in
product revenue was attributable to the purchase of additional user licenses by
existing customers, demonstrating the natural progression of the Company's
client/server Windows installed base. Many customers initially deploy the
product on a selective, divisional or business unit basis and later license
additional users. For fiscal 1996, sales to existing customers represented
approximately 26% of total software licenses as compared to 11% in fiscal 1995,
while the number of new systems licensed decreased from 100 in
 
                                       19
<PAGE>   21
 
fiscal 1995 to 71 in fiscal 1996. The remainder of the increase in product
revenue for 1996 was attributable to a combination of price increases and a
greater number of licensed users per system. Product revenue represented 61% of
total revenue for fiscal year 1996 as compared to 67% in fiscal 1995 and 70% in
fiscal 1994. Enhancements to services revenue offerings account for this change
in mix. Management does not expect the product/service revenue mix for fiscal
year 1997 to vary significantly from 1996.
 
     Services Revenue.  Services revenue increased 67% to $8,327,000 for fiscal
1996 from $4,990,000 for fiscal 1995. Installation, training and consulting
services accounted for approximately $1,700,000, or 51%, of this increase, with
the remainder attributable to increased maintenance revenue. Throughout fiscal
1995, the Company significantly enhanced its service offerings, adding project
management and standardized training and education programs. These enhancements,
combined with a higher number of larger implementations and price increases,
resulted in a 90% increase in average services revenue per system license in
fiscal 1996. Maintenance revenue increased approximately 66% for fiscal 1996 as
compared to 1995 due to the increase in the installed base of client/server,
Windows-based customers. While the Company no longer enhances its legacy DOS
solutions and a number of DOS customers have elected not to renew their
maintenance contracts, the relative dollar value of such annual maintenance
contracts is significantly lower than for client/server, Windows-based
customers.
 
     COST OF REVENUE
 
     Cost of Product Revenue.  Cost of product revenue includes third-party
hardware costs, royalty payments for third-party software embedded in the
Company's products, royalty payments to PeopleSoft, Inc. (beginning in fiscal
1995) and costs of documentation and shipping. Cost of product revenue increased
4% to $1,485,000 for fiscal 1996 from $1,425,000 for fiscal 1995. Cost of
product revenue decreased as a percentage of product revenue to approximately
11% for 1996 from approximately 14% for 1995. This percentage decrease is
primarily attributable to the Company's decision to discontinue reselling
scanning hardware, which represented 58% of cost of product revenue for fiscal
1995. This reduction was partially offset by the increase in royalty payments to
PeopleSoft resulting from a proportional increase in sales of Resume Reader for
PeopleSoft during 1996.
 
     Cost of Services Revenue.  Cost of services revenue includes royalty
payments for third-party hardware and software maintenance and all costs of
maintaining the client services organization, including salaries and
personnel-related expenses, travel, outside consulting services and facilities
costs. Cost of services revenue increased 62% to $4,827,000 for fiscal 1996 from
$2,984,000 for fiscal 1995. Cost of services revenue decreased as a percentage
of services revenue to 58% for 1996 from 60% for 1995. The absolute dollar
increase was due largely to increased service personnel, including the addition
of a dedicated customer account management group and overhead costs associated
with a training facility at the Company's corporate headquarters that was opened
in June 1995. Increased services revenue offset the impact of these costs as a
percentage of revenue.
 
     OPERATING EXPENSES
 
     Research and Development.  Research and development expenses include all
costs associated with the product engineering and quality functions, including
salaries and personnel-related expenses, travel, outside consulting services and
facilities costs. Research and development expenses increased 72% to $2,341,000
for fiscal 1996 from $1,365,000 for fiscal 1995. As a percentage of total
revenue, research and development expenses increased to 11% for fiscal 1996 from
9% for 1995. The increase in total expenses was largely attributable to an
increase in personnel and in consulting costs. The development organization grew
from 17 employees at the end of fiscal 1995 to 29 employees at the end of fiscal
1996. The absolute dollar amount of research and development expenses is
expected to increase significantly in fiscal 1997 due to costs associated
 
                                       20
<PAGE>   22
 
with the expansion of the development organization and other costs relating to
the Company's new product and service initiatives.
 
     Sales and Marketing.  Sales and marketing expenses include promotional
costs and trade shows and costs associated with personnel involved in sales and
marketing functions, including salaries, commissions and other personnel-related
expenses, travel, outside consulting services and facilities costs. Sales and
marketing expenses increased 34% to $8,004,000 for fiscal 1996 from $5,978,000
for fiscal 1995. As a percentage of total revenue, sales and marketing expenses
were 37% for 1996 and 40% for 1995. Approximately 25% of the dollar increase
related to increased marketing program costs in support of the Company's sales
efforts. The remainder was largely attributable to increases in the number of
sales and marketing personnel. Continued increases in sales and marketing
expenses are expected, generally in proportion to increases in revenue.
Management may, however, determine that additional costs are necessary to
promote its new product and service initiatives.
 
     General and Administrative.  General and administrative expenses consist
principally of costs for corporate operations personnel (executive, finance and
accounting, information technology, human resources, legal and administrative),
professional fees and other general corporate expenses. General and
administrative expenses increased 52% to $2,610,000 for fiscal 1996 from
$1,714,000 for fiscal 1995. As a percentage of total revenue, general and
administrative expenses were 12% for fiscal 1996 and 11% for fiscal 1995. These
increases were principally due to personnel increases to support the Company's
growth and infrastructure. Similar increases are expected to continue.
 
     OTHER INCOME, NET
 
     Other income consists primarily of interest income from cash and cash
equivalents. The Company generally invests its cash balances in
interest-bearing, investment grade securities. Other income increased 136% to
$326,000 for fiscal 1996 from $138,000 for fiscal 1995, due to an increase in
average funds available for investment resulting principally from the Company's
initial public offering.
 
     PROVISION FOR INCOME TAXES
 
     The Company's effective tax rate increased to 44% for 1996 from 41% for
1995 due primarily to equity related compensation not benefited for financial
statement purposes. The effective tax rate is expected to decrease in fiscal
1997.
 
FISCAL 1995 COMPARED TO FISCAL 1994
 
     REVENUE
 
     Product Revenue.  Product revenue increased 47% to $10,024,000 for fiscal
1995 from $6,816,000 for fiscal 1994. The increase would have been 80%, after
deducting $1,262,000 in fiscal 1994 product revenue resulting from recognizing
revenue upon shipment rather than upon installation. The increase in fiscal 1995
product revenue was due principally to an increase in the number of systems
licensed and the number of licensed users per system. The Company experienced a
40% increase in the number of new systems licensed in fiscal 1995, due largely
to the growth of the sales force, which provided broader and deeper geographical
coverage, and to increased acceptance of its principal product, Restrac Hire.
 
     Services Revenue.  Services revenue increased 71% to $4,990,000 for fiscal
1995 from $2,921,000 for fiscal 1994. Approximately half of the services revenue
increase was attributable to greater revenue for installation, training and
consulting, with the remaining half associated with increased maintenance
revenue. These increases resulted from the expansion of the client services
organization to service the new accounts and from the growing installed customer
base.
 
                                       21
<PAGE>   23
 
     COST OF REVENUE
 
     Cost of Product Revenue.  Cost of product revenue increased 6% to
$1,425,000 for fiscal 1995 from $1,350,000 for fiscal 1994. The cost of product
revenue decreased as a percentage of product revenue to 14% in fiscal 1995 from
20% in fiscal 1994 primarily due to low-margin scanning hardware becoming a
proportionately lower component of total product revenue. Customers can
generally operate one scanning station for an unlimited number of users.
Consequently, as the average number of licensed users increased, the hardware
needs of customers and, therefore, hardware revenue remained relatively
constant. In addition, more customers purchased scanning hardware directly
rather than through the Company as the ease of use and reliability of this
technology was enhanced over time. The Company discontinued reselling scanning
hardware in October 1995.
 
     Cost of Services Revenue.  Cost of services revenue increased 88% to
$2,984,000 for fiscal 1995 from $1,589,000 for fiscal 1994. The cost of services
revenue also increased as a percentage of services revenue to 60% in fiscal 1995
from 54% in fiscal 1994. Personnel increases accounted for a substantial portion
of these increases. The client services staff increased to 46 at September 30,
1995 from 28 employees at September 30, 1994. Cost of services revenue for
fiscal 1995 also included overhead costs associated with a training facility at
the Company's corporate headquarters that was opened in June 1995.
 
     OPERATING EXPENSES
 
     Research and Development.  Research and development expenses increased 2%
to $1,365,000 for fiscal 1995 from $1,343,000 for fiscal 1994. As a percentage
of total revenue, research and development expenses decreased to 9% for fiscal
1995 from 14% for fiscal 1994. While the development organization grew from 10
employees at the end of fiscal 1994 to 17 employees at the end of fiscal 1995,
the relatively flat level of expenses and reduction in costs as a percentage of
revenue was attributable in part to expenses related to beta testing performed
by client services personnel in fiscal 1994 which were charged to research and
development expense. In fiscal 1995, these services were performed by product
development personnel.
 
     Sales and Marketing.  Sales and marketing expenses increased 79% to
$5,978,000 for fiscal 1995 from $3,336,000 for fiscal 1994. As a percentage of
total revenue, sales and marketing expenses increased to 40% for fiscal 1995
from 34% for fiscal 1994. These increases were largely attributed to increases
in the number of sales and marketing personnel, which increased from 22
employees at the end of fiscal 1994 to 38 employees at the end of fiscal 1995,
and increases in commissions as a result of higher revenue. The Company also
increased its participation in trade shows, seminars and other promotional
activities. In addition, the Company positioned sales personnel in Sacramento,
Chicago, Dallas and Orlando (now Atlanta) in fiscal 1995, and the Palo Alto
office, which opened in fiscal 1993, was also expanded in fiscal 1995.
 
     General and Administrative.  General and administrative expenses increased
37% to $1,714,000 for fiscal 1995 from $1,249,000 for fiscal 1994. As a
percentage of total revenue, general and administrative expenses decreased to
11% in fiscal 1995 from 13% in fiscal 1994. To support the Company's growth and
infrastructure, the corporate operations staff increased from 13 employees at
the end of fiscal 1994 to 20 employees at the end of fiscal 1995.
 
     Non-recurring Charge.  On January 1, 1991, the Company acquired certain of
the assets of Borwick International, Inc., an international consulting firm
which developed and marketed related software known as SuccessPlan. As part of
this 1991 agreement, Borwick International was granted the exclusive right to
distribute SuccessPlan outside of North America, and the Company was prohibited
from selling any competitive products in these territories. On September 30,
1995, the Company entered into an agreement that terminated the remaining
distribution rights of Borwick International to SuccessPlan and removed any
restrictions on the Company's ability to sell competitive products. The process
of succession planning is in transition; thus the Company's
 
                                       22
<PAGE>   24
 
succession planning product strategy is in flux. The Company's evolving line of
staffing products may incorporate certain elements that could be construed as
succession planning under a broad interpretation of the 1991 agreement.
Accordingly, the Company believed that removal of these restrictions was
necessary. As a result of the September 1995 agreement, the Company recorded a
non-recurring charge to operations of $1,010,952 in fiscal 1995, representing
the present value of payments made and payable under the terms of this
agreement. The Company does not have a succession planning product which is
suitably responsive to the international market. In addition, the Company lacks
the internal infrastructure and established distribution channels necessary to
license and support such products outside of North America. Based on the minimal
current and anticipated cash flows from succession planning products, any
intangible asset recorded would be deemed to be non-recoverable and require
recognition of an impairment loss in accordance with SFAS No. 121. Accordingly,
the cost of the distribution rights was charged to operations, as management
believes that the realizability of such cost is uncertain. The Company also
executed a Finder's Fee and Non-Competition Agreement with Irving P. Borwick, a
principal of Borwick International, in conjunction with the September 1995
termination agreement. Although the Company wished to ensure that Borwick
International and Irving P. Borwick would not compete with the Company, neither
was viewed as a serious competitive threat. Accordingly, the stated amounts in
the non-competition agreement were not deemed to reflect their overall value to
the Company and were included in the total ascribed to the termination of
distribution rights.
 
     OTHER INCOME, NET
 
     Other income increased 89% to $138,000 in fiscal 1995 from $73,000 in
fiscal 1994, due to an increase in average funds available for investment.
 
     PROVISION FOR INCOME TAXES
 
     The Company's effective tax rate increased to 40.6% in fiscal 1995 from
35.9% in fiscal 1994. This increase was attributable to the utilization of
research and development tax credits in fiscal 1994. The Company had a valuation
allowance of $258,550 and $171,672 against its gross deferred tax asset at
September 30, 1994 and 1995, respectively. The valuation allowance at September
30, 1994 and 1995 was established due to management's estimate that it was more
likely than not that a benefit of certain deferred tax assets would not be
realized in the future. In assessing the realizability of these assets at
September 30, 1994, management took into consideration historical levels of
taxable income, the volatile nature of the industry in which it competes and the
potential levels of future taxable income. At September 30, 1995, the valuation
allowance related specifically to the buyout of distribution rights.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since its inception, the Company has primarily financed its operations and
capital expenditures through internally generated cash flow. Additional
financing which has been secured by the Company includes $3.2 million of net
proceeds from the issuance of Convertible Preferred Stock in January 1994 and
$14.5 million of net proceeds from the Company's initial public offering in July
1996.
 
     The Company generated cash from operations of $3,798,000, $1,414,000 and
$679,000 for fiscal 1996, 1995 and 1994, respectively. Cash and cash equivalents
were approximately $20.4 million and $3.0 million at September 30, 1996 and
1995, respectively. In 1995, the Company experienced significant growth in
accounts receivable, accompanying increased revenue volume. While revenue
continued to increase in 1996, favorable collection experience resulted in
minimal net change in the accounts receivable balance at September 30, 1996 as
compared to September 30, 1995 and in an increase in net cash provided by
operating activities. Deferred revenue increased for fiscal 1996 and 1995,
representing cash received on contracts pending delivery of product or
performance of services. Accrued expenses reflected significant increases for
fiscal 1996 due to
 
                                       23
<PAGE>   25
 
general corporate growth and the increased expense base commensurate with that
growth, and for 1995 due to bonuses and commissions associated with the
increased sales volume and employee base.
 
     Investing activities have consisted principally of the acquisition of
property and equipment, most notably computer and networking equipment to
support the growing employee base and corporate infrastructure. The Company
expects to continue its purchases of property and equipment as part of its
infrastructure growth.
 
     There have been several notable financing activities by the Company. In
January 1994, the Company generated $3.2 million of net proceeds from the
issuance of Convertible Preferred Stock and subsequently repurchased 607,500
shares of Common Stock at $1.32 per share or an aggregate price of approximately
$800,000. In November 1995, the Company repurchased 56,900 shares of Common
Stock for $2.00 per share or an aggregate purchase price of $113,799. In July
1996 the Company, through its initial public offering sold 1,500,000 shares of
Common Stock at $11.00 per share which generated proceeds, net of the expenses
of the offering, of $14.5 million.
 
     The Company had available a bank revolving line of credit. Borrowings
outstanding under the line were limited to the lesser of $1 million or 70% of
eligible accounts receivable, as defined, bore interest at the bank's corporate
base rate plus 1% and were collateralized by all corporate assets. There were no
borrowings outstanding as of September 30, 1996 or as of September 30, 1995.
This revolving line of credit was cancelled by the Company in November 1996.
 
     To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. Cash has
been, and the Company contemplates that it will continue to be, invested in
interest-bearing, investment grade securities.
 
     From time to time, the Company evaluates potential acquisitions of
products, businesses and technologies that may complement or expand the
Company's business. The Company currently does not have any understandings,
commitments or agreements with respect to any such acquisitions. Any such
transactions consummated may use a portion of the Company's working capital or
require the issuance of equity or debt.
 
     The Company believes that its current cash balances and cash provided by
future operations will be sufficient to meet its working capital and anticipated
capital expenditure requirements for at least the next twelve months. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, its operating and investing activities
may use cash. Consequently, any such future growth may require the Company to
obtain additional equity or debt financing.
 
FACTORS AFFECTING FUTURE OPERATING RESULTS
 
     Statements made or incorporated in this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward
looking statements include, without limitation, statements containing the words
"Anticipates", "Believes", "Expects", "Intends", "Future", and words of similar
import which express management's belief, expectations or intentions regarding
the Company's future performance. The Company's actual results could differ
materially from its historical operating results and from those set forth in the
forward-looking statements and may fluctuate between operating periods. Factors
that might cause such differences and fluctuations include the following: risks
related to the management of growth, the Company's ability to attract, train and
retain qualified personnel, product development risks, new product announcements
and introductions, development and promotional expenses relating to the
introduction of new products, changes in technology and industry standards,
dependence on certain strategic partnerships, increased competition, changes in
pricing policies by the Company and its competitors, the timing of the receipt
of orders from major customers, the size and rate of growth of the market for
human
 
                                       24
<PAGE>   26
 
resources staffing software, market acceptance of the Company's products and
those of its competitors, and general economic conditions. In addition, a
significant portion of product revenue within a quarter is typically not
realized until late in that quarter. As a result, it may be difficult for the
Company to predict its total revenue for the quarter or to quickly adapt its
spending levels within a quarter to reflect changes in demand for its products.
The market price of the Company's common stock has been, and in the future will
likely be, subject to significant fluctuations in response to variations in
quarterly operating results and other factors, such as announcements of
technological innovations or new products by the Company or its competitors, or
other events.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, of this Form 10-K.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       25
<PAGE>   27
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item 10 is hereby incorporated by
reference to the text appearing under Part I, Item 1 -- Business under the
caption "Executive Officers and Directors" in this Report, and by reference to
the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed by the Company within 120 days after close of its
fiscal year.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Executive Compensation" in the
Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders
to be filed by the Company within 120 days after the close of its fiscal year.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Securities Beneficially Owned by
Directors, Officers and Principal Stockholders" in the Company's definitive
Proxy Statement for the 1996 Annual Meeting of Stockholders to be filed by the
Company within 120 days after the close of its fiscal year.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Transactions", if any,
in the Company's definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders to be filed by the Company within 120 days after the close of its
fiscal year.
 
                                       26
<PAGE>   28
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)(1) FINANCIAL STATEMENTS
 
     1. Report of Arthur Andersen LLP dated October 25, 1996 (See Page F-2
        hereof).
 
     2. Consolidated Balance Sheets as of September 30, 1995 and 1996. (See Page
        F-3 hereof).
 
     3. Consolidated Statements of Income for the years ended September 30,
        1994, 1995 and 1996 (See Page F-4 hereof).
 
     4. Consolidated Statements of Redeemable Convertible Preferred Stock and
        Stockholders' Equity (Deficit) for the years ended September 30, 1994,
        1995 and 1996. (See Page F-5 hereof).
 
     5. Consolidated Statements of Cash Flows for the years ended September 30,
        1994, 1995 and 1996. (See Page F-6 hereof).
 
     6. Notes to Consolidated Financial Statements. (See pages F-7 through F-16
        hereof).
 
(a)(2) FINANCIAL STATEMENT SCHEDULES
 
       SCHEDULE NO.                      DESCRIPTION
       ------------                      -----------

       Schedule II               Valuation and Qualifying Accounts

 
     Other schedules are not provided because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
 
                                       27
<PAGE>   29
 
(A)(3) EXHIBITS

<TABLE> 
     (a) Exhibits.  The following is a complete list of Exhibits filed as part
of this Form 10-K.

<CAPTION>
EXHIBIT NO.                                 DESCRIPTION
-----------                                 -----------
  <S>        <C>
      *3.1   Form of Third Amended and Restated Certificate of Incorporation of the Company

      *3.2   Amended and Restated By-laws of the Company

      *4.1   Specimen certificate for shares of Common Stock, $.01 par value, of the
             Company

     *10.1   Stock Purchase Agreement dated January 5, 1994, as amended, by and between the
             Company and the Purchasers identified therein

     *10.2   Stock Redemption Agreement dated January 5, 1994 between the Company and J.
             Paul Costello, Lars D. Perkins and John P. Jopling

     *10.3   Registration Rights Agreement dated January 5, 1994 between the Company and
             Lars D. Perkins, J. Paul Costello and John P. Jopling

     *10.4   Restrac, Inc. 1994 Stock Option Plan

     *10.5   Restrac, Inc. 1996 Stock Option and Grant Plan

      10.6   Restrac, Inc. 1996 Employee Stock Purchase Plan

     *10.7   Paid-up Software License dated as of January 1, 1993 by and between the
             Company and Costello and Company, Inc.

    *+10.8   VAR Agreement dated November 27, 1991 between the Company and Verity, Inc. and
             all amendments thereto -- see 10.25 below

    *+10.9   Value Added Reseller License Agreement dated August 31, 1992 by and between
             The Analytic Sciences Corporation and the Company and all amendments thereto

    *+10.10  Joint Marketing Agreement with Referral Fee Payments dated as of October 1,
             1994 between the Company and PeopleSoft, Inc.

     *10.11  Lease Agreement dated March 31, 1993 by and between Dedham Place Office
             Associates Limited Partnership and the Company and all amendments thereto

  (x)*10.12  Form of Director's Indemnification Agreements

  (x)*10.13  Form of Employment Agreement with Senior Management

  (x)*10.14  Form of Addendum to Employment Agreement with Senior Management

     *10.15  Agreement Pertaining to the Election of Directors dated January 5, 1994 by
             Lars D. Perkins, J. Paul Costello and the Purchasers identified therein

     *10.16  Shareholder Agreement dated January 5, 1994 by and among the Company and the
             Shareholders identified therein

     *10.17  Agreement Pertaining to Certain Activities dated January 5, 1994 by and
             between Lars D. Perkins and the Company

     *10.18  Termination Agreement dated September 30, 1995 by and among the Company and
             Borwick International, Inc. and Irving P. Borwick

     *10.19  Finder's Fee and Non-Competition Agreement dated September 30, 1995 between
             the Company and Irving P. Borwick

   (x)10.20  Fiscal 1997 Senior Management Compensation Plan

   (x)10.21  Fiscal 1997 Management Incentive Plan

      10.22  Lease agreement dated November 12, 1996 between Boston Properties, Inc. and
             the Company

     +10.23  Scanning Services Agreement dated May 1, 1996 between the Company and
             ScanCenters of America and all exhibits thereto

     +10.24  Amendment #3 to VAR Agreement dated November 27, 1991, between the Company and
             Verity, Inc.

      11.1   Schedule regarding computation of earnings per share

      21.1   Subsidiaries of registrant
</TABLE>
 
                                       28
<PAGE>   30
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                   DESCRIPTION
-----------  ------------------------------------------------------------------------------
<C>          <S>
      23.1   Consent of Arthur Andersen LLP
      27.1   Financial Data Schedule.
</TABLE>
 
---------------
* All exhibits with an asterisk are incorporated by reference to the specified
  exhibit with the corresponding numbers in the Company's Registration Statement
  on Form S-1, as amended (No. 333-03521), declared effective on July 22, 1996.
 
+ Confidential treatment requested as to portions of this document.
 
x Required to be filed pursuant to item 14(c) of Part IV of this report, Form
  10-K.
 
(b) Report on Form 8-K.
 
     The Company has not filed any Form 8-K's during the fourth quarter of 1996.
 
                                       29
<PAGE>   31
 
                                   SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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 on this twenty-seventh day
of December 1996.
 
                                          By: /s/ LARS D. PERKINS
                                              -----------------------------
                                              Lars D. Perkins, President
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
          SIGNATURE                    TITLE                       DATE
          ---------                    -----                       ----

/s/  LARS D. PERKINS        Director, Chief Executive Officer  December 27, 1996
---------------------------   and President (Principal 
Lars D. Perkins               Executive Officer)

/s/ CYNTHIA G. EADES        Chief Financial Officer            December 27, 1996
---------------------------   (Principal Financial Officer
Cynthia G. Eades              and Principal Accounting 
                              Officer)
 
/s/ RUSSELL J. CAMPANELLO   Director                           December 27, 1996
---------------------------
Russell J. Campanello
 
/s/ J. PAUL COSTELLO        Director                           December 27, 1996
---------------------------
J. Paul Costello
 
/s/ A. BRUCE JOHNSTON       Director                           December 27, 1996
---------------------------
A. Bruce Johnston

 
                                       30
<PAGE>   32
 
                                 RESTRAC, INC.

<TABLE> 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                      <C>
Report of Independent Public Accountants..............................................   F-2
Consolidated Balance Sheets as of September 30, 1995 and 1996.........................   F-3
Consolidated Statements of Income for the Years Ended September 30, 1994,
  1995 and 1996.......................................................................   F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders'
  Equity (Deficit) for the Years Ended September 30, 1994, 1995 and 1996..............   F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994,
  1995 and 1996.......................................................................   F-6
Notes to Consolidated Financial Statements............................................   F-7
</TABLE>
 
                                       F-1
<PAGE>   33
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders and Board of Directors
of Restrac, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Restrac,
Inc. as of September 30, 1995 and 1996, and the related consolidated statements
of income, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
September 30, 1996. These consolidated financial statements and schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of
Restrac, Inc. as of September 30, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
 
     Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole . The schedule listed on
Schedule II is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
 
                                          /s/ ARTHUR ANDERSEN LLP
 
Boston, Massachusetts
October 25, 1996
 
                                       F-2
<PAGE>   34
 
                                 RESTRAC, INC.
<TABLE> 
                          CONSOLIDATED BALANCE SHEETS
 
<CAPTION>
                                                                        SEPTEMBER 30,
                                                                  --------------------------
                                                                     1995           1996
                                                                  ----------     -----------
<S>                                                               <C>            <C>
ASSETS
Current Assets:
  Cash and cash equivalents.....................................  $2,966,637     $20,367,641
  Accounts receivable, less allowance for doubtful accounts of
     approximately $300,000 and $350,000, at September 30, 1995
     and 1996, respectively.....................................   3,485,744       3,387,010
  Other current assets..........................................     454,470         229,577
  Deferred income taxes.........................................     718,254         770,965
                                                                  ----------     -----------
          Total current assets..................................   7,625,105      24,755,193
                                                                  ----------     -----------
Property and Equipment, net.....................................   1,452,548       1,520,893
                                                                  ----------     -----------
Deferred Income Taxes...........................................      46,328              --
                                                                  ----------     -----------
Other Assets, net...............................................      14,832          33,898
                                                                  ----------     -----------
                                                                  $9,138,813     $26,309,984
                                                                  ==========     ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
  Current portion of long-term debt.............................  $   14,367     $     5,060
  Accounts payable..............................................     585,471         570,603
  Accrued expenses..............................................   2,180,479       3,339,895
  Deferred revenue..............................................   2,526,073       3,140,801
  Accrued income taxes..........................................     239,900         280,917
                                                                  ----------     -----------
          Total current liabilities.............................   5,546,290       7,337,276
                                                                  ----------     -----------
Deferred Income Taxes...........................................      63,777              --
                                                                  ----------     -----------
Other Liabilities...............................................      45,119              --
                                                                  ----------     -----------
Commitments (Note 4)............................................          --              --
Redeemable Convertible Preferred Stock (Note 5).................   3,842,474              --
                                                                  ----------     -----------
Stockholders' Equity (Deficit) (Note 6):
  Preferred stock, $.01 par value -- Authorized -- 5,000,000
     shares, Issued and outstanding -- none.....................          --              --
  Common stock, $.01 par value -- Authorized -- 30,000,000
     shares, Issued -- 4,500,000 shares at September 30, 1995,
     8,569,711 shares at September 30, 1996.....................      45,000          85,697
Additional paid-in capital......................................     160,618      18,222,648
Treasury stock, at cost.........................................    (804,970)       (830,764)
Retained earnings...............................................     240,505       1,495,127
                                                                  ----------     -----------
          Total stockholders' equity (deficit)..................    (358,847)     18,972,708
                                                                  ----------     -----------
                                                                  $9,138,813     $26,309,984
                                                                  ==========     ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   35
 
                                 RESTRAC, INC.
<TABLE> 
                       CONSOLIDATED STATEMENTS OF INCOME


<CAPTION>
                                                       FOR THE YEARS ENDED SEPTEMBER 30,
                                                   ------------------------------------------
                                                      1994           1995            1996
                                                   ----------     -----------     -----------
<S>                                                <C>            <C>             <C>
Revenue:
  Product revenue................................  $6,816,249     $10,023,919     $13,264,809
  Services revenue...............................   2,921,248       4,989,965       8,327,263
                                                   ----------     -----------     -----------
          Total revenue..........................   9,737,497      15,013,884      21,592,072
                                                   ----------     -----------     -----------
Cost of Revenue:
  Product revenue................................   1,350,318       1,424,847       1,484,629
  Services revenue...............................   1,588,778       2,983,931       4,827,332
                                                   ----------     -----------     -----------
          Total cost of revenue..................   2,939,096       4,408,778       6,311,961
                                                   ----------     -----------     -----------
Gross Margin.....................................   6,798,401      10,605,106      15,280,111
                                                   ----------     -----------     -----------
Operating Expenses:
  Research and development.......................   1,342,692       1,364,542       2,341,300
  Sales and marketing............................   3,335,599       5,978,133       8,004,156
  General and administrative.....................   1,248,630       1,714,079       2,609,679
  Non-recurring charge (Note 2)..................          --       1,010,952              --
                                                   ----------     -----------     -----------
          Total operating expenses...............   5,926,921      10,067,706      12,955,135
                                                   ----------     -----------     -----------
Income From Operations...........................     871,480         537,400       2,324,976
Other Income, net................................      73,063         137,707         326,294
                                                   ----------     -----------     -----------
Income Before Provision for Income Taxes.........     944,543         675,107       2,651,270
Provision for Income Taxes (Note 7)..............     338,835         274,300       1,166,820
                                                   ----------     -----------     -----------
Net Income.......................................  $  605,708     $   400,807     $ 1,484,450
                                                   ----------     -----------     -----------
Pro Forma Net Income per Common and Common
  Equivalent Share...............................                 $      0.06     $      0.21
                                                                  -----------     -----------
Pro Forma Weighted Average Number of Common and
  Common Equivalent Shares Outstanding...........                   6,949,273       7,212,171
                                                                  ============    ============
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-4
<PAGE>   36
 
                                 RESTRAC, INC.
 
     CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                         STOCKHOLDERS' EQUITY (DEFICIT)
 
                                    (NOTE 6)
 
<TABLE>
<CAPTION>
                         REDEEMABLE CONVERTIBLE                         STOCKHOLDERS' EQUITY (DEFICIT)
                                                      COMMON STOCK      -------------------------------
                            PREFERRED STOCK       --------------------                TREASURY STOCK                    TOTAL
                         ----------------------                $.01     ADDITIONAL  -------------------  RETAINED   STOCKHOLDERS'
                          NUMBER      CARRYING     NUMBER       PAR      PAID-IN     NUMBER              EARNINGS      EQUITY
                         OF SHARES     VALUE      OF SHARES    VALUE     CAPITAL    OF SHARES    COST    (DEFICIT)    (DEFICIT)
                         ---------   ----------   ---------  ---------  ----------  ---------  --------  ---------  -------------
<S>                      <C>         <C>          <C>        <C>        <C>         <C>        <C>       <C>        <C>
Balance,                       --            --   4,500,000     45,000     149,282    22,500     (5,500)   (10,214)      178,568
  September 30, 1993....
Issuance of preferred     556,155     3,503,776         --          --          --        --         --   (270,227)     (270,227)
  stock, less issuance
  costs of $270,227.....
Purchase of treasury           --            --         --          --          --   607,500   (799,470)        --      (799,470)
  stock.................
Amortization of deferred       --            --         --          --      11,336        --         --         --        11,336
  compensation
  expense...............
Dividends paid on              --            --         --          --          --        --         --   (146,871)     (146,871)
  redeemable convertible
  preferred stock.......
Accretion of                   --        58,396         --          --          --        --         --    (58,396)      (58,396)
  dividends.............
Net income..............       --            --         --          --          --        --         --    605,708       605,708
                         ---------   ----------   ---------  ---------  ----------  ---------  --------  ---------  -------------
Balance,                  556,155     3,562,172   4,500,000     45,000     160,618   630,000   (804,970)   120,000      (479,352)
  September 30, 1994....
Accretion of                   --       280,302         --          --          --        --         --   (280,302)     (280,302)
  dividends.............
Net income..............       --            --         --          --          --        --         --    400,807       400,807
                         ---------   ----------   ---------  ---------  ----------  ---------  --------  ---------  -------------
Balance,                  556,155     3,842,474   4,500,000     45,000     160,618   630,000   (804,970)   240,505      (358,847)
  September 30, 1995....
Exercise of common stock       --            --     67,015         670      37,744        --         --         --        38,414
  options...............
Purchase of treasury           --            --         --          --          --    56,900    (25,794)        --       (25,794)
  stock.................
Accretion of                   --       229,828         --          --          --        --         --   (229,828)     (229,828)
  dividends.............
Tax benefit from stock         --            --         --          --      35,000        --         --         --        35,000
  options exercised.....
Effect of preferred      (556,155)   (4,072,302)  2,502,696     25,027   3,478,749        --         --         --     3,503,776
  stock
  conversion............
Public offering                --            --   1,500,000     15,000  14,496,345        --         --         --    14,511,345
  proceeds,
  net...................
Issuance of warrants....       --            --         --          --      14,192        --         --         --        14,192
Net income..............       --            --         --          --          --        --         --  1,484,450     1,484,450
                         ---------   ----------   ---------  ---------  ----------  ---------  --------  ---------  -------------
Balance,                        0             0   8,569,711     85,697  18,222,648   686,900   (830,764) 1,495,127    18,972,708
  September 30, 1996....
                         ---------   ----------   ---------  ---------  ----------  ---------  --------  ---------  -------------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   37
 

                                     RESTRAC, INC.
<TABLE> 
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<CAPTION>
                                                                 FOR THE YEARS ENDED SEPTEMBER 30,
                                                             ------------------------------------------
                                                                1994           1995            1996
                                                             ----------     -----------     -----------
<S>                                                          <C>            <C>             <C>
Cash Flows from Operating Activities:
  Net income...............................................  $  605,708     $   400,807     $ 1,484,450
  Adjustments to reconcile net income to net cash provided
     by operating activities --
     Depreciation and amortization.........................     243,948         430,597         861,130
     Provision for doubtful accounts.......................          --         317,080         200,588
     Deferred income taxes, net............................    (153,669)       (448,000)        (70,160)
     Amortization of deferred compensation expense.........      11,336              --              --
     Loss on disposal of property and equipment............          --           9,061              --
     Issuance of warrants..................................          --              --          14,192
     Changes in assets and liabilities --
       Accounts receivable.................................    (885,961)     (1,650,069)       (101,854)
       Other current assets................................      66,425        (297,180)        224,893
       Accounts payable....................................     118,502          45,582         (14,868)
       Accrued expenses....................................     251,088       1,474,914         589,264
       Deferred revenue....................................    (108,680)      1,529,779         614,728
       Other liabilities...................................      23,124         (64,329)        (45,119)
       Accrued income taxes................................     507,118        (334,148)         41,017
                                                             ----------     -----------     -----------
          Net cash provided by operating activities........     678,939       1,414,094       3,798,261
                                                             ----------     -----------     -----------
Cash Flows from Investing Activities:
  Purchases of property and equipment......................    (285,088)     (1,115,455)       (927,849)
  Proceeds from sale of property and equipment.............          --           7,770              --
  Increase in other assets.................................      (4,255)           (941)        (19,066)
                                                             ----------     -----------     -----------
          Net cash used in investing activities............    (289,343)     (1,108,626)       (946,915)
                                                             ----------     -----------     -----------
Cash Flows from Financing Activities:
  Payments on capital lease obligations....................     (74,182)        (26,936)         (9,307)
  Payments of bank notes payable...........................     (40,000)        (46,667)             --
  Net proceeds from initial public offering of common
     stock.................................................          --              --      14,511,345
  Payment of promissory note payable to a related party....     (28,114)             --              --
  Proceeds from issuance of redeemable convertible
     preferred stock, net of $270,227 of issuance costs....   3,233,549              --              --
  Proceeds from exercise of common stock options...........          --              --          38,414
  Tax benefit of stock option exercise transactions........          --              --          35,000
Dividends paid.............................................    (146,871)             --              --
  Purchase of treasury stock...............................    (799,470)             --         (25,794)
                                                             ----------     -----------     -----------
          Net cash (used in) provided by financing
            activities.....................................   2,144,912         (73,603)     14,549,658
                                                             ----------     -----------     -----------
Net Increase in Cash and Cash Equivalents..................   2,534,508         231,865      17,401,004
                                                             ----------     -----------     -----------
Cash and Cash Equivalents, beginning of period.............     200,264       2,734,772       2,966,637
                                                             ----------     -----------     -----------
Cash and Cash Equivalents, end of period...................  $2,734,772     $ 2,966,637     $20,367,641
                                                             ----------     -----------     -----------
Supplemental Disclosure of Cash Flow Information:
  Cash paid during the period for
     Interest..............................................  $   23,028     $     9,683     $    15,853
                                                             ----------     -----------     -----------
     Income taxes..........................................  $  105,241     $ 1,280,025     $   892,726
                                                             ==========     ===========     ===========
 
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       F-6
<PAGE>   38
 
                                 RESTRAC, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1996
 
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
 
     The accompanying consolidated financial statements include the accounts of
Restrac, Inc. (formerly MicroTrac Systems, Inc.) and its wholly-owned
subsidiary, Restrac Securities Corporation, collectively referred to in these
Notes to Consolidated Financial Statements as, "the Company". All intercompany
accounts and transactions have been eliminated in consolidation.
 
     The Company designs, develops, markets, implements and supports human
resource staffing software to automate the recruitment, selection and placement
of an organization's workforce. The Company's staffing software enables
organizations to strategically manage their human capital by reducing hiring and
placement costs, decreasing time to fill positions and providing more effective
skills management and worker deployment. The Company's products -- Restrac Hire
and Resume Reader for PeopleSoft -- provide human resource departments with
client/server solutions to quickly and efficiently build and search
comprehensive "pools" of resume skills data to find the workers they need, while
also managing the workflow of the staffing process.
 
     In 1982 the Company was incorporated under the laws of the Commonwealth of
Massachusetts. On January 5, 1994, the Company was reincorporated as a Delaware
corporation. On June 15, 1995, the Company amended its Certificate of
Incorporation to effect a name change from MicroTrac Systems, Inc. to Restrac,
Inc.
 
     The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described below and elsewhere in
the Notes to the Consolidated Financial Statements.
 
     (a) Revenue Recognition
 
     Product revenue includes software license fees, third-party hardware and
royalty revenue. Services revenue includes customer maintenance fees, training,
installation and consulting. The Company recognizes product and services revenue
in accordance with the provisions of Statement of Position No. 91-1 (SOP No.
91-1), Software Revenue Recognition.
 
     Product revenue from software license fees and hardware is recognized upon
delivery provided there are no significant Company obligations remaining and
collectibility of the revenue is probable. If an acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period, as defined in the applicable software
license agreement. Prior to fiscal 1994, the Company recognized software license
fees upon installation rather than delivery, as its then current product
releases required extensive customization subsequent to delivery. Software
license fees for fiscal 1994 included $1,262,000 related to this former business
practice. Royalty revenue is recognized as earned.
 
     Services revenue from customer maintenance fees for postcontract support is
recognized ratably over the maintenance term, which is typically 12 months. When
customer maintenance fees are included in an initial software license fee, the
Company allocates 15% of the software license fee to the first year's
maintenance. The amount allocated to customer maintenance fees for the first
year is comparable to customer maintenance fees charged separately by the
Company. Other services revenue from training, installation and consulting is
recognized as the related services are performed.
 
     Deferred revenue represents payments received by the Company in advance of
product delivery or service performance.
 
                                       F-7
<PAGE>   39
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
     (b) Research and Development Costs
 
     Research and development costs are generally charged to operations as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting
for the Costs of Computer Software To Be Sold, Leased or Otherwise Marketed,
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have not
been material. For the years ended September 30, 1994, 1995 and 1996 all
research and development costs have been expensed.
 
     (c) Cash and Cash Equivalents

<TABLE> 
     Cash equivalents consist of highly liquid investment grade securities with
original maturities of 90 days or less. The Company adopted SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, effective
October 1, 1994. Under SFAS No. 115, the Company's cash equivalents are
classified as held-to-maturity securities. At September 30, 1995 and 1996 , cash
and cash equivalents consisted of the following:
 

<CAPTION>
                                                                SEPTEMBER 30,
                                                          --------------------------
                                                             1995           1996
                                                          ----------     -----------
        <S>                                               <C>            <C>
        Cash/Money Market Funds.........................  $2,966,637     $ 5,367,641
        Security Purchased Under Agreement to Resell....          --      15,000,000
                                                          ----------     -----------
                                                          $2,966,637     $20,367,641
                                                          ==========     ===========
</TABLE>
 
The "Security Purchased Under Agreement to Resell" at September 30, 1996
consisted of a United States Government agency security acquired to facilitate
the transfer of funds from Restrac, Inc. to Restrac Securities Corporation upon
the latter's incorporation. Subsequent to the initial investment, the Company,
in accordance with its investment policy has diversified its investment
portfolio. The Company's investment policy has established guidelines relative
to concentration, maturities, and credit ratings that maintain the safety and
liquidity of its investments.
 
     (d) Other Current Assets
 
     Other current assets primarily consist of prepaid operating expenses. The
Company capitalizes prepaid expenses and amortizes them over the applicable
period. Prepaid expenses amounted to $229,577 and $330,238 at September 30, 1996
and 1995, respectively. Also included in other current assets are refundable
income taxes of approximately $73,000 and $0 at September 30, 1995 and 1996,
respectively.
 
                                       F-8
<PAGE>   40
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
     (e) Property and Equipment

<TABLE> 
     The Company records property and equipment at cost and provides for
depreciation and amortization on a straight-line basis over the estimated useful
lives of the assets, as follows:

<CAPTION>
                                                                   SEPTEMBER 30,
                                             ESTIMATED       -------------------------
        ASSET CLASSIFICATION                 USEFUL LIFE         1995           1996
        --------------------               --------------    ----------     ----------
        <S>                                <C>               <C>            <C>
        Office equipment.................  3 - 5 Years       $1,854,638     $2,684,062
        Furniture and fixtures...........  3 - 7 Years          307,423        405,850
        Leasehold improvements...........  Life of Lease        133,129        133,129
        Equipment under capital lease....  Life of Lease        123,098        123,098
                                                             ----------     ----------
                                                              2,418,288      3,346,139
        Less -- Accumulated depreciation
          and amortization...............                       965,740      1,825,246
                                                             ----------     ----------
                                                             $1,452,548     $1,520,893
                                                             ==========     ==========
</TABLE>
 
Depreciation expenses for the years ended September 30, 1994, 1995, and 1996
amounted to approximately $244,000, $431,000, and $861,000 respectively.
 
     (f) Income Taxes
 
     The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or
liability is measured by the enacted tax rates expected to be in effect when the
differences between the financial statement and tax bases of assets and
liabilities reverse.
 
     (g) Use of Estimates in the Preparation of Financial Statements
 
     The preparation of financial statements in conformity with generally
accepted accounting principles 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 from those estimates.
 
     (h) Concentration of Credit Risk
 
     The Company has no significant off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company's accounts receivable credit risk is not
concentrated within any geographical area, and no single customer accounts for
greater than 10% of total revenue or represents a significant credit risk to the
Company.
 
     (i) Postretirement Benefits
 
     The Company offers no postretirement benefits.
 
     (j) Pro Forma Net Income per Common and Common Equivalent Share
 
     For the fiscal years ended September 30, 1995 and 1996, net income per
common and common equivalent share was based on the weighted average number of
common and common equivalent
 
                                       F-9
<PAGE>   41
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
shares outstanding during the period, computed in accordance with the treasury
stock method, plus the number of shares of common stock issuable upon conversion
of the redeemable convertible preferred stock and the number of shares of common
stock issued pursuant to the initial public offering sufficient to generate
proceeds for the payment of $338,698 and $568,526, respectively, of estimated
accumulated redeemable convertible preferred stock dividends payable subsequent
to the initial public offering. The weighted average number of common and common
equivalent shares assumes that common stock options granted and shares issued
one year prior to the initial filing of the registration statement for the
Company's initial public offering are outstanding for the periods presented,
computed in accordance with the treasury stock method. Historical net income per
share data for 1994 has not been presented, as such information is not
considered to be relevant or meaningful.
 
     (k) New Accounting Standards
 
     During March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, which is effective for fiscal years
beginning after December 15, 1995. The Company elected early adoption of SFAS
No. 121 in the fiscal year ended September 30, 1995. The adoption of this
standard did not have a material effect on its financial position or results of
operations.
 
     In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has determined that it will continue to account for
employee stock-based compensation under Accounting Principles Board Opinion No.
25 and elect the disclosure-only alternative under SFAS No. 123. The Company
will be required to disclose the pro forma net income or loss and per share
amounts in the notes to the financial statements using the fair value based
method beginning in the fiscal year ending September 30, 1997 with comparable
disclosures for the fiscal year ended September 30, 1996. The Company has not
determined the impact of these pro forma adjustments.
 
     (l) Financial Instruments
 
     The estimated fair value of the Company's financial instruments, which
include cash equivalents, accounts receivable and long-term debt, approximates
their carrying value.
 
     (m) Noncash Investing and Financing Activities
 
     Noncash investment and financing activities include conversion of
redeemable convertible preferred stock into common stock of $3,503,776 and the
tax benefit from the issuance of warrants of $14,190 for the year ended
September 30, 1996 and dividend accretion in the amount of $58,396, $280,302 and
$229,828 for the fiscal years ended September 30, 1994 , 1995 and 1996,
respectively. Additional noncash investing and financing activities during the
fiscal year ended September 30, 1994 include a $31,174 increase in equipment
under capital leases and a $100,000 increase in property and equipment under a
note payable.
 
     (n) Reclassifications
 
     Certain reclassifications have been made to the fiscal 1994 and 1995
consolidated financial statements to conform to the fiscal 1996 presentation.
Such reclassifications have no effect on previously reported net income.
 
                                      F-10
<PAGE>   42
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
(2) BUYOUT OF DISTRIBUTION RIGHTS
 
     On January 1, 1991, the Company acquired certain of the assets of Borwick
International, Inc. (Borwick), an international consulting firm which developed
and marketed related software known as SuccessPlan (the Product). As part of
this 1991 agreement, Borwick was granted the exclusive right to distribute the
Product outside of North America, and the Company was prohibited from selling
any competitive products in these territories.
 
     On September 30, 1995, the Company entered into an agreement that
terminated Borwick's remaining distribution rights to the Product and removed
any restrictions on the Company's ability to sell competitive products. The
process of succession planning is in transition; thus the Company's succession
planning product strategy is in flux. Its evolving line of staffing products may
incorporate certain elements that could be construed as succession planning
under a broad interpretation of the 1991 agreement. Accordingly, the Company
believed that removal of these restrictions was necessary.
 
     As a result of the September 1995 agreement, the Company recorded a
non-recurring charge to operations of $1,010,952 in the fiscal year ended
September 30, 1995, representing the present value of payments made and payable
under the terms of this agreement. The Company does not have a succession
planning product which is suitably responsive to the international market. In
addition, the Company lacks the internal infrastructure and established
distribution channels necessary to license and support such products outside of
North America. Based on the minimal current and anticipated cash flows from
succession planning products, any intangible asset recorded would be deemed to
be non-recoverable and require recognition of an impairment loss in accordance
with SFAS No. 121. Accordingly, the cost of the distribution rights was charged
to operations, as management believes that the realizability of such cost is
uncertain.
 
     The Company also executed a Finder's Fee and Non-Competition Agreement with
Irving P. Borwick, a principal of Borwick, in conjunction with the September
1995 termination agreement. Although the Company wished to ensure that Borwick
and Irving P. Borwick would not compete with the Company, neither was viewed as
a serious competitive threat. Accordingly, the stated amounts in the
non-competition agreement were not deemed to reflect their overall value to the
Company and were included in the total ascribed to the termination of
distribution rights.
 
(3) LINE OF CREDIT
 
     At September 30, 1996 and 1995 the Company had a $1,000,000 revolving line
of credit with a bank. Borrowings outstanding under the line are limited to 70%
of eligible accounts receivable, as defined, bear interest at the bank's prime
rate (8.25 at September 30, 1996) plus 1%, and are collateralized by all
corporate assets. There were no borrowings outstanding as of September 30, 1995
and 1996. This revolving line of credit was cancelled by the Company in November
1996.
 
(4) LEASE COMMITMENTS
 
     The Company's corporate headquarters are located in Dedham, Massachusetts,
where it currently occupies approximately 24,000 square feet of office space
under a lease expiring in December 1996. The Company has regional sales and
service offices on the West Coast and in the United Kingdom. The Company
occupies approximately 2,200 square feet of office space in Palo Alto,
California under a lease expiring in September 1997 and 400 square feet of
office space in Reading, England under a lease expiring in October 1997. The
Company also leases office space for its sales representatives in Chicago,
Dallas, Atlanta and Toronto, Ontario.
 
                                      F-11
<PAGE>   43
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
     During November 1996 the Company entered into a new lease for its corporate
headquarters and for its Chicago office. The new headquarters lease calls for
approximately 60,000 square feet of office space under a lease expiring in
December 2003. The new Chicago lease calls for approximately 5,500 square feet
of office space under a lease expiring in February 2002. Future minimum rental
payments as of September 30, 1996 under both the operating and capital leases
(related to equipment), including the effect of the new leases for the Company's
corporate headquarters and Chicago office, is shown in the following table:
 
<TABLE>
<CAPTION>
                                                                CAPITAL    OPERATING
                                                                LEASES      LEASES
                                                                -------   -----------
        <S>                                                     <C>       <C>
        1997..................................................  $ 5,343   $ 1,321,780
        1998..................................................       --     1,517,412
        1999..................................................       --     1,554,475
        2000..................................................       --     1,569,440
        2001..................................................       --     1,614,684
        Thereafter............................................       --     3,433,331
                                                                -------   -----------
                                                                  5,343   $11,011,122
                                                                          ============
          Less -- Amount representing interest................      283
                                                                -------
        Present value of minimum lease payments...............    5,060
          Less -- Current portion.............................    5,060
                                                                -------
                                                                $     0
                                                                 ======
</TABLE>
 
     Aggregate net rental expense included in the accompanying statements of
income for the fiscal years ended September 30, 1994, 1995 and 1996 is
approximately $188,000, $330,000 and $542,000, respectively.
 
     Leases with escalating rents or free rent periods are expensed on a
straight-line basis over the fixed term of the lease. Deferred rent arises when
expense recorded exceeds actual payments. Deferred rent of approximately $45,119
and $0 is included in other liabilities in the accompanying consolidated balance
sheets at September 30, 1995 and 1996, respectively.
 
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
     On January 5, 1994, the Company amended its Certificate of Incorporation to
authorize the issuance of 1,000,000 shares of Preferred Stock with a par value
of $1.00 per share and issued 556,155 shares of redeemable convertible preferred
stock (Preferred Stock) for a purchase price of $6.30 per share for proceeds of
$3,233,549, net of $270,227 of issuance costs. On July 26, 1996, as a result of
the initial public offering, the Company converted the 556,155 shares of
Preferred Stock stock into 2,502,696 shares of common stock.
 
     During the fiscal years ended September 30, 1994, 1995 and 1996, the
carrying value of the Preferred Stock had been increased by accreted dividends
of $58,396, $280,302 and $229,828, respectively. In fiscal 1994, dividends of
$146,871 were declared and paid; no dividends were declared or paid in fiscal
years 1995 and fiscal 1996. Both accreted and paid dividends were charged to
retained earnings in the accompanying consolidated financial statements. Upon
the closing of the initial public offering of common stock, accumulated
dividends of $568,526 remained outstanding and are included in accrued expenses
as of September 30, 1996. In October 1996, the company paid these dividends to
the preferred stockholders.
 
                                      F-12
<PAGE>   44
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
(6) STOCKHOLDERS' EQUITY (DEFICIT)
 
     (a) Authorized Capital Stock
 
     On June 5, 1996 the Company filed a Second Amended and Restated Certificate
of Incorporation, which provided, among other things for (i) an increase in the
number of authorized shares of Common Stock, par value $.01 per share of the
Corporation, to 30,000,000 shares, par value $.01 per share, (ii) the
authorization of 556,155 shares of Convertible Preferred Stock, par value $.01
per share, and 5,000,000 shares of undesignated preferred stock, par value $.01
per share.
 
     On July 26, 1996 the Company filed a Third Amended and Restated Certificate
of Incorporation, which provided for the elimination of the Company's authority
to issue Convertible Preferred Stock and a prohibition on action by written
consent of stockholders.
 
     (b) Stock Dividends
 
     On May 22, 1995, the Company's Board of Directors declared a three-for-one
stock split, effected in the form of a stock dividend, payable on May 22, 1995.
On May 8, 1996, the Board of Directors approved a three-for-two stock split,
effected in the form of a stock dividend. Accordingly, all shares of common
stock, options to purchase common stock and the conversion ratio of the
Preferred Stock have been retroactively adjusted to reflect these stock splits
for all periods presented in the accompanying balance sheets and statements of
changes in redeemable convertible preferred stock and stockholders' equity
(deficit).
 
     (c) Initial Public Offering
 
     On July 26, 1996 the Company completed its initial public offering of
common stock. The Company sold 1,500,000 shares of common stock at $11.00 per
share which generated proceeds of $14,511,345, net of issuance costs of
$833,655.
 
     (d) Stock Option Plans
 
     All of the outstanding options under the 1990 Stock Option Plan (the 1990
Plan) were exercised prior to the establishment of the 1994 Stock Option Plan
(the 1994 Plan). The 1994 and 1996 Plans enable the Company's Board of Directors
to grant nonqualified and incentive stock options (ISOs) and shares of common
stock. ISOs are granted at the then fair market value as determined by the
Company's Board of Directors. On May 8, 1996, the 1994 Plan was amended to
decrease the maximum number of shares reserved for issuance of statutory and
nonstatutory options to 641,844 shares of common stock.
 
     In October 1995, an employee exercised options under the 1994 Plan to
purchase 56,900 shares of common stock at an exercise price of $0.44 per share.
The Company repurchased these shares at $2.00 per share for an aggregate of
$113,799. The Company recorded the difference between the aggregate exercise
price and the amount paid to the former employee as compensation expense
included in sales and marketing expense for the year ended September 30, 1996.
 
     On May 8, 1996, the Board of Directors and stockholders of the Company
approved the adoption of the 1996 Stock Option and Grant Plan (the 1996 Plan),
which provides for the issuance of options to purchase 958,156 shares of Common
Stock. The 1996 Plan permits the grant of (i) options to purchase shares of
Common Stock intended to qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended, (ii) options that do not so
 
                                      F-13
<PAGE>   45
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
qualify and (iii) shares of Common Stock. The 1996 Plan is administered by the
Compensation Committee as appointed by the Board of Directors from time to time.
 
     Under the terms of the 1994 and 1996 Plans, options generally vest over
four years and expire ten years after the date of grant.
 
     In connection with a software development agreement, the Company granted to
a third party warrants to purchase 66,000 shares of common stock in July, 1996
at $11.00 a share. The fair value of the warrants was estimated at approximately
$85,000. The warrants vest over one year and $14,192 was charged to cost of
product revenue and additional paid in capital in fiscal 1996 related to these
warrants.
 
<TABLE>
     Stock option activity for the 1990, 1994 and 1996 Stock Option Plans are as
follows:
 

<CAPTION>
                                                           NUMBER OF     OPTION PRICE
                                                            SHARES        PER SHARE
                                                           ---------     ------------
        <S>                                                <C>           <C>
        Outstanding, September 30, 1994..................    325,134     $0.44
          Granted........................................    471,313      0.44-  2.00
          Canceled.......................................   (195,079)     0.44
                                                           ---------
        Outstanding, September 30, 1995..................    601,368     $0.44-  2.00
          Granted........................................    347,280      2.00- 19.75
          Exercised......................................    (67,015)     0.44-  2.00
          Canceled.......................................    (79,342)     0.44-  2.00
                                                           ---------     ------------
        Outstanding, September 30, 1996..................    802,291     $0.44-$19.75
                                                           ---------     ------------
        Vested, September 30, 1996.......................    211,655     $0.44-$ 2.00
                                                           =========     ============
</TABLE>
 
     On October 8, 1996 the Company issued 173,000 options under the 1996 plan
to purchase common stock at $7.125 per share.
 
     (e) Employee Stock Purchase Plan
 
     On May 8, 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the Employee Plan). Under the Employee Plan, the Company may
issue up to an aggregate of 150,000 shares of common stock to employees at 85%
of the lower of the fair market value of the common stock on the first or last
day of each six-month purchase period. On October 1, 1996 5,375 shares of common
stock were issued pursuant to this plan.
 
                                      F-14
<PAGE>   46
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
(7) INCOME TAXES
 
<TABLE>
     The provision for income taxes in the accompanying statements of income
consists of the following for the fiscal years ended September 30, 1994, 1995
and 1996:

<CAPTION>
                                                     1994        1995         1996
                                                   ---------   ---------   ----------
        <S>                                        <C>         <C>         <C>
        Current --
          Federal................................  $ 378,475   $ 541,200   $  969,318
          State..................................    114,029     181,100      267,279
                                                   ---------   ---------   ----------
                                                     492,504     722,300    1,236,597
                                                   ---------   ---------   ----------
        Deferred --
          Federal................................   (117,417)   (354,250)     (50,172)
          State..................................    (36,252)    (93,750)     (19,605)
                                                   ---------   ---------   ----------
                                                    (153,669)   (448,000)     (69,777)
                                                   ---------   ---------   ----------
                  Total provision................  $ 338,835   $ 274,300   $1,166,820
                                                   =========   =========   ==========
</TABLE>

<TABLE> 
     The deferred tax amounts as of September 30, 1995 and 1996 are as follows:

<CAPTION>
                                                                   1995       1996
                                                                 --------   --------
        <S>                                                      <C>        <C>
        Deferred tax asset --
          Current --
             Nondeductible reserves............................  $197,254   $303,965
             Deferred revenue..................................   521,000    434,000
                                                                 --------   --------
                                                                  718,254    737,965
                                                                 --------   --------
          Long-term --
             Buyout of distribution rights.....................   188,000    188,000
             Nondeductible reserves............................    30,000     30,000
                                                                 --------   --------
                                                                  218,000    218,000
                                                                 --------   --------
                  Total gross deferred tax asset...............   936,254    955,965
                                                                 --------   --------
          Less -- Valuation allowance..........................   171,672    185,000
                                                                 --------   --------
                  Net deferred tax asset.......................  $764,582   $770,965
                                                                 --------   --------
        Deferred tax liability --
          Long-term --
             Differences between book and tax depreciation.....  $ 63,777   $     --
                                                                 ========   ========
</TABLE>
 
     The Company had a valuation allowance of $ 171,672 and $ 185,000 against
its gross deferred tax asset at September 30, 1995 and 1996, respectively. The
valuation allowance at September 30, 1995 and 1996 was established due to
management's estimate that it was more likely than not that a benefit of certain
deferred tax assets would not be realized in the future. At September 30, 1995
and 1996, the valuation allowance related specifically to the buyout of
distribution rights.
 
                                      F-15
<PAGE>   47
 
                                 RESTRAC, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               SEPTEMBER 30, 1996
 
<TABLE>
     At September 30, 1994, 1995 and 1996, management took into consideration
historical levels of taxable income, the volatile nature of the industry in
which it competes and the potential levels of future taxable income The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate as follows:
 
<CAPTION>
                                                            1994       1995       1996
                                                            ----       ----       ----
        <S>                                                 <C>        <C>        <C>
        Provision at federal statutory rate...............  34.0%      34.0%      34.0%
        State income tax, net of federal benefit..........   6.3        6.3        6.3
        Tax effect of equity transaction (Note 6(d))......    --         --        3.0
        Utilization of R&D tax credits....................  (4.0)        --         --
        Other, net........................................  (0.4)        .3         .2
                                                            ----       ----       ----
                  Effective tax rate......................  35.9%      40.6%      43.5%
                                                            ====       ====       ====
</TABLE>
 
(8) EMPLOYEE BENEFIT PLAN
 
     The Company maintains an employee benefit plan (the Benefit Plan) under
Section 401(k) of the Internal Revenue Code. The Benefit Plan is available to
all full-time U.S. employees. The Benefit Plan allows for employees to make
contributions up to a specified percentage of their compensation. Under the
Benefit Plan, the Company makes discretionary contributions, which for the
fiscal years ended September 30, 1994, 1995 and 1996 was a match of 20% of the
employees' contributions up to a maximum annual match of 1% of each employee's
salary. The Company contributed approximately $14,000, $33,000 and $53,000
during the fiscal years ended September 30, 1994 ,1995 and 1996, respectively.
 
(9) ACCRUED EXPENSES
 
     Accrued expenses at September 30, 1995 and 1996 consist of the following:
 
<TABLE>
<CAPTION>
                                                               1995           1996
                                                            ----------     ----------
        <S>                                                 <C>            <C>
        Payroll and payroll-related costs.................  $1,338,855     $1,063,402
        Accumulated Redeemable Convertible Preferred
          Stock Dividend Payable..........................          --        568,526
        Buyout of distribution rights (Note 2)............     310,000        176,000
        Other accrued expenses............................     531,624      1,531,967
                                                            ----------     ----------
                                                            $2,180,479     $3,339,895
                                                            ==========     ==========
</TABLE>
 
(10) OTHER INCOME
 
     Other income consists of the following:
 
<TABLE>
<CAPTION>
                                                  FOR THE YEARS ENDED SEPTEMBER 30,
                                                  ----------------------------------
                                                    1994         1995         1996
                                                  --------     --------     --------
        <S>                                       <C>          <C>          <C>
        Interest income.......................    $ 70,592     $163,003     $331,039
        Interest expense......................     (23,028)      (9,683)     (15,853)
        Other.................................      25,499      (15,613)      11,108
                                                  --------     --------     --------
                                                  $ 73,063     $137,707     $326,294
                                                  ========     ========     ========
</TABLE>
 
                                      F-16
<PAGE>   48
 
                                                                     SCHEDULE II
 
                                 RESTRAC, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
               FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995, 1996
 
<TABLE>
<CAPTION>
                                                    BALANCE,
                                                  BEGINNING OF    CHARGED                   BALANCE,
        ALLOWANCE FOR DOUBTFUL ACCOUNTS               YEAR       TO EXPENSE   WRITE-OFFS   END OF YEAR
------------------------------------------------  ------------   ----------   ----------   -----------
<S>                                                 <C>           <C>           <C>          <C>
Year ended September 30, 1994...................    $ 23,000      $      0      $  6,000     $ 17,000
Year ended September 30, 1995...................    $ 17,000       317,080        34,080     $300,000
Year ended September 30, 1996...................    $300,000       200,588       150,588     $350,000
</TABLE>